AGRICULTURAL FINANCE YEARBOOK 2011

AGRICULTURAL FINANCE: 20COPING WITH01 ECONOMIC REALITIES11 Bank of and the Plan for Modernisation of Agriculture Secretariat Sorghum grown with 30kg N and 10kg P per ha. Table of Contents

Foreword 4 Uganda Day Statement 5

Policy 7

1.1 Trends in Lending and Leasing in 2011 8 1.2 Agricultural Credit Facility (ACF) 14 1 1.3 Economic Realities Impacting the Agricultural Sector in 2011 18 1.4 Food Supplies and Prices: Crisis, Opportunity or Both? 27 1.5 International Dimension: The Principles for Agricultural Finance Policy 34

The aBi Trust Support to Key Value Chains 43

2.1 Boosting Investment in the Maize Value Chain 44 2.2 Boosting Investment in the Coffee Value Chain 51 2 2.3 Boosting Investment in the Oilseeds Value Chain 59

The Issues with Inputs/Market Information 67

3.1 Seed Supply: The Role of Financial Services in Ensuring the Required Varieties, 68 Quality and Volume are Produced for Sale in the Ugandan Market 3 3.2 The 1 Kg Challenge: Can Financial Services Help Increase the Use of Fertiliser in 78 Ugandan Farming? 3.3 What is the Role of Market Information and Related Services in Improving the 86 Returns to Investments in Agricultural Value Chains in Uganda? 3.4 The Effects of Favourable International Prices on Investment along the Coffee Value 97 Chain in Uganda

Regulated Financial Institutions – Highlights for 2011 107

4.1 Opportunity Bank and its Involvement in Financing the Coffee Value Chain 108 4.2 Housing Finance Bank Financing of Grain Storage using Warehouse Receipts as 114 4 Collateral 4.3 - World Bank AgriFin Project 122

SACCOs and MFIs 127

5.1 Mateete: - an Agricultural SACCO Achieving Solid Performance 128 5.2 SACCOs and MFIs: How a Focus on Gender can Improve SACCOs’ Services to their 136 5 Members 5.3 Savings Groups Filling an Important Gap in Financial Services 146

Innovations 155 3 6.1 Micro-factoring: Kenyan Example of using this Product to Improve Agricultural Value 156 Chain Financing 6 6.2 Linkages between SACCOs and the Central Finance Facility Promoted by the Uganda 162 Cooperative Alliance 6.3 Human Resources for Agricultural Banking 168 YEARBOOK 2011

List of Abbreviations and Acronyms 176

Inprint 181 AGRICULTURAL FINANCE AGRICULTURAL Foreword

The Agricultural Finance Yearbook, of which this is the fifth edition, reviews developments pertaining to the modernization of the agricultural sector in Uganda, particularly those which have relevance for investment in, and the financing of, agriculture and agricultural marketing. The modernization of agriculture is a key development priority for Uganda but this will not be possible without improving the provision of a wide range of financial services to farmers, agro processors and traders.

One of the most striking features of agricultural finance in 2011 was the very rapid growth of loans and advances to agriculture by supervised financial institutions (banks, credit institutions and deposit taking microfinance institutions). New advances to agriculture grew by 60 percent in 2011, albeit from a relatively small base. Much of this increase was a result of a substantial expansion in post –harvest lending by commercial banks, with loans secured by warehouse receipts, which is testament to the fact that the efforts made in recent years to reform policy and legislation related to warehouse receipts and to undertake capacity building in this area have begun to bear fruit.

Food prices in Uganda were driven up sharply in 2011 by a combination of domestic and regional supply shocks and higher global food prices. The Yearbook analyses the recent food price shocks in Uganda and discusses policy measures to improve food security. Higher global food prices are likely to be a feature of the global economy over the long term, which will provide Uganda with an opportunity to exploit its comparative advantage in agriculture and boost agricultural exports.

The Yearbook explores in detail various issues pertaining to investment in value chains in agriculture, including the role of market information and the need to encourage greater utilisation of high quality seeds, fertiliser and other modern inputs. The Yearbook also discusses some important innovations pertaining to agricultural finance, including micro-factoring in Kenya and new approaches to the challenge of training agricultural bankers.

We recommend the Yearbook to everyone interested in agricultural finance and the modernization of agriculture in Uganda.

Hon. Tress Bucyanayandi M.P. Prof. Emmanuel Tumusiime-Mutebile 4 Minister of Agriculture, Governor, Animal Industry and Fisheries YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL UGANDA DAY STATEMENT ON b) Demand better flow ofinformation AGRICULTURAL FINANCE from government and other sources on improved crop and animal husbandry, Preamble and the role of investment in raising Uganda Day was focused on ‘Resolving the productivity of resources on the farm. Challenges of Agricultural Finance in Uganda’. This consultative meeting, on 28th June 2011, c) Utilize savings opportunities offered by was a precursor to the Making Finance Work financial institutions to provide an ‘own for Africa (MFW4A) Conference titled contribution’ for significant investments Zipping Finance and Farming in Africa from e.g. in irrigation and motive power; at the 29th to 30th June 2011. It was aimed at enabling same time address framework conditions Uganda to resolve its own challenges and including SACCO regulatory issues and identify opportunities prior to hosting the enforce the law regarding non-deposit MFW4A Conference. taking MFIs; these measures are to safeguard the deposits of rural people. The Uganda Day brought together approximately 350 stakeholders from public d) Understand the disconnect between and private sector institutions, including farmers and banks. Embrace opportunities policy makers, researchers, regulators, for better exchange of information in the bankers, farmers, agriculture and agribusiness business of agriculture. promotion agencies, international, regional and local development partners and e) Alert the appropriate Ministries to the representatives of apex institutions in the reality that research and training on agriculture and finance sectors. market and product development towards adding value to agricultural This Statement summarizes the key commodities is a public good and requires resolutions that came out of the extensive, action. lively and focused discussion on the challenges and opportunities facing Uganda’s f) Seize opportunities to work with farmers efforts to provide agricultural financing. and farmer groups to smoothen supply Fundamental to the discussion is the reality of commodities by staggered production, that agricultural finance policy is an orphan, within the scope of agro-climatic realities with no recognised parentage. and address the difficulty of volatile pricing. KEY RESOLUTIONS a) Embrace commodity value chain g) Develop financing technology to take approach to farming development, account of the over-riding need to select following examples set in Uganda by the borrowers on the basis of both motivation more efficient chains such as those for and competence in using purchased coffee. inputs and equipment. 5 h) Aggressively seek term liabilities in order to be able to meet the effective demand for term investment finance all along YEARBOOK 2011

agricultural value chains. AGRICULTURAL FINANCE AGRICULTURAL i) Build on the promising examples of irrigated crop production and livestock cooperative developments and farmers’ farming, infrastructure for weather index groups to establish societies providing insurance, rural energy and roads. inputs, collective marketing for improved farm incomes and clustering for advisory m) Address the need for concrete action to services. improve financial literacy and deepen financial inclusion in rural areas. j) Address the current need for effective linkages within the financial sector. n) Address women’s rights as regards implementation of land ownership k) Focus on standards of inputs and legislation. machinery and give teeth to regulations governing these requirements in order o) Develop an Agricultural Finance to safeguard the productivity of these Strategy (AFS) by means of an effective investments, many of which will be credit- coordination framework involving key financed. Similarly address enforcement ministries and the central bank. of standards of farm produce. The above recommendations will form the l) Increase public sector investment in basis for development of an Agricultural crop and livestock research, water for Finance Action Plan (AFAP).

6 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL 01 Policy In the warehouses, hundreds of ladies sort coffee.

1.1 Trends in Lending and Leasing in 20111

Section 1: Background

s shown in Diagram 1, agricultural in the coffee value chain - with two financial lending by regulated commercial institutions accounting for much of this banks, credit institutions and increase. The warehouse receipt product in microfinance deposit-takingthese two financial institutions contributed Ainstitutions (MDI’s) increased substantially over 26 percent of total agricultural lending. in 2011 - by over 60 percent. The overall Without this business, the increase in contribution of agricultural lending to total agricultural lending in 2011 would have been 8 formal lending also increased, from 7 percent substantially less than the 60 percent noted in 2010 to 9 percent in 20112. above.

The significant increase in agricultural It is believed that borrowing for speculation lending was mainly a result of increased on food may have also contributed to the YEARBOOK 2011 volume of warehouse receipt products mainly increase in agricultural lending in 2011,

1 Author: Irene Sekamwa Kajoro, BoU/GIZ FSD Programme 2 As in the 2010 Yearbook a caveat is in order. Despite strenuous efforts, there is still reason to believe that some scope exists for improvement in the quality of data being collected in this area. It is hoped that as the situation improves, the future will see more reliable time series and comparative analyses, for publication in subsequent editions of the Yearbook. AGRICULTURAL FINANCE AGRICULTURAL given the opportunities for this type of Diagram 1 below shows the pattern on activity prompted by the soaring food prices a quarterly basis. It reveals a generally experienced in mid-2011. downward trend of agricultural lending from 2007 to 2009, until 2010 and 2011 when the The information on advances to agriculture trend reversed. That is, total agricultural by regulated financial institutions was lending increased from UShs 353 bn in 2010 first compiled for and presented in the to UShs 566 bn in 2011. Although the increase 2007 Agricultural Finance Yearbook and in 2010 (22 percent) did not match up to the subsequently followed in the 2008, 2009 and decrease in 2009 (32 percent), the increase in 2010 editions. This, the 2011 Agricultural 2011 (60 percent) significantly surpassed the Finance Yearbook, is the 5th edition and increase in 2010 (22 percent). Policy builds on the previous work. The format used for the compilation of the data has not Agricultural lending significantly and 01 changed. That is, it tracks the new advances continuously declined from 2007 to 2009, as to the agricultural sector rather than the shown in Table 1. However, in 2010 it picked outstanding portfolio. This approach provides up, increasing by UShs 62 bn from UShs 291 a more dynamic view of movements in bn in 2009 to UShs 353 bn in 2010. In 2011 it lending to the agricultural sector. As with the increased further, by 213 bn from UShs 353 bn 2010 Yearbook, the information on leases to in 2010 to UShs 566 bn in 2011. As in the 2010 the agricultural sector has also been captured. Yearbook, the figures in the Annual Totals column also include leases to the agricultural sector.

Diagram 1: Total Agricultural Lending

250

200

150

100

Advances in Billions of UShs of in Billions Advances 50

9 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 Period in Quarters YEARBOOK 2011

Source: Bank of Uganda Supervision Function AGRICULTURAL FINANCE AGRICULTURAL Table 1: Agricultural Lending by Regulated FIs and MDIs between 2007 and 2010 in bn of UShs.

1st 2nd 3rd 4th Annual Quarter Quarter Quarter Quarter Totals Agricultural lending in 2007 86 84 108 172 450 Agricultural lending in 2008 92 73 118 142 425 Agricultural lending in 2009 69 57 86 79 291 Agricultural lending in 2010 69 72 73 139 353 Agricultural lending in 2011 97 104 191 174 566 Source: Bank of Uganda Supervision Function The increase could be attributed to a number Section 2: of reasons some of which have already been institutions in Uganda by category mentioned in the 1st paragraph. Other reasons could include: Commercial banks still constitute the biggest percentage of the total number of regulated t "O JODSFBTF JO PQFSBUJPOT PG UIF  OFX financial institutions in Uganda. The numbers regulated financial institutions which within the 3 tiers are as shown in Table 2 acquired licenses in 2008, 2010 and 2011, below. as a result of the lifting of the moratorium on new banking licenses. The total number of regulated financial institutions increased from 28 in 2010 to 30 t ćF DPOUJOVFE JODSFBTF JO HPWFSONFOU in 2011. There were 2 new entrants: Imperial investment to the agricultural sector in Bank which gained a licence at the end of 2011 through provision of the Ushs 30 bn 2010 to operate as a Tier 1 institution, and Agricultural Credit Facility, the objective UGAFODE Microfinance Ltd., which was of which was to increase agricultural granted a licence at the end of 2011 to operate productivity and incomes, and thereby as a Tier 3 institution (MDI). stimulate lending to the agricultural sector.

Table 2: Regulated Financial Institutions in Uganda

Year Tier 1 Tier 2 Tier 3 Total 2007 14 5 4 23 2008 20 5 4 29 2009 21 4 3 28 2010 22 3 3 28 2011 23 3 4 30 10 Note: Tier 1: Commercial Banks; Tier 2: Credit Institutions; Tier 3: Microfinance Deposit taking Institutions Source: Bank of Uganda Supervision Function YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Section 3: Agricultural lending by 2007 and 2009, it increased in 2010 and even more significantly in 2011. A divergence to this trend was noted in lending to agricultural As shown clearly in Diagram 2, commercial processing, which went up already in 2008. banks remain the biggest contributors to From 2009 to 2011, lending to agricultural agricultural lending, accounting for 95 processing continued to steadily increase. percent of the total amount lent out for agriculture in 2011 (as in 2010, 2009, 2008 Diagram 3 indicates that in 2011 lending and 2007). They are followed by Tier 3 MDIs across the value chain significantly increased. and Tier 2 credit institutions, in that order. The increase in lending to agricultural Policy Diagram 2: Agricultural Lending by Category of Institution 01

2% 3%

Commercial Banks Credit Institutions Micro Finance 95% Deposit Taking Institutions

Source: Bank of Uganda Supervision Function Lending in agricultural value chains It is noted from Diagram 3 that although production was more evident than that lending to agricultural production and for other value chain stages. Lending to marketing steadily declined between the year agricultural production increased by over 100 percent in 2011 for reasons already explained in Section 1.

Diagram 3: Agricultural Finance Lending by Activity

300

250

200 Agricultural Production Agricultural Processing 150 Agricultural Marketing 11 100 Agricultural Leases Total Advances in Billions of UShs of in Billions Advances Total 50

- 2007 2008 2009 2010 2011 YEARBOOK 2011

Source: Bank of Uganda Supervision Function AGRICULTURAL FINANCE AGRICULTURAL Lending to agricultural processing increased lending contributed 44 percent of the total by almost 1 percent while lending to agricultural lending to the sector, short term agricultural marketing increased by over 37 lending contributed 43 percent while long percent. term lending (3+ years) contributed the least.

In terms of contribution of each stage of Section 5: Total agricultural the value chain to total agricultural lending, lending agricultural production contributed the highest (50 percent). Agricultural marketing From Diagram 5, agricultural lending in 2011 contributed over 23 percent, while agricultural progressively increased from the 1st to the processing this year contributed the least 3rd Quarter and decreased slightly in the 4th (over 22 percent). Quarter.

Although leases for agricultural machinery It is important to note that regulated increased by over 21 percent in 2011, they institutions are among the many other contributed only 3 percent to total agricultural providers of credit to the sector. Many agro- lending, indicating a reduced contribution of based individuals access credit from informal 1 percent from 4 percent in 2010. sources like individual money lenders, and many agro-based industries also access credit from their overseas head offices or lending by repayment period from cheaper capital markets abroad, as mentioned in the 2009 and 2010 editions of Diagram 4 illustrates that as was in 2009 the Yearbook. For obvious reasons, data on and 2010, most of the lending was medium these advances from outside of the regulated term (1-3 years) with short term lending (< Ugandan financial sector are not presented in 1 year) also following closely. Medium term this article.

Diagram 4: Agricultural Finance Lending by Repayment Period

300

250

200 Agricultural Production Agricultural Processing 150 Agricultural Marketing 100 Agricultural Leases Advances in Billions of UShs of in Billions Advances 50 12 - Short Term Medium Term Long Term Totals

Source: Bank of Uganda Supervision Function YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Diagram 5: Total Agricultural Lending Compared

250

200

150 1st Quarter

2nd Quarter Policy 100 3rd Quarter 4th Quarter 01

Lending in Billions of UShs of Lending in Billions 50

0

2007 2008 2009 2010 2011

Source: Bank of Uganda Supervision Function

Section 6: Conclusion the Government. It also underlines the role of innovation in bridging the gap between the From the 2011 statistics, there has been a very financial and agricultural sectors, so that both substantial increase in formal advances to sides see profitable business opportunities agricultural value chains. Agricultural lending through new types of banking products, as a percentage of total financial institution coupled with access on both sides to better lending has also increased – up from 7 to 9 information. percent. Though significant, the 9 percent figure is still low in relation to the importance The Yearbook series is clearly one important and size of the sector in the national economy. tool in making worthwhile innovations better So there is some way to go. known and in furnishing information about investment opportunities to the financial Given the very positive effect on lending of sector, while at the same time explaining the Warehouse Receipts legislation, this has financial products to farmers and others who to be noted as a significant policy success for earn their living in agricultural value chains.

13 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Coffee farmers during a consultative meeting.

1.2 Agricultural Credit Facility (ACF)1 Section 1: Introduction The main objective of the ACF is to promote the commercialization of agriculture through he Agricultural Credit Facility the provision of medium and long term (ACF) was operationalised in financing of capital investments in agriculture October 2009 and disbursements and agro-processing. The ACF enables loans commenced in March 2010. The to be extended to farmers and agro-processors TACF was set up by the Government in on more favourable terms (e.g. lower interest partnership with commercial banks, the rates) than are available through normal Uganda Development Bank, microfinance market channels, because the Government subsidises the scheme through the provision 14 deposit taking institutions (MDIs) and credit institutions; the financial institutions involved of interest free loans to the participating are referred to as participating financial financial institutions and through its bearing institutions (PFIs). of some of the credit risk. The Bank of Uganda plays a purely administrative role in the ACF. YEARBOOK 2011

1 Author: ACF Section, Accounts Dept., Bank of Uganda AGRICULTURAL FINANCE AGRICULTURAL Section 2: Loan terms and Under ACF I, almost all of the funds available conditions were fully utilized, enabling loans of UShs 58.6 billion to be made to final borrowers. Projects which are eligible for ACF loans In contrast only a small fraction of the include acquisition of agricultural machinery, funds available under ACF II were utilized, post-harvest handling equipment, storage with loans to final borrowers falling to facilities, agro-processing and any other UShs 8 billion (less than 10 percent of the machinery and equipment used for maximum). Disbursements have picked up agriculture and agro-processing. A maximum slightly under ACF III, with loans to final of 20 percent of each loan can be used to borrowers amounting to UShs 15 billion, but only a quarter of the available funds have been finance the purchase of material inputs used Policy 2 in production. utilized . 01 The ACF has been implemented in three ACF I was popular with PFIs because the level phases: ACF I from October 2009 to June of Government subsidy was high (50 percent 2010, ACF II from July 2010 to June 2011 and of both the cost of funds and the credit risk) ACF III from July 2011 to date. Each phase and the effective interest rate earned by the was partially funded by the Government. In PFIs on their 50 percent contribution to the ACF I and III, Government contributed 50 scheme was 20 percent per annum, which was percent of the total funds to the ACF and bears in line with prevailing market rates at the time 50 percent of the credit risk, whereas in ACF (the average lending rate for agricultural loans II the Government contribution and share in the second half of 2009/10 was 21 percent of the credit risk is one third. Government’s per annum). contribution to the ACF is interest free to the participating financial institutions. The ACF II was much less attractive to the banks interest rate charged to the final borrower because the level of Government subsidy was in ACF I and III was fixed at 10 percent per cut to 33.3 percent and the increase in the annum whereas in ACF II it was fixed at 12 interest rate which PFIs were allowed to charge percent per annum. The loans funded from the final lenders was not sufficient to offset the the ACF have a maximum maturity of 8 years higher effective cost of funds and the increase and minimum of 6 months, with a grace in risk borne by the PFIs. In effect, under ACF period of up to a maximum of 3 years. II, the PFIs could earn an interest rate of only 18 percent on their own contribution to the Section 3: Disbursements under scheme yet at the same time they bore a larger share of the credit risk than was the case under the ACF ACF I. This explains why the utilization rate of funds available under ACF II was so poor. In each of the three phases of the ACF, Government made available UShs 30 billion Although the terms of ACF III reverted as its contribution to the financing of the to those of ACF I in terms of the level of 15 scheme, which would have allowed total Government subsidy, ACF III has become less lending to the eligible borrowers of Shs 60 attractive to the PFIs because of the sharp rise billion in each of ACF I and III and Shs 90 in market interest rates in 2011. Under ACF billion in ACF II. III the effective interest rate earned by the PFIs YEARBOOK 2011 is 20 percent, the same as under ACF 1, but

2 ! AGRICULTURAL FINANCE AGRICULTURAL the average lending rate for agricultural loans than Shilling denominated bank lending to rose from 22 percent in June 2011 to nearly 29 all sectors of the economy, which increased percent in February 2012. Consequently, ACF by 59 percent in this period. All of the ACF III is potentially very attractive for borrowers, lending was denominated in Shillings. Bank because the lending rate is barely a third of loans to agriculture denominated in foreign the prevailing market rate, but it is not very currency increased by 177 percent in this attractive for the PFIs who are facing much period, but this was a slightly slower increase higher costs of mobilising funds than they than that of all foreign currency denominated were in 20103. bank lending which was 211 percent. Of course it is possible that agricultural lending Section 4: Investments funded would still have grown as fast even without under ACF I, II & III the ACF, but that seems unlikely because there are no obvious reasons, other than the The bulk of the ACF funds have gone to subsidy afforded by Government through acquisition of machinery and equipment for the ACF, why Shilling denominated bank agro-processing, tractors and heavy machinery lending to agriculture should have been much for land opening and commercialisation of more buoyant than lending to the rest of the 2 agriculture. The chart below gives the details economy . of the various areas funded.

Investments funded under the ACF Processing Machinery (Tea, coffee, seed oil, cotton) 4% Milk Cooling Equipment 7% 18% 10% Poultry Units, Hatcheries and Feedmill 10% Total Storage Facilities Other 29% 10% Farm Improvement 12% (Modernisation and Expansion) Food & Milk processing machinery and Equipment Tractors and Heavy duty machinery

Section 5: Evaluation of the The loans extended under the ACF have performance of the ACF mainly been extended to larger commercial farmers and agro-processors, many of which The ACF appears to have contributed to an are well established companies that already expansion of bank lending to the agricultural have access to bank finance. Nevertheless, the 16 sector. Between September 2009 (the month ACF was designed to try and ensure that the immediately preceding the inception of funds available were not monopolised by large the ACF) and March 2012, total Shilling borrowers. Accordingly a ceiling of Shs 2.1 denominated lending by the commercial billion was imposed on the amount that could banks to the agricultural sector has increased be extended to any single borrower or group YEARBOOK 2011

by 118 percent. This is a faster rate of increase of related borrowers. However, to date 13

3 Editors’ Note: One reason could be the more widespread use of Warehouse Receipt modalities in lending (see Articles 1.1 and 4.2 in this Yearbook). AGRICULTURAL FINANCE AGRICULTURAL borrowers, which include companies involved Smallholder farmers comprise 96 percent in grain milling, sugar processing, poultry, tea of all farmers in Uganda, but the level growing and dairy farming, obtained loans of commercialisation among this sector which exceeded this ceiling; these loans in is very low. Very few if any of the loans total amounted to UShs 45 billion, which extended under the ACF have been made is 56 percent of the entire amount of credit to smallholder farmers. This is because the disbursed under the ACF to date. Another modalities of accessing loans under the ACF 5 borrowers have obtained loans which are are not suitable for this group. For example, either equal to the ceiling of UShs 2.1 billion the PFIs require borrowers to provide land or slightly less than it; these loans amount to titles as loan security, but many smallholder UShs 10.4 billion. farmers lack these titles. Policy

Hence almost 70 percent of the credit The MDIs are better suited to lending to 01 disbursed under the ACF to date has gone to smallholder farmers than commercial banks large borrowers with loans of UShs 2 billion and development banks, because they can use or above. Many of these borrowers, who have innovative lending technologies such as group benefitted from the low market interest rates lending, which obviate the need for physical available under the ACF, could probably have loan securities. afforded to pay market interest rates for the investments, though admittedly this is not However, the MDIs have not participated known for certain in each case. Hence whether in the ACF, because the cost structure of there is a strong public policy rationale for the scheme is not suited to them. Because subsidising their borrowing is debatable. they incur much higher transactions costs of administering loans than banks, the In contrast, there is a much stronger case fixed interest rate which can be charged to for supporting the commercialisation of borrowers is a much more serious constraint smallholder farmers, by improving their for MDIs than it is for banks. access to credit4.

17 YEARBOOK 2011

4 This is one of the conclusions of the World Bank report: Uganda Promoting Inclusive Growth, released in February 2012. AGRICULTURAL FINANCE AGRICULTURAL A farmer harvests from his garden.

1.3 Economic Realities Impacting the Agricultural Sector in 20111

Section 1: What were the determine whether life continues (ability to feed and afford life’s basics). ‘realities’? Thus, as the professionals sit in the air Introduction conditioned seminars and offices to discuss the magnitude and impact of economic conomic effects and impacts are real phenomena, average people are reeling from to the persons who feel them, but the effect of such phenomena – sleeping 18 to some in society they are more hungry, contracting diseases they are unable of an academic issue. Whereas for to treat, closing businesses, losing jobs and Ethe brilliant scholar and dignified corporate living in constant fear of tomorrow. Quite executive, inflation is an object for scholarship often, the unspoken and unreported aspects and slight discomfort, to the wider population of economic changes are more impactful than YEARBOOK 2011 it is a serious personal challenge that can statistics tell us.

1 Author: Andrew Obara, Friends’ Consult AGRICULTURAL FINANCE AGRICULTURAL This article therefore intends to engage the for seasonality variations or for exceptional reader in empathizing with realities of various items that usually show price volatilities. people in agricultural value chains and how economic changes in the year 2011 affected Food crop inflation – Rise in the prices of them. It is not based on any grand national representative food items survey, but on interpretation of facts in view of the impact of economic changes. The article Core inflation – General price rises in goods takes changes in two phenomena – inflation and services excluding those items that usually and interest rate changes – and discusses face volatile price movements (like food and their impact on the different people in the fuel/ petroleum products) agricultural value chain. Energy, fuel & utilities (EFU) inflation – Policy

Economic realities are many and they General rise in the prices of fuel, energy and 01 all impact on people. For this article, we utilities shall examine two: inflation (general rises in prices of goods and services) and After years of low and fairly stable inflation, currency depreciation (weakening of the 2011 saw inflationary shocks in Uganda. It Uganda Shilling against major international is difficult to say that anyone in the private currencies). For both aspects, the year 2011 sector was prepared for these shocks. Table 1 was full of drastic changes and challenges. below presents inflation rates for the selected months of the years 2010 and 2011. Inflation The figures below and their likely impact on In its simplest definition, inflation is the rate different agricultural value chain actors are of general rise in prices of goods and services discussed under Section 3 of this article. The in an economy (and subsequently the rate of box below presents an extract of the private decline in purchasing power of the currency). sector perspective on the 2011 inflation from The commonly used measures of inflation in an article posted by PSFU (Private Sector Uganda are the ones we shall examine here. Foundation Uganda) on its website. From They are: PSFU’s viewpoint, the main reasons for the high inflation were: Annual headline/ national inflation – This is the raw inflation figure as reported through the t Rising fuel prices on the international Consumer Price Index (CPI) monthly by the market (up to 50 percent since June 2010 Uganda Bureau of Statistics. It is not adjusted due to very strong demand growth and,

Mar May Dec Jan Mar Jun Sep 2010 2010 2010 2011 2011 2011 2011 19 Annual National 7.6 4.6 4.8 8.6 29.1 39 50.4 Food crop 17.3 4.2 3.2 5.6 11.7 15.7 28.3 Electricity, fuel & utilities -1.4 3.9 3.1 5.0 10.4 12.2 27.5 Core2 6.7 3.5 -4.6 1.5 7.8 10.3 12.1

Source: UBOS 2011 YEARBOOK 2011

2 \#$%&'$$* AGRICULTURAL FINANCE AGRICULTURAL “The world is experiencing unprecedented high prices Uganda, the prices of diesel and fuel have increased of agricultural and commodity prices. In February by between 15 – 18 percentage points. The prices of 2011, the World Bank Food Price Index reached its food and other commodities too have subsequently 2008 peak, after rising by 47 percentage points since increased on account of bad weather that affected June 2010. Food prices are rising across the globe, agricultural productivity, higher transportation costs, driven in part by the higher transport costs that the depreciating shilling that has affected the price of accompany rising oil prices. During the same time imports and industrial inputs and imported inflation. period, the international fuel prices have increased Whereas the causes are thought to be mostly external, by at least 32 percent on account of strong demand the private sector is concerned that if unchecked, growth and political instability in the Arab region. the price spikes (particularly of fuel) will inevitably The East Africa region too has experienced increased increase the cost of doing business in the country prices for fuel and agricultural prices. In Rwanda, and will affect the competitiveness of the business the fuel prices have increased by 14% from RWF community.” 887 in January to RWF 1,015 in March 2011. Kenya and Tanzania, which unlike Rwanda are not land From PSFU website www.psfuganda.org locked, have seen increments of about 15 percent. In

since early 2011, regional geopolitical risk relative stability of the currency is necessary in North Africa and the Middle East); for continued stimulation of economic t Most of Uganda’s major trading partners activity. The effects of currency depreciation have been experiencing rising inflation in 2011 are discussed under Section 3 of this (notably Kenya, China, India and the article. Eurozone); t Depreciation of the Uganda Shilling Interest rates against most major currencies over the past one year (from below 2,200 per US$ The market interest rates rose by two to three in Dec 2010 to over 2,800 per US$ by percentage points between January and June August 2011 - key causes being strong 2011, mainly following a modest increase in demand for fund externalization and fuel the BoU rate to commercial banks. imports); t Persistent drought as the country In the second half of the year, BoU introduced experienced delayed rains at the beginning the minimum interbank rate which was meant of the year. This affected food production to check inflation by making borrowing and consequently food supplies to the expensive. This saw the prime lending rates of markets, leading to increases in food commercial banks increasing by 10 percentage prices. points or more. So generally, borrowing became very expensive during the year. Currency depreciation High demand for food in neighbouring Currency depreciation in this context refers countries to a weakening of the value of the Ugandan 20 Shilling relative to the main international Demand for food from neighbouring currencies, notably the US Dollar, the Euro countries, especially Sudan, continued to and the Pound Sterling. As will be shown in attract exports of such food items from Section 3 of this article, the Ugandan Shilling Uganda. This also had the effect of increasing swung widely, unpredictably and sometimes the food prices within the country. YEARBOOK 2011

suddenly during the year. Some level of AGRICULTURAL FINANCE AGRICULTURAL Adverse weather compare the year’s food price inflation (as a proxy for agribusiness related inflation) to the Though not purely economic phenomenona, general or headline inflation during the year. weather patterns affect fundamentally the economic realities of people in agricultural The graph below reveals the following: value chains. While any detailed discussion of the effects of adverse weather is beyond t Annual national (or headline) inflation the scope of this article, it is useful to note was higher than food crop inflation for all that adverse weather affected agricultural the months of 2011 (although October to production in 2011. December figures were not yet available by the time of writing this article). To the Policy Examples are: extent that farmers and other agricultural - Late rains and later on floods in parts of value chain actors use other goods and 01 northern and eastern Uganda services (which is a fact of life), this - Droughts in north-eastern Uganda (Teso suggests that they got high prices but did and Karamoja) not necessarily have a purchasing power - Landslides and threats of more landslides, advantage since the overall inflation was resulting from torrential rains higher than the general rises in food items; - Pests and diseases of crops and animals t Food crop and electricity, fuel and utilities (e.g. cattle) (EFU) inflation were neck-to-neck, meaning that food producers’ advantages Section 2: The people affected were minimal since most of the actors spend significantly on fuel and utilities (or There was a fairly popular view during the year are indirectly affected through other price that the 2011 inflation was good for farmers rises); and other actors in agribusiness value chains. t The fact that the general (headline) To validate or disprove this, it is necessary to inflation was significantly higher than all

60.00

50.00 Annual 40.00 National

30.00 Food Crop

20.00 Electricity, Fuel & Utilities 10.00 Core 21 -

-10.00 Mar May Dec Jan Mar Jun Sep ‘10 ‘10 ‘10 ‘11 ‘11 ‘11 ‘11

Source: UBOS 2011 (Extract) YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL the other three components of inflation Another interesting closer look would be validates, to a significant extent, the at those agribusiness value chain actors argument that inflation was mainly caused who were in the market mainly as sellers in by external factors (imported inflation). comparison to those who were there mainly as buyers. If one takes the prices of agricultural If the food price inflation had been higher commodities in isolation from the rest of the than the monthly annualized headline price levels in the economy, the conclusion rates, there would have been reason for the would be that the sellers were advantaged farmers and agribusiness traders to rejoice. and the buyers were disadvantaged because This would mean that in real terms, those in of the price rises. The case being that inflation the agribusiness sector were earning more. was mostly imported (evidenced by the This was not the case and thus they are not higher headline rate than all the three major clapping hands. If we looked more closely components of domestic inflation); neither at the agribusiness value chain actors to group was in a position of absolute advantage. distinguish between the commercial farmers The following newspaper article extract in part illustrates.

“Kitgum — Many families in Kitgum are beginning “It also comes at a time when fuel prices have to forego meals and other essentials due to daily escalated, raising transportation costs and weakening increase in prices of commodities on the market. the local currency. This is likely to cause inflationary Margaret Akello, an orphan who is taking care of her pressures on the economy…” young siblings, said it is becoming increasingly hard Margaret Lamunu, who owns a retail shop in Kitgum to buy items like salt and sugar because their prices town council, said she is realising little proceeds from have gone up. Akello said the situation has been made her sales because consumers are foregoing some worse by the dry season where other food items like commodities. ... vegetables and fruits are no longer being sold in big quantities like it used to be about a month ago… By Stephen Komakech, 12 March 2011

(typically large, fairly well informed) and the The above could have been a story in any of majority of small scale farmers, we would find the districts of Uganda during the year 2011. another pattern. The small scale producers The names of people and places would change often get low prices and, because of their but the story would be similar: relative lack of information and power, enjoy less of the price increases in their products. t The peasant or small scale agricultural Typically the middle-men or traders do not producer, producing and selling normal immediately translate higher market prices quantities, had a hard time getting normal into proportionately higher prices paid basics; to the small scale producers. It is only the t The shopkeeper who has increased prices competition among the traders for produce because of general inflation finds that 22 that later on translates into higher prices for fewer and fewer customers show up to buy the small scale farmer. Thus, the MSME types anything; of agricultural producers most likely benefited t The transporter who appeared to less than the more commercialized farmers. overcharge the produce trader for transporting produce to the market went YEARBOOK 2011 to the market and spent his ‘excess’ earning and a bit more on the normal basics; AGRICULTURAL FINANCE AGRICULTURAL Policy 01

Farmers weeding through their maize field. t The agricultural processor who initially Section 3: Effects on investing got delighted about “good prices” soon opportunities and challenges realized that this comes along with higher raw material and other input prices – thus The two other economic aspects that changed no reason to rejoice; drastically and relate to investments are t The produce trader who might have been interest rates and foreign currency exchange expected to have benefited most from rates. Their brief examination in this section the inflation (although no research has will highlight the likely effect their movements yet been undertaken on this for the year had on investment in the agribusiness sector. 2011), was negatively affected, since the overall price increases were higher than those of food/ agricultural commodities. 23 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Interest rates Foreign exchange rates

Bank interest rates, which had for years been The line graph in Figure 2 shows the exchange fairly stable, rose rapidly during the year. rate movements during the year 2011. Whereas at the start of the year most banks had their Prime lending rates at around The exchange rate between the Ugandan 15 percent, two major drastic changes saw Shilling and the US Dollar swung from this jumping up to the mid and higher 20s UShs 2,300 in January to UShs 2,900 in and even to 30 percent. The changes, both September and then back to below UShs triggered by the Central Bank’s actions, were 2,500 by December 2011. Such wide and i) increase in the Bank Rate (rate at which unpredictable swings in a relatively short BoU lends to commercial banks) at the start of period cannot be conducive to investments the year and ii) introduction of the Interbank – less so in the agribusiness sector. While the Rate (minimum rate at which banks can lend traders in agricultural commodities could to each other) in July. have benefited in the short term from the upswings, their excitement was checked by As noted, and in response to the increase in immediate downswings. It is very likely that the Bank Rate, the banks increased their prime some could have made losses by buying and lending rates substantially. Introduction of transporting produce across the border when the Interbank Rate at 20 percent and later an the Shilling was very weak, only to sell the increase to 23 percent saw interest rate jumps produce for hard currency and realise that the of a magnitude that had not been experienced Shilling had strengthened significantly in the in Uganda’s recent past. By the close of the short lead period. For farmers (small or large) year, interest rates charged to bank borrowers the most immediate effect was an increasing were generally more than 30 percent p.a. uncertainty in the long term viability of their enterprises. Without going into detailed argument, investment and business in general was not Overall, therefore, investment opportunities helped by the sudden rise in the cost of money for agribusiness people were bleak during the during the year. The threats and strikes by year. trading groups like Kampala City Traders Association (KACITA) were representative Section 4: Responses of the of the desperation of all other businesses authorities including agribusinesses.

Whereas the traders were the most visible of What was done? those affected (they are in cities, they have an association and they feel the immediate One year is a short time for any government impact of interest rate rises), farmers and other to respond to economic phenomena in a meaningful way (save for Band-Aid or short 24 agribusiness operators were equally or worse affected; input prices rose and unfortunately term relief activities). The Central Bank, for the farmers, they had to wait for a longer on the other hand, has the instruments and time to recoup the higher costs from sales. At authority to respond to such phenomena 30 percent, the cost of borrowing was largely for both short and long term benefits to the

YEARBOOK 2011 economy. During the year 2011, Bank of prohibitive (which is what the interventions were meant to achieve). Uganda (BoU) strove to maintain sanity in the economy through: AGRICULTURAL FINANCE AGRICULTURAL Figure 2: Exchange Rate UShs/US$ 2011

3,000.0

2,500.0

2,000.0 UShs/US$

1,500.0- Jul Policy Jan Jun Sep Feb Oct Apr Dec Aug Mar Nov May 01 t BoU raising the Bank Rate Overall, therefore the interventions were t BoU introduction of the Interbank Rate appropriate in the circumstances – but what and later raising it caused the circumstances? This is the question t BoU selling forex to stabilize the market that is seldom asked, let alone answered. For over two decades, Uganda was known as The first two interventions above were aimed one of the African countries that had tamed at checking the spiralling inflation in the short inflation and therefore created a truly enabling run by reducing the amount of money in monetary environment for private sector led supply. They were warranted and appropriate growth. Evidence is in the investments we though not popular. The milder methods like have attracted and realized since the early raising the yields on government securities to 1990s. mop up liquidity seemed inadequate at that time and in the circumstances. Inflation was so Causes of high inflation rate bad that it had to be dealt with pragmatically. So, what caused this sudden onset of high This, however, to some extent came at the inflation? Only when we fully answer this expense of economic growth which must question can we avoid similar experiences in be supported by increased consumption the future. There are a number of possibilities: and fuelled by enhanced investment. In this regard, the BoU interventions checked a) Was it purely external factors (imported investment and perhaps production by inflation)? If so, why was Uganda’s making both long term and working capital “imported inflation” experience more financing too expensive for business people in adverse than that of its neighbours? all businesses, including those in agricultural According to Figure 3 below (extracted value chains. from http//www.bloomberg.com), Kenya’s inflation rate for all months of BoU interventions on the foreign exchange 2011 kept rising but remained below 20 25 front were also merited because extreme percent unlike Uganda’s which went up to swings in exchange rates, mainly typified by 50 percent. swift and wide depreciation of the Shilling, b) Was it an unsupported increase in the would have been bad for all businesses in the domestic supply of money (Shilling) in YEARBOOK 2011 long run. circulation? AGRICULTURAL FINANCE AGRICULTURAL c) Was it a shrinkage of the productive Reason would suggest that as more evidence and business activity (figures might not is available and more analysis is done, then support this)? the true picture will emerge. This, and its d) Was it a combination of these three relevance for agricultural finance, may well be factors, or perhaps some inexplicable force the subject of a future Yearbook article. majeure?

!"#%&'

Kenya Inflation Rate - Annual Change on Consumer Price Index

35 35

30 30

25 25

20 20

15 15

10 10

5 5

0 0 Jan/06 Jan/08 Jan/10 Jan/12

Source: www.tradingeconomics.com | Kenya National Bureau of Statistics

26 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Policy 01

Freshly harvested corn.

1.4 Food Supplies and Prices: Crisis, Opportunity or Both?1

Section 1: Introduction have led some people deeper into poverty, hunger, civil strife and/or in some instances Global context to death. In 2008, global maize prices tripled, wheat prices increased 127 percent, and rice prices increased 170 percent. Since January his article explores the state of 2011, World Bank estimates that there has food supplies and prices and how been a net increase in extreme poverty of changes in either may constitute a about 44 million people in low- and middle- crisis or an opportunity, especially income countries. FAO expects the price of 27 Tin the Ugandan context. agricultural commodities to continue to be at high levels throughout 2012. Since 2007, globally, the supply of food has not been stable, resulting in widespread A food crisis is usually set off by a shock to YEARBOOK 2011 hikes in food prices. The rising food prices either supply or demand for food and often

1 +!-565786-8-959 Fisheries (MAAIF) AGRICULTURAL FINANCE AGRICULTURAL involves a sudden spike in food prices. The limited range and volume of food is imported. nature and impact of food crisis or insecurity Examples include: wheat, some rice and food on peoples’ lives is determined by its severity concentrates. Indeed, for a long period of time and duration. Although a food crisis can be the country has been and continues to be a set off by a shock such as drought, it is not reliable source of surplus food, which is sold solely ‘an act of God’. Weak or ineffective to neighbouring countries such as Kenya and agricultural systems that fail to produce South Sudan. enough food/ market opportunities in good times and break down completely in bad The main sources of calories for the Ugandan times also play their part. population are crops that are not extensively traded across borders, i.e. foods such as sweet The 2008 rise in food prices re-occurred potatoes, cassava and matooke (cooking in late 2010. Examining the price index banana). These staples are grown by over one gives an indication of the extent of the price million households every season. However, changes over the period (Figure 1). The index the country does experience seasonal and measures monthly prices for a food basket localised food shortages, triggered mainly by which includes cereals, oils, dairy, meat and the effects of prolonged droughts and floods. sugar. In 2011 Uganda experienced some food supply Uganda context constraints, leading to concerns among many people of an impending crisis. So, what is the Fortunately, global price movements have a pertinent evidence? Food prices periodically limited effect on Uganda, as the country is rise and fall according to the seasonal nature largely food secure. Therefore, most of the of farming in the country (Figure 2). For country’s households are not directly exposed example, prices of most agricultural products to rising global food prices. Only a very fall immediately after the normal harvest for

Figure 1: FAO Food Price Index: 1990 – 2012, with high price peaks in 2008 and 2011 2002-2004=100 250

Nominal 210

170

130

Real*

28 90

50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 *The real price index is the nominal price index inflated by the World Bank Manufactures Unit Value Index (MUV) YEARBOOK 2011

Source: http://epianalysis.wordpress.com/2011/03/20/foodpricecrisis AGRICULTURAL FINANCE AGRICULTURAL crops and, for milk, following periods of high Section 2: Causes of food production triggered by good rainfall. The shortages food prices for many commodities rise again during periods of prolonged stress resulting, The recent food shortages in the country in particular, from drought. affected some parts of the population more than others. Thus the most affected were the Furthermore, according to the Background income-insecure, whose ability to get food is to the Budget for the Financial Year (FY) marginal in the best of times and therefore not 2 2011/2012, food crop production grew by 2.7 at all resilient in bad times. On the other hand, percent , the same level as of the FY 2009/2010. regional food shortage or famine is usually Food production was affected by a prolonged

localised, affecting only a particular region of Policy drought in the early part of 2011. This partly the country, such as Karamoja. contributed to inflationary pressures the 01

Figure 2: Uganda Food Prices, 2011

Matooke (cooking banana): Nominal retail prices in Kampala Maize: Nominal Retail Prices in Kampala Cassava chips: Nominal retail prices in Soroti 1200 1200 1200 1000 1000 1000 800 800 800 600 600 600 UShs/Kg UShs/Kg UShs/Kg 400 400 400 200 200 200 0 0 0 SEP SEP SEP JUL JUL JUL FEB FEB FEB JAN JAN JAN JUN JUN JUN APR APR APR DEC DEC DEC OCT OCT OCT AUG AUG AUG MAY MAY MAY NOV NOV NOV MAR MAR MAR 2008 - 2010 2000 2010 2008 - 2010 2000 2010 2008 - 2010 2000 2010

Matooke prices rising Maize price rising but Cassava Price stable and & higher than usual normal (as of November) normal (as of November)

Source: FEWS-NET, 2011 country experienced, with the general price Causes of regional food shortages include level of all items combined increasing by natural and human factors. The key human 16 percent in May 2011. Food crop prices cause is civil strife or war. Others include registered the greatest increase in prices poor i.e. inefficient food distribution systems. recorded, at slightly over 44 percent over the Natural causes include drought, floods, same period (Figure 3) gives an example of other unfavourable weather conditions, pest rice and maize. Excluding all food items, the infestation, plant and animal diseases. Crop non-food inflation went up to 6.5 percent for failures due to drought or floods hit harder the year ending April 2011, which was close when too many people are challenged by to the country’s 5 percent target range. This limited access to land. suggests that the major drivers of the surge in inflation were food items, including food Poor rainfall and drought conditions during crops and other processed food items such as early 2011 have been the main drivers of 29 sugar3. food price inflation. The drought affected production areas by causing crop failure and consequently led to an increase in food prices. YEARBOOK 2011

2 Ministry of Finance, Planning and Economic Development (MoFPED) – The Background to the Budget 2011/2012 Fiscal Year 3 Editors’ Note: The readers should note that the period quoted does not take into account the huge food price increases in the middle of 2011 – see Article 1.3. AGRICULTURAL FINANCE AGRICULTURAL Figure 3: Uganda - Selected wholesale cereal prices in Kampala

USD per tonne 1200

1000

800

600

400

200

0 Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 09 09 10 10 10 10 10 10 11 11 11 11 11 Rice Maize

Source: Regional Agricultural Trade Intelligence Network

Flood and landslide-prone areas such as may also be short or long term in nature. Katakwi and Bududa districts, respectively, For those who see high prices as a welcome have in the recent past suffered total crop opportunity, the immediate response has losses due to excessive rain. Crops such as been to boost investment in production of a cassava, groundnuts and sweet potatoes marketable surplus of food. There is also an simply rot and/or have been washed away. increase in demand for farm land and in some cases over-exploitation of natural resources. Increasing demand for food products in the Farmers have intensified production of neighbouring countries also contributed tradable commodities such as rice, maize, to the increase in food prices in both the beans, fish and poultry. As a result, their domestic and regional markets. Traders incomes have risen significantly. With responded by exporting more food to the improved income security, these farmers regional markets, especially to Kenya and have also increased their expenditure on basic South Sudan. Some media commentators services such as education, health, shelter and have maintained that food exports to the generally have improved their livelihoods. region are the main cause of domestic food shortages. However, for the country’s poorest, particularly those who rely on local markets to 30 Section 3: Response to rising food get food, rising prices and increased volatility prices are obviously negative – a crisis. The poor have been forced to resort to buying more staple The response to the food price rises varies foods at the expense of vegetables and other depending on how the prices are perceived – nutritious foods. People are forced to eat less, YEARBOOK 2011 a crisis, an opportunity or both. The responses or buy less expensive and less nutritious food. AGRICULTURAL FINANCE AGRICULTURAL Of course a diet of carbohydrates might quell Other responses at country level have hunger pangs, but a lack of nutrients has a included: significant impact on long-term cognitive and physical development, especially for children t 6OEFSUBLF EFMJCFSBUF JOUFSWFOUJPOT UIBU under the age of two. Poor mothers have promote trade, continue modernising had to forego meals to ensure their children transport and market infrastructure can get something to eat. With less money including provision of market information available, families on the margin feel they and intelligence. have very limited choices to make. As a result, such farmers may sell even seeds and tools so as to buy food now, even though it affects their Policy ability to grow food for the subsequent season.

Others resort to removing their children from 01 school to toil for food, with many finding it impossible to return.

The vulnerable group includes extremely poor people in urban slums, landless laborers in rural areas and subsistence farmers who cannot grow enough food to last the year. These groups already live on the very margin, spending as much as 80 percent of their income on basic foods. For them, even a slight increase in food price results in devastating Training radio presenters - interview at the market. effects. They need to be offered social protection through appropriate safety nets t &TUBCMJTINFOU PG TUSBUFHJD GPPE SFTFSWFT such as inputs vouchers, cash transfers, food or warehouses as in Masindi, Kapchorwa, for work and school feeding programmes. Kasese, Jinja and . t "WPJEJOH UIF JOUSPEVDUJPO PG GPPE QSJDF At country level, high food prices are an controls, domestic movement restrictions opportunity for triggering increased domestic and export bans. food production as well as enhanced income t *OUSPEVDJOHBDDFTTJCMFDSPQBOEMJWFTUPDL security for farmers through domestic and risk management schemes for farmers. external trade. The typical supply side support required includes better access to improved In the longer term, however, investment in seeds, planting and stocking materials. In this agriculture, not just in increased production, connection it is important to make agricultural but all along commodity value chains will productivity enhancing technologies or inputs ensure that farmers can grow enough food accessible and affordable by promoting bulk for their families and be cushioned from procurement of inputs and support to small fluctuations in local market prices. When 31 and medium scale distributors around the farmers can grow a surplus and are able country. Provision of appropriate agricultural to access a market, they gain from higher credit and targeted smart input subsidies is prices and are likely to spend this income on also critical. local goods and services, leading to strong YEARBOOK 2011 multipliers in local income. AGRICULTURAL FINANCE AGRICULTURAL Section 4: How to prevent a a) crops that mature early, consume less future food crisis water and grow in harsh environments, and b) livestock breeds that can sustain There are a number of measures that can be high levels of production during periods of taken to ensure sustainable domestic food water shortages. Improved and affordable supply, enhanced export growth and control water harvesting, storage including of supply-driven inflation. It is essential to valley dams, irrigation and drainage ensure that the country’s food security is technologies should be made available to enhanced so that every citizen has sustainable farmers according to their scale and type access to adequate daily food for consumption of farming - covering small, medium and in order to attain a productive and healthy large scale irrigation infrastructure. life. To be effective, the policy environment for food value chain actors should ensure t 1SPWJEF BQQSPQSJBUF HVJEBODF UP GBSNFST that exploiting Uganda’s potential for food to undertake timely crop and animal production becomes a profitable and attractive husbandry operations. Assist farmers avenue of entrepreneurship and work. to undertake agriculture as a business through provision of strategic commodity- Interventions for increasing food availability specific advisory/extension services. address the supply side of food security. They Prioritise the value chain approach around are aimed at increasing the amount of food the selected commodities, which have the that is physically present in an area or country greatest impact on employment, food and through all forms of domestic production, income security. reserves, imports and/or food aid - supported by appropriate food storage and mobilisation. t "TTJTU GBSNFST UP NJOJNJ[F QPTUIBSWFTU Listed below are some of the most effective losses (estimated at 20 and 40 percent measures that have proved successful in for grain and perishables, respectively), increasing food production sustainably. They through better handling and improved include various policy and other interventions storage (upscale the warehouse receipt to enhance food availability, access, utilisation system). Use of better post-harvest as well as price stability. handling practices and facilities should result in more of the harvested food being available to the population for a longer Policy interventions period of time. t 1SPWJEF BO FOBCMJOH FOWJSPONFOU XJUI t "TTJTUGBSNFST GBSNFSTHSPVQTBOEPUIFS predictable policies, application and actors to extend shelf life of agricultural stability so that key actors along the food commodities through value addition value chains can operate effectively and interventions. efficiently. t %FBM EFDJTJWFMZ XJUI DSPQ BOE BOJNBM 32 t &OTVSF QSPEVDUJPO PG BEFRVBUF GPPE  pests/vectors and diseases. Introduce crop irrespective of weather variations. varieties and livestock breeds that have Introduce varieties that can produce ability to resist pest, vector and disease food during seasons of water shortages attacks. or drought. Research needs to develop YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL t *ODSFBTFUIFQSPWJTJPOPGĕOBODJBMTFSWJDFT information on the issues surrounding key to farmers as well as to other agricultural farm production inputs in Uganda. commodity value chain actors. Financial services t 3FQMFOJTI ĕTI TUPDLT JO FYJTUJOH OBUVSBM water bodies, promote aquaculture and Given the already established fact that access explore the commercial introduction of to finance is key to unleashing Uganda’s properly regulated cage farming on the agricultural potential, it is important to lakes. continue making the sector better understood and attractive to investors. A major challenge t 1SPWJEF TBGFUZ OFUT GPS UIPTF XIP BSF has been lack of appropriate agricultural Policy unable to provide adequate food for financial products and services that are themselves because of reasons beyond accessible to farmers. This seems to have 01 their control - various vulnerable groups. been aggravated by absence of a designated Such safety nets include food aid and institutional home fully mandated to handle school meals. agricultural finance policy. Fortunately there is increasing recognition of the key issues Information management here, not only for Uganda but also for Africa as a whole. The remedial measures required, Access to information is one of the critical especially on the policy side, are summed up inputs in enhancing food production and in the Kampala Principles – see Article 1.5 in preventing future food crises or shocks. this Yearbook. Strong evidence that there is a problem or an opportunity is hard to ignore. If fairly Section 5: Conclusion reliable and timely information is made available about the level of food prices, then In summary, the recent food price rises have farmers can seize the opportunity to benefit. not been a national crisis, but rather a shock It is also true that information on the level of – Uganda as a country had not run out of hardship, nutritional levels and the number food. The crisis did exist, but the effects were of people affected by shortages of food can localized to certain regions and to particularly be used to lobby for resources and immediate vulnerable groups. Key to note is that the intervention, otherwise the situation could supply response in agriculture is quite slow due get worse in a few weeks or months. to seasonality – it actually takes one bumper harvest in one season to send the prices down Provision of inputs and support services again, as it happened in the recent past.

One of the major food supply constraints In the case of Uganda shocks of this type are is limited access to quality productivity- also an opportunity for the well prepared enhancing inputs and guidance on how to to enhance their income security. Again maximise benefits from their use. Therefore, at country level, as a net exporter of food, 33 it is critical to ensure that farmers have Uganda benefits from high food prices and ready access to adequate and appropriate experiences favourable terms of trade within seeds, planting and stocking materials - and the food deficit Eastern African region. know how to use them. Articles 3.1 and 3.2 YEARBOOK 2011 in this edition of the Yearbook give more The resulting opportunities must be seized. AGRICULTURAL FINANCE AGRICULTURAL A farmer returns from the garden.

1.5 International Dimension: The Kampala Principles for Agricultural Finance Policy1

Section 1: The call for a policy The Year 2011 saw a renewed call by a number focus of countries and bilateral and multilateral development partners for a new focus on “Agriculture plays a vital role for economic poverty alleviation and food security. growth and sustainable development. Investment in the sector has been shown to This article discusses some of the reasons be an effective instrument to alleviate poverty for this renewed call, describes the push and pull factors, the commitments/resolutions 34 and enhance food security. Evidence suggests that gross domestic product (GDP) growth and finally, outlines the implications of originating from agriculture is twice as effective these processes for re-vamping Agricultural at reducing poverty as GDP growth linked to Finance Policy in Uganda and elsewhere in the non agricultural sectors.”2 Africa. YEARBOOK 2011

1 Author: Robert Akoda Ocaya, GIZ /FSD. 2 World Development Report 2008, World Bank, Washington AGRICULTURAL FINANCE AGRICULTURAL The Problem Section 2: The broad environment for agricultural Despite Africa’s comparative agricultural advantages3, the continent is still a net food importer. In order to address this challenge, There are several long-standing issues a massive increase in the production and impacting on the effectiveness of agricultural productivity of the continent’s agriculture finance in Africa. Recent years have brought is needed to turn Africa from a net food out new challenges. A brief overview of the importer into a net food exporter. There is a key issues is set out below. broad consensus that sustainable growth of the agriculture sector is central for development Many of the issues are beyond the authority Policy in Africa. of policy makers in agriculture and finance. 01 Nevertheless, they are very pertinent to The Role of Finance strengthening the crucial interface between the agricultural and financial sectors on the Access to finance is key to unleashing Africa’s continent, since they affect fundamentally the agricultural potential. However, as agriculture business of agriculture. is subject to high systemic risks, both from the environment (e.g. drought, flood and diseases) Food security issues and markets (e.g. price volatility, trade policy barriers, dumping, transport and logistical Recent food shortages (e.g. in Kenya and challenges), engaging with the sector has Somalia) coupled by spikes in food prices, been traditionally challenging for financial the resultant inflation and civil strife have institutions. Reliable data on crop cycles, heightened the discussions on food security, yields and weather are scarce, and financial which encompasses food affordability and institutions can seldom use the information. incomes. Therefore the focus of agricultural finance policy needs to be broader than As a result, financial institutions are often food production. It calls for consideration unable to adequately conceptualize and assess of a more holistic approach to value chains risk and therefore are unable or reluctant to including adequate consideration of the develop sustainable financial products for various stakeholders involved4. Food security actors in agricultural commodity value chains. is very closely aligned with poverty alleviation Consequently, agricultural clients, from small and the generation of livelihoods, both being holders to larger agricultural businesses often important and fundamental objectives for lack access to adequate financial services and policy makers in all countries. therefore face severe growth constraints. Demographic issues A suitable policy framework is a major building block for creating an enabling environment A growing and especially young population for financial institutions to develop and put could be a recipe for civil strife, due to lack 35 in operation effective financial products for of available employment opportunities. agricultural clients. Efforts to address this problem by various stakeholders such as governments and

development partners ought to include the YEARBOOK 2011

3 ;<5$$ both to service its own food demand and to take advantage of export opportunities arising from rising global demand. 4 See also Article 1.4 in this Yearbook. AGRICULTURAL FINANCE AGRICULTURAL potential opportunities in value addition shocks such as failure of rains, especially the industries for those youths who can acquire effects of successive droughts. Management the skills that such industries require. of this type of risk is now an essential accompaniment of investment, especially The migration of people, predominantly when this is financed by loans. youths, to towns in search of better employment opportunities affects labour Demand in export markets supply on farms and contributes to the higher market demand for food. Despite Africa in the main still exports its products the fact that women contribute a large part in primary form (raw or semi processed). In of the agricultural labour force, cultural cases where products have been produced in stigmatization limits their ability to own their processed form, the performance has property (collateral) and even to access been mixed. This is not, perhaps, surprising. financial services. With the business structure of agricultural value chains in most African countries geared Arable land availability to export of unprocessed or semi processed commodities, major changes will be needed Africa has enormous resources in terms of in order to move towards significant value arable land actually or potentially available addition. These changes demand investment for crop production and also, by implication, – in product development as well as in for intensive as opposed to extensive livestock manufacturing, transport and storage. production. However, in many regions of Africa, soils especially those in high rainfall Starting with markets, the growing domestic areas, are typically degraded in terms of some and regional populations constitute an key nutrients, e.g. nitrogen5. Intensification important market for processed items. Within as a recommended practice is still largely the continent trade is now being assisted in the ignored. It will also require the application of various regional and continental blocks like appropriate fertilisers at the correct growth the EAC and COMESA, but easing movements stages of crops. Seasonal investments in the of goods between blocks will need continued form of crop finance will be in demand. attention by governments – a process that is now ongoing. At the international level, Animal and plant health issues become more African governments require expertise in trade important as production intensifies. As farm related discussions. Without strengthening of management capability increases and with it markets, investments in product development the ability to make productive and profitable and value addition will have limited impact. use of disease and pest control measures, so too demand for appropriate agro-chemicals On-farm production and post-harvest and veterinary products increases. issues

36 Environmental and climate issues The need for a reliable and competitive input market is obvious, as is the need and scope for Climate changes in recent years have group formation in order to capture economies highlighted the vulnerability of agriculture – of scale that are otherwise not available to the both cropping and livestock enterprises – to small operator. Post-harvest losses, in terms YEARBOOK 2011

5 See also Article 3.2 in this Yearbook AGRICULTURAL FINANCE AGRICULTURAL of quantitative losses and erosion of quality, Finance is a part of the overall financial system are claimed to be high in Africa. of a country, the financial service needs of agricultural sectors in Africa are particularly Research and extension pressing and demand special attention. The Kampala Principles, set out below, were Research capability in support of investment developed on the basis of deliberations at the in agricultural value chains is needed not only MFW4A Conference in 2011, in Kampala. for enhancing farm production – crops and livestock - but also for product development, Kampala Principle 1: Address Agricultural to extract more value out of basic agricultural Finance Policy strengthening through commodities. establishing a specific high-level coordination Policy body and by recognising a single entity as the Extension should be a smooth and effective advocate for Agricultural Finance. 01 transfer of knowledge to where it can be applied – down on the farm. It is notoriously In most countries Agricultural Finance is weak over much of Africa, plagued by a policy orphan. It falls somewhere in an insufficient resources, poorly trained and awkward gap between various ministries weakly motivated staff. One exception to the responsible for Finance, Agriculture, Trade generally poor performance of extension and Commerce and might even impact on services is when they are part of contract Water and the Environment! For none of farming arrangements, focusing on a these Ministries is it a major topic. This fact, particular crop or livestock product. together with the shared responsibility, means that Agricultural Finance all too easily falls off Foreign investment capital the desks of key policy makers.

Spurred by rising commodity prices on the one One aspect of the policy process is the hand and food security concerns on the other, development and adjustment of policy. the foreign investment appetite in agriculture This needs to be informed by a consistent both from commercial and “developmental” flow of relevant data – e.g. as generated and sources has increased in recent years. Given analysed in conjunction with the Supervision the continent’s vast potential for increasing Function of Central Banks. agricultural production, Africa is an obvious target for those seeking to invest in The second key part of the policy process is agriculture. Policy is needed to protect local delivery, plus the monitoring of this delivery. populations from negative consequences of The monitoring enables feedback to the first this investment, while optimizing its benefit part – policy making and adjustment. In in terms of jobs and incomes. many cases the second part – delivery – is more challenging than the first. Section 3: The Kampala Principles However, in both phases there is a need for 37 Financial Inclusion is a key to achieving leadership - a champion. Should this role be the MDG’s and Africa’s Development. The assumed by the Central Bank, or by one of the MFW4A6 Conference, Zipping Finance and key ministries? This will vary from country to Farming in Africa, held in Kampala in late country. In any case, the overall policy process YEARBOOK 2011 June 2011, recognised that while Agricultural (both phases) must have leadership that is recognised, that can coordinate the interested

6 MFW4A = Making Finance Work for Africa - a multi-donor initiative, with a Secretariat based in the African Development Bank. $''!H!5'J'$9J<JJ5JJJ! AGRICULTURAL FINANCE AGRICULTURAL parties and that has the resources to function collective marketing (and local processing) effectively. in order to improve sales returns by offering larger volumes of better quality products. Kampala Principle 2: Strengthen farmers’ organizations so that the production end The group approach to these services may of agricultural value chains becomes an or may not involve group lending, but even effective influence on agricultural finance lending to individuals is facilitated by the policy making. ready means of contact through group input supply and marketing activities. Too much reliance for feedback and advice is placed by policy makers on sources physically Kampala Principle 4: Ensure legislation close to them. This is hardly surprising, but is in place and is implemented to foster often results in policies are being delivered innovation and to remove barriers to that are “off-message” as regards farmers’ real financing the business of agriculture, through needs. Given the impossibility of surveying the measures such as, but not limited to: asset- whole sector, the policy making process has backed products, warehouse receipts, contract to be informed from the rural areas through farming, credit reference bureaux (and better the intermediation of farmers’ associations. client identification), consolidation of small In some countries this can be strengthened but viable rural financial institutions and by sample surveys such as those conducted other support to the informal financial sector. under the FinScope label, in Southern and Eastern Africa. It is well appreciated that there are very real barriers to building effective business linkages Farmers’ associations or organizations are between banks and farmers (and even often poorly resourced and can readily with downstream processors), using classic become focused on a single issue, or become financial institutions and products. Clearly aligned with a particular political faction. innovation in product design, including Thus ensuring their effectiveness as genuine collateral, is needed. mouthpieces for the farming sector can be a serious challenge. Legislation is often involved here – or regulation as is the case for central bank Kampala Principle 3: Focus public sector supervisory requirements. One difficulty is policy on a value chain/commodity approach, that product design will nearly always precede with clustering of smaller farmers to facilitate legislation, so there is an inevitable time gap. economies of scale in input purchase, value Addressing this with political pressure may be addition, marketing and advisory services. possible.

Policy making needs to be based on the Kampala Principle 5: In accordance with improvement of conditions for investment CAADP Principles, and in encouragement 38 in adding value in agricultural commodity of private sector investment, increase public chains. This can start with a policy to foster sector expenditure in areas such as, but not the clustering of small farmers in order to limited to: crop and livestock research and permit economies of scale in input purchase, extension, water for irrigated crop production convenience for advisory services and and livestock farming, infrastructure YEARBOOK 2011 for crop insurance, rural energy supply, communications and roads. AGRICULTURAL FINANCE AGRICULTURAL CAADP Principles call for governments Kampala Principle 7: Enable financial to invest in the necessary public sector institutions to meet the demand for longer infrastructure to encourage and indeed enable term financing by developing financial farmers and others who make a living in the markets so that lenders can gain access to the agricultural sector to invest for increased term liabilities required. productivity using their own funds and/or borrowed money. This remains a pressing There is wide acceptance of the necessity need in many countries, since the CAADP and scope for transformation of much of the expectations have been met in few if any cases. productive structure of African agriculture. This is emphasized in the NEPAD/CAADP Apart from the obvious public sector process. There are many aspects to the Policy responsibilities of roads, agricultural research required transformation. These include applied to local conditions etc. the issue of management capacity, technical competence, 01 water for irrigation is one of the more pressing access to advisory services, inputs, financial concerns in the continent. Here the situation services markets, and, crucially, to on-farm is patchy. Some countries, for example investments. Swaziland, with 38% of arable land irrigated, have made impressive strides. Others, for On the farm there is a pressing need for longer example Rwanda, Uganda and Lesotho all term investment in production-enhancing register less than 1% irrigated. measures such as water supply, irrigation works and equipment, orchards and other tree Whereas topographical and agro-climatic crops, livestock handling facilities (including differences place limitations on the validity fencing and specialised structures), drainage, of such cross-country comparisons, the shelter etc. The funding requirement for fact remains that in many African countries investments of these types, across the farming the potential for irrigated crop production sectors of most countries, is substantial. The is vastly underutilised. The Author’s own development of financial markets to facilitate country, Uganda, is a classic example. access by banks and their clients to longer term liabilities is a basic priority. Kampala Principle 6: Support transformation of the agricultural Kampala Principle 8: Encourage the sector through encouragement of longer commercialisation of agriculture and term productivity-enhancing, on-farm of farming as a business, whether by investments such as water supply/irrigation, consolidation of small holdings or through fencing and farm buildings, through involvement of the private sector (domestic consensual approaches to land tenure issues. and foreign); in both cases ensure that social, cultural and environmental concerns are Can longer term investment be encouraged met and, in the latter case, that appropriate if the investing farmer occupies land controls are in place to prevent undesirable under traditional tenure? Some innovative exploitation. 39 measures to enhance confidence include long term leases or the formation of trusts by the “owning” clans, so that no one person actually has title – whether or not this is traditional or YEARBOOK 2011 freehold. AGRICULTURAL FINANCE AGRICULTURAL The move from subsistence farming to areas are still more noted for plans than for commercial production is only partly a implementation with the target groups. change in resources. Examples exist where the resource base has been expanded (e.g. by land Another challenge relates to the monitoring of acquisition) but the attitude of the farmer the effectiveness of the actions. Improvements has not become fully commercial. In some in financial literacy and farm business parts of Africa there is a distinction between education, in particular, are not readily villagers, for whom farming is part of the life measured. It is therefore difficult to maintain of a resident, but who do not see farming as a the ongoing flow of resources to meet the means to a worthwhile cash income and the needs, due to the challenges of assembling farmers, who do have this attitude. hard data that demonstrate the value of the actions taken and therefore the worth of the Undoubtedly the farmers, as described above, required investments in human resources and will attempt to expand their land holding associated costs. and their command over other productive resources, such as labour. This is part of Kampala Principle 10: Drive research, development of the sector and spurious training and dissemination of knowledge to arguments about equity should not be foster private sector investment in developing permitted to interfere with this process. There and marketing added-value agricultural are many persons on the land whose holdings products and services. and labour are more productive when under the direction of a professional farm manager. This needs no annotation. Policies should therefore encourage the fair and equitable consolidation of small holdings Kampala Principle 11: Ensure a and/or application of the commodity approach sustainable flow of information is available to commercialisation of small holder farmers in areas such as, but not limited to: markets, e.g. coffee in Uganda. output prices, costs of inputs and cost and conditions of financial products and services. Kampala Principle 9: Develop and implement concrete actions to improve Information access for those earning a financial literacy, consumer protection and living in agricultural value chains is vital farmer business education, with a special for the effectiveness of agricultural finance focus on gender and youth issues. policies. This means a demand for knowledge management on the part of several entities in Financial literacy and farmer business the economy. education are closely linked, both to each other and to consumer protection. At present, The first need is at the farmer level, where in 2011, it is probably fair to observe that inaccurate technical information can adversely financial literacy and consumer protection affect the productivity and profitability 40 enjoy more attention from policy makers than of investments. When failed investments farmer business education. This is a matter are credit-financed, then lenders too are for some concern. But even more worrying impacted. Examples include: information is the fact that in many countries (admittedly on the suitability of tools and machines for with some exceptions) real actions in all three the tasks for which they are being bought YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL and for the competence of the users; purity Unsurprisingly the Kampala Principles and and germination percentages of purchased the Uganda Day Statement share common seeds; correct fertilisers for soils/crops; agro- themes. These address the gaps between and chemicals and veterinary products applicable within the policies and plans of the sectors for correctly identified disease and pest (agriculture, finance and cooperatives and problems. trade) in order to facilitate coherence in the national approaches to fostering an enabling Also, at the farmer level, there is a need for environment for agricultural finance. information on markets and prices, so that enterprise selection and scale can be geared References and timed at the production level to profitably Policy meet the expected demand. 1. World Bank (2008) World Development Report 2008 - “Agriculture for Development” 01 There is, of course an associated need for World Bank, Washington information by the staff of financial institutions 2. Roberts R.A.J., Keizire, Boaz B. and offering products to the agricultural sector. Rothe Michael (2011), “Policy Support to Agricultural Finance in Africa”, Paper The information relates especially to the presented at the MFW4A Conference: business of farming and value addition Zipping Finance and Farming In Africa to agricultural products, and embraces Conference – Harnessing the Continent’s both technical and economic aspects. The Potential, Kampala, Uganda Ugandan Yearbook series, Agricultural 3. Rothe M, Frickenstein J. and Huber C. Finance Yearbooks 2007, 2008, 2009 and 2010 (2011), Report of the MFW4A Conference: respectively, is one of a number of tools that Zipping Finance and Farming In Africa can be used to inform the agricultural and Conference – Harnessing the Continent’s financial sectors of approaches being tried - Potential,Kampala both those rated as successful and those which demonstrated a significant degree of failure.

Section 4: Implications of the Kampala Principles for Uganda

The implications of the Kampala Principles for Uganda are summed up in the Uganda Day Statement (reproduced after the Foreword above). This document was drafted at a special “Uganda Day”, held in conjunction with the June 2011 Zipping Finance and Farming in Africa. 41 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL

02 The aBi Trust Support to Key Value Chains Processing maize.

2.1 Boosting Investment in the Maize Value Chain1

Section 1: Market signals and their impact on the maize supply signal was not only by increase in volume but situation in 2011 also by the steady increase in prices of maize grain and maize flour throughout the year uring 2011 the maize market, in across the entire value chain. terms of demand and supply, was 44 more robust than in 2010. In 2011 Comparably, 2011A season prices were the regional demand for maize (by higher than those for the same period in DKenya and South Sudan) continued to increase 20102 and this was expected to be the case for and this particularly influenced the trend 2011B season as the trend in the global food of business amongst the actors within this commodity prices maintained an upward YEARBOOK 2011

commodity value chain. The market demand movement.

1 Author: Asaph Besigye, Consultant under contract to aBi Trust 2 For example the Market Analysis Report 2011 published by FIT Uganda AGRICULTURAL FINANCE AGRICULTURAL Beyond volumes and price, signals on quality via local FM radio stations through its (another key characteristic of the market) Localized Radio-based MIS (LoRaMIS) were not remarkable as the scramble by community programme. primary traders for volumes was often in contra direction to the attention on quality. Other entities that were actively involved in market information collection and Market signals to the actors in the value dissemination are FIT Uganda (via SMS chain were conveyed by several entities, with requests to 8555 and e-mail messaging), attempts to make it regular and accurate. It Agrinet and RATIN (http://www.ratin.org), included market information dissemination with the last named largely used on the higher on prices, quantities, quality and the identity level by large traders involved in the regional of major maize buyers in 2011. Farmgain market. Although market information was

Africa (http://www.farmgainafrica.org), readily accessible on the websites of all the The aBi Trust one of aBi partners engaging in market entities providing the service, it is noteworthy 02 Maize Price Trend 2009 - 2011

1,400 1,200 1,000 800 Price UShs 600 400 200 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Kampala Maize 2009 Kampala Maize 2010 Kampala Maize 2011 information services, collected daily market that this access was fairly constrained at rural information and disseminated it through level, due to limited internet connectivity. both mobile telephone (SMS) and weekly Nonetheless, interested parties could still pick market bulletins e-mailed to interested up the information through phone calls to parties (producers, producer organisations, their contacts with access to the internet3. traders and other stakeholders engaged in agribusiness development support). With the high maize prices throughout the year, farmers’ responses (in expectation of The access for instant market price updates better returns on investment in maize) were 45 by SMS is through requests to 8198 and both equally positive. For example, there were domestic and regional market information visible increases in acreage under maize was available through this service in 2011. production (observed during aBi field In addition, Farmgain Africa, with funding visits in Iganga, Masindi and other major YEARBOOK 2011 support from aBi, relayed market information maize producing areas). Other indicators

3 See also Article 3.3 in this Yearbook AGRICULTURAL FINANCE AGRICULTURAL of increased response, albeit subjectively The continuing positive trend in maize reported to aBi Trust by partners and prices, the increased domestic and regional collaborators but also observed by aBi in market opportunities and the impact of past the field, were increased sale and planting of and on-going support interventions will improved seed in anticipation of high yields definitely help to maintain the growth trend for higher returns. This was coupled with an of investments in the entire maize value chain increase in the number of farmers engaging in the foreseeable future. On-farm production in bulk marketing of maize for sale to bigger will definitely be stepped up, thus warranting traders, WFP and other institutions, rather investment in procuring improved inputs, than to the usual village traders. With good hiring labour and mechanized operations and access to reliable market information, farmers’ improving harvest and postharvest handling bargaining power with buyers for better prices facilities. was boosted and provided an additional incentive for bulk marketing. Similarly, actors (including farmers organizations) engaged at the marketing and Section 2: Investment signals and processing levels of the value chain will need to trends in the maize value chain invest in additional working capital to match the increased volume, higher procurement prices and increased procurement and .... marketing through producer groups necessitated increased investment in storage and quality ascertaining and enhancing ....

From the financial support requests received marketing logistical costs; as well as medium by aBi Trust, the increasing investment term investment in items such as equipment flows for the maize value chain continued for additional and better processing capacity, to target boosting productivity through the and increasing storage facilities. It is also use of improved inputs, improving quality highly possible that investment in better at harvest and postharvest stages including storage facilities such as silos4 will be stepped drying, cleaning and storage, and enhancing up. value addition, including for final products diversification. Furthermore, the vertical nature of produce bulking by farmer groups and the opportunity Collective marketing through producer created by World Food Programme central groups necessitated increased investment marketing storage facilities under its in storage and quality ascertaining and Purchase for Progress initiative will stimulate 46 enhancing facilities and transport. In addition, investment in localized smaller and medium production expansion and increased use of capacity storage and trucking facilities to feed mechanized operations at farm level that were into WFP’s bigger central stores. highly visible clearly signaled increased farm level investment. At the inputs supply level, In spite of the numerous opportunities for YEARBOOK 2011

actors were equally keen to increase volumes financing the maize value chain presented of inputs stocked and increase outreach to the by the favourable factors enumerated above, buyers and users of inputs. there are still many issues of concern to aBi:

4 Though the government intends to build regional produce storage silos, these (if realized) will not be enough. AGRICULTURAL FINANCE AGRICULTURAL i) The highly informal but robust cross- iii) In addition, the critical lack of production border maize trade, mainly into Kenya and and market risk mitigation insurance South Sudan with limited or no attempt products has held down efforts to increase for value addition and better quality, and commercial financing for the maize value lack of buyer contracts, is a disincentive chain. The production risks associated for providing commercial financing. with unfavourable weather and pest and This is despite the lucrative nature of this diseases, among others, and price collapse trade. If buyer contracts for maize exports risks for maize value chain are real and into regional markets were tenable, they have bad past memories. Lenders, under would catalyze development of financing such circumstances, have for justifiable mechanisms especially by the financial reasons maintained a high level of risk institutions with operations in the aversion to lending to the value chain.

countries of the maize export destination The aBi Trust

and Uganda. Examples could include: As will be explained later in this article some 02 Stanbic, Standard Chartered, Equity and of the programmed aBi Trust interventions in Kenya Commercial Bank. the near term and also recommendations for policy initiatives should help to address these ii) Related to the challenge of lack of export challenges. market contracts, the non-existence .... the critical lack of production and market risk mitigation insurance products has held down efforts to

of production contracts from bigger Section 3: Interventions by aBi domestic buyers like WFP further blocks Trust to boost investments in the financing opportunities for the maize maize value chain value chain. If production were to be underpinned by pre-planting contracts As for the other commodities which aBi that relay clear market and price signals, Trust supports (oilseeds, coffee, pulses, and both farmers’ production planning horticulture and vegetables), the Trust uses (including investment and financing a holistic approach to support market-driven needs) and reduction in lending risk maize value chain actors to improve their perception would be highly boosted and efficiency and market competitiveness. The thus allow a reasonable flow of commercial interventions focus on increasing productivity, finance to the value chain. The issue of product quality, access to finance, market lack of contracts in domestic commodity linkages for inputs supply and produce markets, ostensibly on the premise of lack trading, and greater gender integration in the 47 of contract enforcement mechanisms to entire value chain. discourage side-selling and other non- performance vices, is not insurmountable5 Working through implementing partners, as effective policy action can provide including farmers’ organizations, SMEs YEARBOOK 2011

remedies – see Section 5 below. engaging in trading and processing, women

5 The suggested mitigation measures for this in article 4.2 in the 2010 Agricultural Finance Year Book are still relevant. AGRICULTURAL FINANCE AGRICULTURAL and youth groups and inputs supply mechanisms and products amongst partner stakeholders associations, and also through financial institutions and supporting collaboration with other development the demand side (value chain actors) to partners6 and public sector actors for greater effectively engage with financial institutions. synergy and impact, the Trust provides This is through BDS support for business technical and financial support for the maize plan development, management systems value chain activities. These activities focus strengthening and financial intermediation. on: In addition, aBi Trust collaborates on 1) Enhancing farm level productivity development and piloting of risk mitigation through demonstration of best agronomic mechanisms such as weather index insurance practices, plus improving quality at harvest and hedging financial products that aim to to postharvest stages; further steer the agenda for better access to 2) Increasing demand, availability and finance. accessibility to improved inputs such as seed, fertilisers and crop protection Furthermore, aBi supports financial chemicals in partnership with UNADA institutions’ efforts to increase rural outreach and other entities supporting inputs through new branches and branchless supply development; mechanisms. 3) Enhancing operational and value-addition efficiency, and quality at farm and firm It also provides lines of credit to qualifying levels; financial institutions for on-lending to 4) Increasing market access through market agribusinesses and operates an agribusiness information dissemination, market credit risk sharing scheme to catalyze linkages facilitation and marketing comfort of lending to agribusinesses within mechanisms development; participant financial institutions. 5) Enhancing sanitary and phytosanitary standards and quality management Section 4: Support services for systems; the maize value chain 6) Integrating gender awareness in production and marketing throughout the Extension value chain. There are gaps in public extension provision Other interventions in regard to accessibility, outreach broadness and quality and content of extension Increasing access to financial services messages. This has been visibly exemplified through partnerships with financial by chronic low yields for maize7, high harvest institutions, which is cross-cutting for all and postharvest losses and generally low aBi supported value chains including maize, quality of maize grain on the market. This 48 is another key intervention by the Trust. phenomenon translates into high unit cost of Emphasis in this respect is on activities production and impacts the return on farm that target improved agribusiness lending level investment. skills and developing appropriate financing YEARBOOK 2011

6 Under a delegated cooperation agreement with the Royal Danish Embassy, USAID is providing additional funding to aBi to support further interventions in maize, coffee and bean value chains. 7 Average yield of 1.5 mt per ha is less than one third of the expected yield under good agronomic practices. AGRICULTURAL FINANCE AGRICULTURAL Business Development Services (BDS) Section 5: Policy environment and issues BDS for enterprise skills development, financial services access and provision, and Maize is regarded as a priority crop, due to market development and market access, its potential to contribute to national food among others, is either lacking or inadequate. security, increased household incomes9 and This is especially so in rural areas, where the reduction of poverty, as well as being a key majority of maize value chain actors operate. regional export commodity10. As such it has As a result of BDS gaps, actors are not fully received reasonable policy and legislative realizing the benefit of their investments attention. The crop protection laws and and efforts. Related to BDS is the relevance policies, fiscal policies on agricultural inputs, of inspection and collateral management. implements and exports, and the East Africa

The number of providers for this service is maize grain standard (latest, still in draft, being The aBi Trust extremely low, thus limiting their outreach the 3rd edition) should steer the expansion of 02 capacity and impacting on the cost of service maize production and quality standards, and to the value chain actors. enhance trade in the commodity. However, there are apparent gaps within the maize value Financial sector weaknesses chain that should warrant additional policy scrutiny and interventions where appropriate, Though there has been reasonable as summarized below. improvement, the degree to which the value chain had been able to attract commercial i. Quality standards finance in 2011 was still not adequate. Low liquidity in lower tier financial institutions did Cross-border trade in maize grain from 8 not help the situation . Uganda to Kenya, South Sudan and other neighbouring countries is a robust economic Also the agribusiness lending skill gaps and activity throughout the year. However very lack of suitable products tailored for the value little attention is put on quality standards for chain within financial institutions, and lack of much of the maize exported, notwithstanding insurance products to address production and the existence of the grain standard mentioned market risks all constrained access to finance. above. The trade is mainly informal, without Beyond financing, the issue of payment and the production contracts which would remittance mechanisms for the maize value encourage compliance to quality standards. chain remained a challenge, as buyers and Similarly, emphasis by domestic traders and sellers continued to shoulder the risk of millers on farm product quality is, in many carrying big amounts of cash. instances, lacking; traders and millers do much of the quality improvement themselves. As explained in the third section of this article, aBi’s interventions are expected to These phenomena directly impact on value tackle these gaps through the partners with realized, especially at farm level. Compliance 49 whom it works in the maize value chain and to quality is definitely an issue which ought to in financial services provision. attract policy attention and action. In addition, there is need to intensify the implementation of government policy on export of value- YEARBOOK 2011

8 #$V9-X%-X*87[\]] and farmer groups. 9 Approximately one million households in Uganda engage in maize production. 10 Maize exports generated USD 40 million in 2010/2011 according to UBOS. AGRICULTURAL FINANCE AGRICULTURAL added maize products instead of grain. This Other policy issues would boost export value realized from the commodity. A move in this direction would Other areas for policy concern and attention also assist in the development of formal export include: eradication of counterfeit inputs contracts for cross-border maize trade. from the market, crop pests and disease control (including for striga weed that is ii. Soil fertility a big blow to maize production in several districts), resolving land conflicts in areas Maize production yields are highly correlated where people were internally displaced by to soil nutrient intensity. Thus fertiliser usage war, primary producer groups strengthening, ought to be of high priority in enhancing maize dissemination of appropriate productivity production. However, fertiliser prices have in enhancement and market information, the recent years skyrocketed and are now out intensified research and supply of good quality of reach of the majority of producers. This maize varieties especially hybrid seed, support has led to lower yields with consequent high for production risk mitigation insurance unit costs, which are a disincentive not only products and putting in place mechanisms to to producers but also to financiers that would increase access to credit by smallholder maize be interested in lending for maize production. producers and small-scale traders. There is therefore need for a strategic policy intervention to increase availability and References accessibility to fertiliser by maize producers. (See also Article 3.2 in this Yearbook.) 1. Farmgain Africa LoRaMIS Annual Report 2011 submitted to its partners (including iii. Encouragement of contract farming aBi) 2. East African Standard, EAS 768:2011 The maize value chain has high potential for contract-based and commodity exchange trading mechanisms. However, these have been little used, despite their relevance to underpinning effective commercial financing to the maize value chain. Thus policy enactment and implementation towards greater use of contracts and trading through the commodity exchange should enhance increased production and quality of maize. Clear laws on contracts enforcement, particularly production contracts, should be a priority agenda.

50 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL The aBi Trust 02

Ripe coffee cherries.

2. 2 Boosting Investment in the Coffee Value Chain1

Section 1: Market signals and compared to UShs 3,600 and UShs 5,900 for their impact on the coffee supply the respective varieties in 2010. Throughout trends in 2011 the year there was a high level of effectiveness in dissemination of market information for lobal coffee production in 2011 coffee. This helped to fairly distribute the is estimated to have been 135m margins between the value chain actors, with 60kg bags2. The year 2011 was the farmers continuing to receive the highest characterised by a steady rise in share of these margins3. 51 Gprices of both Robusta and Arabica coffees, above those realized in 2010 in Uganda. The The Uganda Coffee Development Authority average Kampala FoT prices for Robusta (UCDA) continued to monitor market trends FAQ and Arabica ordinary parchment were and to post indicative daily coffee prices (for

UShs 4,600 and UShs 8,000 respectively, all varieties and grades) for both export and YEARBOOK 2011

1 Author: Asaph Besigye, Consultant under contract to aBi Trust 2 Source: United States Dept. of Agriculture. 3 For example farmers engaging in Robusta coffee production received 70% of the Kampala FoT price with the balance shared between the other actors in the chain. AGRICULTURAL FINANCE AGRICULTURAL local transactions on its website. This service by producers and traders in anticipation by the UCDA greatly boosted access to of higher returns and margins. From the important market information. available data, it was also ascertained that there was increased volume of farmer bulk- Indeed, 2011 saw a tremendous improvement marketed coffee. For example the volume of in the dissemination of market signals. bulk-marketed FAQ through Kaweri Coffee This is attributed to the sustained high Farmers Alliance Support Project in Mityana/ level of competition in the coffee sector, the Mubende increased by 45% from 701 mt in continued shortening of the value chain with 2010 to 1,021 mt in 2011 and this has been many farmers’ organisations directly selling to attributed to the good margins realized by exporters, and increased market transparency the farmers. These ranged between UShs 400 by the leading coffee exporters including and UShs 800 per kg. their regular direct dissemination of price information to producer organisations and Section 2: Investment trends traders, as was the case with Ibero Coffee. In within the coffee value chain addition, robust access to market information via mobile phone SMS, web mails and websites The favourable trend in the market during the of several market information providers was year countered, to some extent, the continued

.... the increase in the number of wet coffee washing stations, additional coffee grading operations, increased number of farmers .....

maintained. Furthermore, actors providing global uncertainty and the harsh domestic grading services were a valuable channel economic situation occasioned by the high for market information access as they had inflationary pressure during the second half a constant data flow, through commercial of the year. Indeed, there were noticeable linkages, on prices for the different coffee investment flows into the coffee value grades. Therefore, coffee value chain actors chain as reported by both aBi partners and had rich sources of timely and reliable market collaborating entities that were supporting this information that informed their supply value chain. response decisions. Production level investments in acreage Because of the big boost in access to market expansion and rehabilitation of the existing information and the clear positive market shambas, including replacement of old coffee signals, producer and trader confidence to trees, stumping, pruning and gap-filling were 52 engage in the market increased. This was highly visible. There was excess demand reflected in the increased volume of coffee for planting materials, leading to country- exports of 3.17 million 60 kg bags worth US$ wide shortages of quality seedlings from the 456 million in 2011 up from 2.8 million bags nurseries. in 20104, an indication of supply response YEARBOOK 2011

4 Source: UCDA monthly reports for 2011. AGRICULTURAL FINANCE AGRICULTURAL Beyond investment in quality seedlings, of coffee bars, especially at shopping malls producers stepped up investments in other and supermarkets and at busy filling stations, yield enhancing technologies such as manure, with Ugandan coffee constituting the major inorganic fertiliser, mulch materials and soil raw material ingredient. conservation. There were also increases in investments targeting quality improvement Besides investment in capital assets in the for premium prices as reflected by the steady respective coffee value chain points triggered increase in the demand for drying tarpaulins by the good market, investment in increased and increase in the number of farmers working capital, precipitated by the increase adopting better drying technologies such as in prices during the year, was inevitable. raised platforms for washed Arabica coffee Buyers had to dig deeper into their pockets for to minimize dust, moulds and other foreign the same volume previously purchased. Also,

matter. the vibrant market ought to have had a direct The aBi Trust

ripple effect on investment in coffee trading 02 At the processing level there was a noticeable infrastructure such as storage and haulage. increase in investments targeting higher and This effect is difficult to accurately qualify for better value addition. This was indicated this article, especially due to the non-specific by the increase in the number of wet coffee and multi-commodity usage of these assets.

.... the respective coffee value chain points triggered by the good market, investment in increased working capital .... washing stations, additional coffee grading Section 3: Interventions by the operations, increased number of farmers aBi Trust to boost investments in and farmer groups acquiring and using hand the coffee value chain pulpers and increased investment in quality hullers and hulling equipment refurbishment. The aBi Trust adopted a holistic approach The investment in rural-based coffee hulling to support coffee value chain actors, aimed facilities was also propelled by the rapid shift at improving their operational efficiency by the farmers from selling Kiboko coffee and market competitiveness - keys to to selling FAQ which provided an increased stimulating investment in the sector. This was demand for hulling hire services. In addition, accomplished through targeted technical and there was a noticeable increase in domestic financial support to implementing partners coffee roasting for both local consumption such as farmer organizations, SMEs engaging and export. in processing and marketing, women and youth groups and input supply stakeholders’ 53 A further development in the domestic coffee associations, and also through collaboration roasting initiatives was the shift from roasting with other development partners and public poor grade coffee to roasting good quality sector actors. Primarily, aBi interventions, as coffee for better cupping quality. In addition, summarized in the next paragraphs, aimed YEARBOOK 2011 there was a dramatic increase in the number AGRICULTURAL FINANCE AGRICULTURAL at increasing productivity, quality, access value chain. Partnering with UNADA and to finance and markets, and greater gender UCDA, input dealers have been trained integration in the entire value chain. in key aspects that enhance efficiency at this level of the value chain. Support was i. Producer level productivity also provided for input supply linkages, enhancement support targeted especially with farmer organizations. technology transfer mechanisms through demonstration of best agronomic practices iii. Though aBi has not yet provided such as: use of improved inputs, water substantial support for the processing and conservation, stumping, pruning and pest marketing level of the coffee value chain, and disease control. Related support was it has an enriched menu for it in the short provided for demonstration of quality and medium term. Indeed, aBi highly management through better harvest rates the role of value addition through and postharvest handling practices such processing to impact the coffee value as picking ripe coffee cherries, proper chain through backward and forward drying using appropriate facilities. The linkages. Its strategy supports BDS for .... not yet provided substantial support for the processing and marketing level of the coffee value chain, it has an enriched menu ....

aBi Trust considers producers as anchors business plan development, processing of the value chain and thus puts greater technology identification and sourcing emphasis on interventions at the primary and management systems development. production level. Also aBi emphasized The aBi Trust also supported a number of producer-led initiatives at this level of exporters and NOGAMU to step up efforts the value chain for maximum ownership to meet organic and other certification and the eventual sustainability of the requirements for the conventional coffee interventions. For standardization of market. technology dissemination messages, aBi worked with MAAIF and UCDA to iv. On the financial services development produce standard coffee productivity side, aBi supported a number of financial and quality improvement dissemination institutions to improve their efficiencies manuals. in providing financial services to agribusinesses, including the coffee ii. At the inputs supply level, aBi support sector. Improving agribusiness lending targeted increasing availability, skills and developing appropriate 54 accessibility and affordability of quality financing mechanisms and products inputs through support for development amongst partner financial institutions, of an efficiently functioning inputs and supporting the value chain actors to procurement and distribution network, effectively link with financial institutions where the actors therein understand the underpinned aBi’s strategy in this YEARBOOK 2011

relevance of quality inputs in the entire dimension. aBi Trust also supported AGRICULTURAL FINANCE AGRICULTURAL efforts aiming at increasing outreach for areas and with other commodities. It also financial services through branch network leveraged from the USAID DCA guarantee, expansion and branchless mechanisms. through the USAID/LEAD Project, for its Some of this support targeted coffee agribusiness lending including to the coffee growing areas such as Kyenjojo with sector, and intends to enlist on the aBi risk Opportunity Bank5. Lines of credit from sharing facility as its utilization of the DCA aBi and the aBi agribusiness credit risk facility is about to be exhausted. sharing scheme for financial institutions6 also benefited the coffee value chain Though aBi’s interventions have emphasised actors, as was reported by the partner innovation, this lies more in the new financial institutions. combinations of techniques, rather than new stand-alone systems of supporting

One example of aBi’s support for financial investment. Thus aBi support draws heavily The aBi Trust services that is impacting the coffee value on existing researched and documented good 02 chain is the support to Opportunity Bank. practices, replicating successful cases, sharing In June 2011 Opportunity accessed a line of knowledge and experiences and leveraging credit from aBi for on-lending to agribusiness expertise resources as long as these are able to actors, especially smallholder farmers. stimulate efficiency within the value chain. The

.... Uganda Coffee Farmers Alliance, Opportunity Bank applied part of the funds from aBi to lend to coffee farmers, through their farmer groups ...

Linking with the Uganda Coffee Farmers support puts greater emphasis on certainty of Alliance, Opportunity Bank applied part of the market and existence of market linkages. the funds from aBi to lend to coffee farmers, through their farmer groups in Mityana Section 4: Support services for and Mubende, for inputs such as herbicides, the coffee value chain pesticides and tarpaulins. Lending was through a low risk and low cost structured Support services are of critical importance, trade mechanism under which disbursement given the nature of the coffee value chain. It of loans was directly to the input supplier and is dominated by over one million smallholder recovery was through the producer groups, producers, who face production-related from the proceeds of coffee delivered by the problems such as coffee wilt and black twig borrowers. Though still at pilot level, by the borer diseases. Other pertinent characteristics end of the year Opportunity had disbursed include: a large number of small middleperson UShs 15.5 million to 27 coffee farmers traders, a few major exporters and the high belonging to one farmer group. Applications quality standards demanded by the terminal 55 from other farmers were in the final stages of market. The effectiveness of overall support being appraised, with the expectation that a services for the coffee value chain during reasonable amount of credit will be disbursed 2011 was mixed, with some cases being highly during the first season of 2012. Opportunity satisfactory and others critically inadequate. YEARBOOK 2011 intends to replicate this innovation in other

5 Please see Article 4.1 below in this Yearbook. 6 As detailed in Article 2.1 in this Yearbook, on the maize value chain. AGRICULTURAL FINANCE AGRICULTURAL Roasted coffee beans.

The extension support for enhanced coffee-specific extension services. These have productivity and quality and for sensitization been very effective because they are based on on how to combat pests and diseases, for a farmer-led approach. the coffee sector, takes two dimensions. The public sector supported and supplied Related to extension is the support for extension services (including NAADS and organic certification and traceability of origin local government agricultural extension staff) in organic and fair-trade marketed coffee. has gaps in regard to outreach effectiveness, This is twinned with quality inspection and quick responsiveness and entire value chain certification at the exporter level. The service coverage. The key constraint in this respect providers in these areas are efficient, though is the inadequate resources (human, physical their costs are still high and largely out of 56 and financial). For example, one extension reach for small actors. It is also foreseeable staff in a sub-county for all crops is inevitably that as demand for these services increases in overwhelmed and cannot be effective. As response to increased market opportunities, a result most coffee exporters, in some the supply will be overburdened as currently cases collaborating with donor programs, there are few service providers. YEARBOOK 2011

continued to invest in own-managed private AGRICULTURAL FINANCE AGRICULTURAL Similarly, private initiatives in market As highlighted earlier in this article, aBi information provision and market linkages, interventions in the coffee value chain and linkages to financial services providers are expected to tackle these gaps in the (especially for farmer groups) registered a geographical areas where it operates and remarkable positive impact during 2011. hopefully these initiatives can be replicated However, though inspection at inputs supply elsewhere by others. level is vested in UCDA and MAAIF for both coffee nurseries and quality crop protection In summary, aBi’s support to partners and pesticides, the continued occurrence of its collaboration with other entities and counterfeit inputs and substandard seedlings stakeholders are of a nature that targets are indicators of a service support gap. Thus, increasing production, productivity and generally the private based support services quality, and increasing access to financial

continue to outperform the public sector services. In addition, some of the interventions The aBi Trust based services, a clear indication of the benefit directly target addressing the constraints 02 of the liberalized coffee sector. emanating from the support services gaps.

During the year there was a noticeable increase These include meeting the costs of certification, in the provision of commercial finance to the market information dissemination and direct coffee value chain, especially in cases where linkages for financial services. market linkages were positively functioning, thus enabling development of structured Section 5: The coffee sector trade financing mechanisms such as those policy environment and issues – operating for the farmers and farmer groups Ten points for attention supported by the Uganda Coffee Farmers Alliance in the Mityana/Mubende area.

... there was a noticeable increase in the provision of cases where market linkages ....

As mentioned earlier, during 2011 Given the historical and current importance Opportunity Bank’s involvement with the the coffee sector commands in the national coffee value chain was stepped up; Centenary economy and national development strategies Bank also became more involved. However, (a major traditional cash crop, major source of lack of insurance products to mitigate export earnings, significant role on increasing production and market risk continued to household incomes and in poverty reduction, constrain access to finance. Also, limited important contributor to rural employment innovation in payments and remittance and carrying enormous potential for value mechanisms for producers, producer groups addition) it has benefited from a good share 57 and small traders remained an issue to be of enabling policy and legislative attention. tackled, as buyers and sellers continued to The sector’s policy environment continues to shoulder the risk of carrying huge amounts of be anchored in UCDA and MAAIF. cash. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL However, there are identified gaps that ought currently considered to be very high. to be of relevance for policy formulation and implementation, as summarized in the Ten 5) There is also a need to provide standard Points below. guidelines and specifications for processors on milling out-turn, quality- 1) The slow pace of approval of the draft enhancing equipment. National Coffee Policy, that is expected to plug a number of gaps in the 1994 6) Urgent attention is needed to tighten UCDA (Amendment) Statute, is of control measures to eliminate counterfeit serious concern to many stakeholders inputs, especially pesticides. in the sector. While the existing statute focuses on the upstream activities from 7) The structure of the roles and relationships the processing level, the draft policy is between UCDA, COREC and NAADS expected to address, and thus steer the needs to be reviewed to align them with efficient functioning of the entire coffee the dynamics of the industry, and ensure value chain. that UCDA support services effectively trickle down to local government level, so 2) The downgrading of the former Coffee as to deepen their impact. Research Institute in Mukono to a Research Center is perceived as a blow to 8) Industry stakeholders strongly believe the much needed research initiatives. This that they should be allowed to actively is contrary to the direction in the sister engage in determining the utilization of East African states of Kenya and Tanzania the Coffee Cess funds both to improve where there has been upgrading of the relevance of this instrument and to research institutes to research foundations, positively underscore the need to step up with the stakeholders (especially farmers) the rate from the current 1% cess, once its having a say in the research initiatives, benefit has been broadly internalized. This with resulting highly visible impacts. has been done in Kenya and Tanzania.

3) There is a need to step up research and 9) Furthermore, efforts and deliberate release of research results on high yielding incentives to step up value addition and to and disease-resistant varieties, increase increase domestic consumption need to disease surveillance through effective be pursued. phytosanitary controls and, intensify interventions to combat the menacing 10) The highly successful coffee value chain coffee wilt and twig borer diseases. development model supported by the NKG Alliance Trust should be replicated 4) On taxes, there should be a review of in other locations, especially through withholding tax on the sale of seedlings public private partnerships. The aBi 58 and other inputs, and review of taxes has been and is expected to continue and licence fees for processors, which are supporting this replication. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL The aBi Trust 02

Healthy blooms of sunflower.

2.3 Boosting Investment in the Oilseeds Value Chain1

Section 1: Market situation and realized by farmers in 2010. All the major prospects for the oil seeds value millers of oilseeds in Northern Uganda, the chain in 2011 leading oilseeds producing area, operated at levels much lower than their installed he oilseeds market situation, milling capacities (totaling over 150,000 MT particularly for sunflower, was per annum) due to inadequate supplies of more dynamic in 2011 than in the oilseeds, implying that farmers never fully

previous year. tapped the existing market opportunities 59 T through substantially increasing production. The high level of competition amongst buyers, including millers, helped to maintain Although there were visible efforts to increase a steady price increase, with the average being production of sunflower in 2011 that were YEARBOOK 2011

UShs 900 per kg as compared to UShs 800 underpinned by good markets, favourable

1 Author: Asaph Besigye, Consultant under contract to aBi Trust AGRICULTURAL FINANCE AGRICULTURAL weather in 2011B, highly increased civil site coordinators. It also directly bought stability and robust recovery initiatives, there from producers who delivered the crop were a number of constraints as reported by at the mill. Both mill gate and agent the several actors and stakeholders engaged in store prices were pre-set and were well the value chain. communicated through site coordinators, radio and posters put at agents’ stores. Constraints Agents received a commission of UShs 30 i. The biggest constraint wasunavailability per kg to cover their overheads and profit. of and accessibility to improved inputs Mt. Meru Millers Ltd. on the other hand especially hybrid seed. During 2011A bought from traders and farmers who there was a serious shortage of hybrid delivered at the mill. It has not put in place seed and also the weather was not very a buying agent structure like Mukwano favourable, which affected production. and as a result many middlemen engaged Due to low demand in 2009 and 2010, with it. the major importer of sunflower hybrid seed (Mukwano) had imported and Though the existing buying arrangement is stocked low volumes of seed (only 63 MT) fair enough as it is encouraging a reasonable in anticipation that the demand would level of competition, it can still be improved be low. A similar situation obtained for upon, especially to catalyze the increased flow fertiliser where access by the farmers, of commercial financing to the oilseeds sector. chiefly dominated by smallholders, was highly constrained due to inadequate Section 2: Opportunities for volumes on the market.

ii.. The situation of inputs supply is impacted Table 1 summarizes the average per acre cost by the procurement process where of production for sunflower in Lira District2 millers are playing a key role, although in 2011A season for both high and low inputs this is not their core business. They are applications and the resultant gross margins. prompted to do this to plug the supply gap, An extrapolation beyond the gross margin since they want the volumes of product to has also been made to analyze the return meet their operational requirements. Thus on investment both in terms of crop cycle there were positive efforts by Mukwano in tenure and annualized basis to indicate the 2011B season to address the seed shortage. likely bankability of investments in oilseed The company imported 144 MT of hybrid production. sunflower seed (more than double the volume it had stocked in 2011A). Victoria From the analysis, it is clear that sunflower Seeds Ltd. also increased its supply of production can viably support commercial hybrid sunflower seed. As a result, timely financing as the annualized return on accessibility to improved seed increased investment (ROI) favourably compares with 60 substantially. commercial interest rates. The analysis should help to inform lenders as to possible financing iii. In terms of the buying arrangements opportunities at the production segment of for sunflower, Mukwano Industries this value chain. The key question here is, Ltd. mainly bought through its agents, ‘Which activities do farmers find difficult to YEARBOOK 2011 most of whom also doubled as its field

2 Lira in this context represents the former greater Lira and is not restricted to the current boundaries of Lira district AGRICULTURAL FINANCE AGRICULTURAL Table 1: Per acre cost of production for sunflower in Lira for 2011A Season Item Low input High input Yield per acre (kg) 500 1,200 Price per kg (at local trader stores) 900 900 Total revenue 450,000 1,080,000 Costs - Inputs: Herbicides – roundup 3,000 Seed - hybrid Pan 7361 31,000 31,000 DAP 150,000 Urea 120,000 Planting rope 6,000 6,000 Sub Total 37,000 310,000 Labor and Mechanical Costs: The aBi Trust Land clearing 10,000 10,000 02 Ox-ploughing (1st & 2nd) 80,000 80,000 Planting (without & with fertilizer) 20,000 40,000 Top dressing fertilizer application 15,000 Weeding 1 30,000 30,000 Weeding 2 30,000 30,000 Harvesting 30,000 35,000 Packing bags @ UShs1,200 each 12,000 28,800 Transport field to store/home 5,000 12,000 Sub Total 217,000 280,800 Other Costs Tarpaulin (use for 2 seasons) 25,000 25,000 Transport to bulking centre 10,000 22,000 Sub Total 35,000 47,000 Total Costs 289,000 637,800 Gross Margin 162,000 442,200 Planting to harvest period (Months) 4 months 4 months Season return on investment 56% 69% Annualized return on investment 168% 207% Source: Data provided by the former field coordinator for USAID/LEAD project in Lira and Dokoro efficiently handle with their own resources of meaningful returns in order for the entire labour, capital and linkages to the market?’ The value chain to be efficient and thus attract crop is still largely grown on a smallholder financing. With much of the oilseed crop basis with big portion of labour being family being directly purchased by the processors, labour. Broadly, the critical activities that and with continued substantial investment merit commercial financing are those related in plant by the two big players, one can infer to land opening, buying improved inputs that profits further along the value chain are and marketing. satisfactory. Indeed, in the recent past, there 61 has been an upward trend in the volumes Although the farm level profitability and ROI marketed and processed, prices have steadily are sound, it is imperative that the other actors risen and millers have continued to diversify in the sunflower value chain equally realize their operations. The only doubtful sunflower YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL value chain segment, in terms of efficiency, inputs savings financial product would be has been inputs supply. The chronic shortages ideal to salvage this situation. Such a financial of key inputs as mentioned earlier continue product may be designed so that farmers to haunt the value chain. Clearly some policy would save a portion of their sales proceeds interventions could help here – a point taken at the time of marketing, an amount sufficient up in Sections 3 and 6 of this article. to meet all or part of the cost of inputs for the next season. Section 3: Potential options to Other financing options oilseeds value chains These include financing animal traction for This section addresses the key issue as to how land opening and marketing finance for the financing of the value chain should be crop procurement. Also helpful would be tailored. Some options are proposed below. off-season finance for income smoothing to enable the farmers to meet their off-farm expenditure such as school fees, medical Financing input dealers bills, etc., thus enabling them to concentrate on their farm activities, without disruption As earlier observed, access to improved to look for alternative sources of funds. This inputs, especially hybrid seed and fertiliser for would reduce the temptation to sell off the crop sunflower production, is highly constrained before harvest to middlemen/moneylenders, and this presents an opportunity for a phenomenon that is highly entrenched in financing. The provision of inputs by millers several agricultural value chains and that is is not part of their core business and is not very detrimental to both farm profitability likely to gain their priority attention. On the and product quality. other hand, this is the core business of input dealers. These should be in a position to meet the demand for inputs from growers, with the Pre-planting contracts potential to arrange financing accordingly. Such financing, to be effective, should be on a Given the current situation in the oilseeds value chain, i.e. millers operating below their structured trade basis, with the lender gaining maximum control of the cash flow for the installed capacities and also the relevance of the quality of oilseeds on the milling out-turn, financed inputs including direct remittances to suppliers of the inputs, with mechanisms to provision of producer and trader contracts is not only highly feasible but would also allow the buyers (farmers) of the inputs to pay catalyze commercial lending. If millers and for them through the lender. traders can provide pre-planting contracts to producers, specifying volumes to be procured Structured inputs saving product and a minimum price for the crop, farmers would be able to determine whether or not Some farmers fail to access inputs because 62 external financing would be worthwhile. of financial constraints even when the This would not only benefit farmers, but required inputs are available in the market, also buyers and millers, as these would have notwithstanding the substantial cash they reasonable certainty of realizing the required realize when they sell their crop. A structured volume and quality of product and thus be YEARBOOK 2011 able to efficiently plan their operations. AGRICULTURAL FINANCE AGRICULTURAL However, though theoretically Section 4: Interventions by aBi straightforward, managing production Trust in the oilseeds value chain contracts to ensure high levels of contract performance necessitates putting in place The Agribusiness Initiative Trust (aBi), using adequate control mechanisms. This is a holistic approach, supports market-driven particularly so for a crop grown on a oilseeds value chain actors to be efficient, smallholder basis, where much of the effective and competitive. Through value contracting would not be with individual chain analysis, the constraints in the entire growers but rather with a growers’ association value chain are identified and an appropriate or cooperative. In such a case the signal action plan for technical and financial support to the individual producer to supply the through identified partners is developed to commodity to meet the contract would not address the constraints. The support extended be strong enough - thus the necessity for by aBi Trust is on a demand-driven basis and The aBi Trust other appropriate enforcement mechanisms has a strong emphasis on cost-sharing for the 02 involving the association or cooperative. necessary sustainability of the intervention.

Payments systems In 2011 aBi Trust supported farmer organizations to increase production of Beyond savings and credit financial products, soybeans and sunflower in Apac, Mayuge, payments and cash transfer mechanisms for Lira and Oyam through demonstration of the oilseed sub-sector are very important best agronomic practices, including the use of because there are so many small scale improved seed, fertiliser and crop protection producers of oil seed. In some areas there have chemicals, in addition to best postharvest been successful efforts to cluster the growers handling practices and quality management. for purposes of extension delivery and this The Trust also supported Mukwano Industries clustering could be used for providing other and Mount Meru Millers to provide similar services by the millers and donor programs. support for sunflower and soybean production in Northern Uganda, an initiative that is The challenge though is to develop a targeting to reach 60,000 smallholder farmers mechanism by which growers are paid at (over the next two years), with the two partner the time of marketing, with safeguards processing firms providing extension services that reduce the risks, for both growers and and a market for the crops. buyers, involved in handling cash money. Producers need to access their proceeds Beyond focusing on production and quality conveniently and at low risk while buyers enhancement, cross-cutting support was also need to be relieved of the burden and provided for strengthening market access risk of carrying huge amounts of money in through appropriate market linkages and rural areas to pay farmers. Enhanced and provision of market information. Efforts also cost-effective electronic funds transfer and addressed creation of broader awareness of access mechanisms would help to address this the importance of sanitary and phytosanitary 63 situation. standards and quality management practices, and strengthening the inputs supply network to increase availability, accessibility and affordability of improved inputs, in YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL partnership with UNADA. The Trust’s major Section 5: Availability of support cross-cutting support in all value chains, not services for the oilseeds value only oilseeds, is integrating gender in the value chain chain to increase the participation of women and youths. These disadvantaged groups are Much of what is required to strengthen important for achieving enhanced production oilseeds value chains has been described and market operations by aBi partners3. above. There are other support services that are needed – as noted below. Though the extent of aBi support to the oilseeds sector is not yet very broad, due to Field extension services for the oilseeds the Trust’s nascent tenure, its medium term sector, particularly for sunflower, are being strategy for oilseeds is comprehensive. The provided by several entities including NAADS strategy envisages further and accelerated (in areas where farmers prioritize particular support for productivity enhancement oilseeds for NAADS support), donor projects, in terms of wider geographic coverage, private sector enterprises engaging in oil seeds farmer organisation strengthening, organic milling such as Mukwano and UOSPPA4. The certification especially for sesame, increased biggest challenge in this support remains value addition for sunflower and soybean the harmonization of agronomic extension cake, and supporting the initiatives of the messages. For example, there have been Oilseeds Sub-sector Platform. The financial conflicting messages by different actors services support for the oilseeds sector has regarding the use of OPVs (e.g. Sunfora) involved three financial institutions, to date. and hybrid seed for sunflower productivity These have been supported to increase their enhancement. Also while private sector outreach in Northern Uganda. Discussions and donor supported extension has been are also in advanced stages with several reasonably effective (for example Mukwano’s financial institutions to support their capacity extension is reaching 50,000 farmers), there building, aimed at increasing the supply of are critical gaps in extension provided by other financial services to the oilseeds sector. entities, especially in regard to regularity and outreach. There is reasonable impact so far being realized from aBi support. Interest in increasing Another critical service provision is in production and productivity in sunflower and respect of increasing yield-enhancing soybean commodities is high and growing. seed varieties through research, breeding More women than in the past are engaged and multiplication. Though it has been in commercial production and marketing of evident that hybrid sunflower seeds have the two commodities and several financial high productivity potential there are no institutions are keen to identify opportunities tangible efforts to increase its production for financing in the oilseeds sector. and multiplication locally. A similar situation exists for sesame oilseeds. 64 More attention is needed to foster Business Development Services (BDS) for business planning, financial services intermediation, production contract management, market YEARBOOK 2011

3 See Article 5.2 in this Yearbook for more detail on the mainstreaming of Gender Issues into development initiatives. 4 UOSPPA = Uganda Oilseeds Producers and Processors Association AGRICULTURAL FINANCE AGRICULTURAL linkages and market information provision, stakeholders in order to leverage financial and and inputs supply network development. expertise resources so as to accelerate, deepen and broaden the attainment of the desired Mechanized service providers are in short impact. supply to provide land opening for farmers. Despite the drudgery involved, the hand hoe The availability of improved inputs, beyond has continued to remain a major tool for those provided through national research, producers. needs additional policy consideration. Inadequacy of supplies of hybrid seed The other areas requiring attention in service and fertiliser has been mentioned earlier. provision include quality certification Strengthening inputs supply through smart services the costs of which are still prohibitive subsidies, targeted financing mechanisms

for the smallholder. such as establishing an inputs credit fund The aBi Trust

and accelerating the efforts to increase local 02 Section 6: Policy environment and production of fertiliser and multiplication of issues hybrid sunflower seed should assist here.

Generally the policy environment for Strict enforcement of commercial contracts agribusiness, and in particular for oilseeds, is is required. Indeed, the judicial system conducive. should function so as to inject greater respect for contracts and thereby enhance Nonetheless, there are some key gaps that the efficiency of operations of the respective should warrant further policy interventions, contracting parties, through facilitating the through a process of continuous review and flow of commercial financing underpinned fine-tuning, as summarized below. by contracts.

Effective extension services are critical for In addition, policies focusing on land tenure the efficient functioning of the oilseeds value issues are highly desirable for the oilseeds chain. There is need to close the gaps in the sector, as access to and utilization of land is a extension messages, broaden the outreach of pivotal dimension in agricultural production. extension and increase research that should Major oilseed producing areas are in eastern lead to greater availability and accessibility and northern Uganda, areas afflicted by of the products demonstrated in extension. post war land conflicts. Thus aneffective These improvements may not necessarily mechanism to resolve land conflicts has to be be achieved by government only. They may a top policy priority for steady and enhanced also be pursued through public / private production and productivity of oilseeds as partnerships with commercial oilseeds well as for other farm products.

65 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL

03 The Issues with Inputs/Market Information Seed beds.

3.1 Seed Supply: The Role of Financial Services in Ensuring that the Required Varieties, Quality and Volume are Produced for Sale in the Ugandan Market1

Section 1: Overall situation a) Research, variety development and he development of a robust seed system registration; provides the foundation for Uganda’s b) Seed production/multiplication system to 68 food security since only such a seed produce commercial volumes from breeder system can ensure efficient delivery of seed to certified seed including processing; Tgood quality seed to farmers and sustained supply c) Distribution and marketing to retail level; of superior varieties with better yield potential d) Finance for the seed supply chain; and tolerance to biotic and abiotic stresses. A seed e) Policy and legal framework.

YEARBOOK 2011 system comprises:

1 Author: Josephine Okot, MD, Victoria Seeds Ltd AGRICULTURAL FINANCE AGRICULTURAL This article outlines the role providers of financial At present, there is no reliable and regular services could play in improving the current weak source of information on seed production and seed supply chain, but it also highlights the actions sales volumes, import volume, crop area under needed by the public sector in order to provide a cultivation, adoption rate of improved seed, suitable environment for investment in the seed potential demand from government (based on industry. budgets for inputs available to local government and NAADS), expansion of distribution outlets, There are several factors presently hampering seed export volume to the regional market etc. The market development. These include: absence of reliable market information has led to serious gaps in Uganda’s seed market, leading to a) Weak enforcement of regulations, under-supply of some seed varieties because seed b) Limited access to trade finance because of companies have no basis for planning production stringent demand for collateral, of some seed crops while on the other hand there The Issues

c) Lack of capacity in the seed companies to have been instances of over-stocking some seed with Inputs undertake field inspection and laboratory varieties when demand is low, which has resulted 03 certification, in losses and a disincentive to invest in seed trade. d) Absence of reliable seed market information, e) Inadequate supply of breeder seed by the In the existing structure at MAAIF, there is public sector, no mechanism for disseminating seed market f) Very poor crop marketing infrastructure for information to the private sector. The National food security crops. Seed Certification Service, as the regulator of the seed industry, has the primary responsibility Seeds are the single most important input in to set up such a database. The private sector crop agriculture as they are the carriers of genetic recommendation is for the Ministry of Trade, potential determining the upper limit on yield Industry and Cooperatives to establish databases and frequently the only ‘improved’ input that for both the agric-input and output markets and small holder farmers in Uganda can afford. Other disseminate market information as a public good. ‘purchased’ inputs, such as fertilisers and crop Timely market information will promote the protection chemicals, require greater levels of development of a robust value chain which in seasonal investment, but also enable good quality turn promotes seed market growth. The existing seeds to yield to their genetic potential, when information channel is neither meeting private other favourable growing conditions, including sector requirements for planning seed production absence of water stress and weed competition are nor government requirements for planning seed present. security.

The sustained production of and timely access Section 2: The seed industry in to seed of appropriate genetic, physiological Uganda and phytosanitary quality by farmers are the basic features of a well functioning seed system. Seeds are biological living entities needed for However production and timely dissemination existence of plants and are of no value for planting of good quality seed by private companies cannot when they lose the capacity to live. The use of be realized without a reliable database providing improved seed supplied by the industry would domestic demand projections. Timely market give the farmer the following benefits: information on domestic seed market potential 69 is a prerequisite for production planning and i. High germination and therefore optimal plant subsequent seed market development, since it population and density, takes a minimum of two years to bulk breeder ii. Less infestation from seed borne diseases, seed to commercialization stage for cereal crops iii. Better tolerance to abiotic stress, YEARBOOK 2011 and up to four years for legume crops with a lower multiplication factor. AGRICULTURAL FINANCE AGRICULTURAL Figure 1: Organizational Structure for the Seed System’s Information

Ministry of Agriculture, Animal Industry and Fisheries (MAAIF)

National National Agriculture NAADS Seed Board (NSB) Research Organisation (NARO)

National Seed Certification Variety Release Private Service (NSCS) Committee (VRC) Companies

Private Companies (Producers) Seed Mechanisms (Importers)

Production & Processing

NGO’s & Relief Government Distributors Agencies

Stockists

Farmers

Source: “Seed Sector Country Profile, Uganda” (modified)

iv. Genetic purity demonstrated in uniform plant more highlighted the critical importance of a stands, robust seed system as central to food security. The v. Higher quality produce, development and dissemination of high yielding vi. Increase in total yield, seed varieties remains the technological force that 70 vii. Higher net income. can drive up crop productivity.

The very high inflation that characterised our There has been remarkable progress in our seed macroeconomic environment in 2011 was driven, market, with demand for improved quality seed in part, by food shortages. This experience once increasing steadily since the first private seed YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL companies emerged about ten years ago. From depletion of 70kgs of nitrogen, phosphorus and an annual average of only 2,500 metric tonnes potassium per hectare (National Development marketed by the public sector some 10,000 metric Report 2010 -2015). tonnes were marketed in 2010 by the private sector. Nevertheless, despite the notable increase Fertilisers are applied on only 1.0% of arable land in demand, adoption rates remain very low. The which makes Uganda amongst the countries in 2007 Human Development Report shows that Africa with the lowest fertiliser usage rate of less improved seeds are applied on only 6.3% of arable than 1kg per acre (2008 Human Development land, making Uganda’s seed market comparatively Report). These facts become evident in the decline small in the continent, only 0.7% of the total. in agriculture output real growth rate recorded at 2.6% in 2008/9, which is below the annual growth Overall crop yields in farmers’ fields in Uganda target of 5.6% (NDP 2010 – 2015). are well below their potential, averaging only The Issues

1/3rd of what should be achieved. This under- Section 3: The seed industry and with Inputs performance is due in significant part to the 03 limited availability of certified seed or improved quality seed. Another factor contributing to low One of the key limitations to seed industry growth productivity is the rate of soil fertility depletion has been the poor financial service delivery in Uganda, which is amongst the highest in Sub- to the sector. Data provided by the National Saharan Africa, with an average annual rate of total Seed Certification Service in 2011 confirms that

Figure 2: Annual Domestic Seed Sales (Millions US$) 818

217

160 140 120

70

50 30 15 10 6

71 S.Africa Egypt Tunisia Zimbabwe Malawi Total Morocco Nigeria Kenya Zambia Uganda

Source: http://www.grain.org/seedling YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL 24 seed companies have been licensed by the lack of funds to lend from financial institutions Ministry of Agriculture, Animal Industry and but rather limited access to available funds plus Fisheries but despite the number, the formal seed the weather risk burden passed to entrepreneurs. sector is meeting only 30% or less of Uganda’s seed market potential. The main reason for this under- Specific to Uganda,this challenge is exacerbated performance is the absence of financial services by limited knowledge of seed industry operations structured for seed industry growth. in commercial banks. In most cases, managers responsible for approving credit lack knowledge Access to finance: First and foremost, throughout of the seed industry and its key components, they Africa with Uganda being no exception, have little understanding of the seed production commercial banks consider agricultural process from breeder to certified seed to the point investments to be high risk and are usually reluctant of sale and also limited understanding of Uganda’s to lend to this sector. The existing services have agro-ecological zones and crop seasons. This lack no provision for rain-fed agricultural risks such of seed industry knowledge makes them respond as drought and flooding, leaving the entrepreneur negatively to risks that are perceived and not real.

Figure 3: Major Food Crop Production 2009

1,400,000

1,200,000

1,000,000

800,000

600,000 Production (MT)

400,000

200,000

0 Maize Millet Sorghum Beans Dry Sunflower Rice GroundnutsSoybeans Sesame Pigeon Seed Paddy Seed Peas Source: FAO Statistics 2009

burdened with all weather risks and given little Stringent collateral requirements demanded by option for renegotiating repayment in the event commercial banks remain a critical constraint 72 of adverse weather. Hence the entire seed delivery limiting capacity of seed companies to access the chain from seed producers to distributors and trade finance they need to enable them to increase finally rural stockists find difficulties in accessing seed volumes for dissemination to small holder adequate trade finance for production or to put up farmers. This failure to meet market demand agri-input shops and stock seed volumes matching trends has disastrous consequences. The vacuum YEARBOOK 2011 market demand. The critical constraint limiting left by the shortfall has encouraged unscrupulous seed market development and growth is not the AGRICULTURAL FINANCE AGRICULTURAL individuals to disseminate counterfeit seed into the In conclusion, developing a strong and resilient market place. The rampant supply of counterfeit seed system requires financial services that seed which persists in Uganda’s seed market not can take key factors into account. These only undermines farmer confidence and brings include: seasonality of seed trade, the long seed loss of market share to seed industry investors, but production cycle, research and development also to the country at large since it directly results costs, weather risks and the impact of climate in low productivity and food insecurity. change on the seed industry.

The high cost of finance. The seed sector is a Section 4: Role of contract seed capital intensive industry requiring huge start growers up capital for establishing plant, machinery and production infrastructure. Existing debt financing Seed companies all over the world outsource seed products available from commercial banks are not

production. The contract seed growers are an The Issues attractive for both long term capital investment with Inputs

important component of the seed supply chain. 03 and trade finance. High interest rates, coupled The production of certified seed involves variety with the unwillingness of banks or micro finance development, maintenance of breeder or pre- houses to lend to agriculture for working capital basic seed, initial multiplication of seed released and the issue of stringent collateral requirements varieties from breeder to basic seed followed by limits the seed volume that the industry can bulk multiplication from basic to certified seed, produce. Moreover the payback period of 8 years processing, marketing and distribution to agro- for long term borrowing is very short for the seed dealers and farmers.

.... to Uganda, this challenge is exacerbated by limited knowledge of seed industry operations in commercial banks .... industry because it takes a minimum of 3 years The seed production process involves seed quality to develop parental seeds to commercialization control during active growth and during storage stage. As a result, the lower cost financing offered to the point of delivery to the end user. In Uganda through the government’s Agricultural Credit more than 90% of the seed marketed by the private Facility (see Article 1.2 in this Yearbook), that sector is supplied by contract seed growers who has a maximum tenor of 8 years, failed to have therefore have a responsibility in determining significant impact on the seed sector because this the seed quality delivered to the market place. sector requires longer repayment periods of 10 Selection of the contract farmer is an important – 15 years for financing capital investments with component of the quality assurance process. weather risk embedded in such instruments. The contract growers are in isolated production The seed trade is seasonal, characterised by areas and require rural financing to enable them weather risks and other market uncertainties. In meet standards for quality seed production. The Uganda, the seed sector suffers from low demand following are some of the factors considered when when commodity prices collapse, a recurrent recruiting growers: 73 problem emanating from the lack of marketing i. Adequate land for isolation and crop rotation, infrastructure and policy to handle surplus crop ii. Willingness to be trained, output. iii. Farming field should be accessible, iv. Access to enough start-up capital, YEARBOOK 2011

v. Should have post-harvest equipment and storage, or be able to borrow the capital to obtain these assets. AGRICULTURAL FINANCE AGRICULTURAL Seed contract growers, like other small holders, d) Construction of on-farm seed storage. need a diverse range of financial services which would assist them to become efficient seed However, some of the challenges faced by contract producers, build assets and become income growers who opt for credit from SACCO’S can be secure. To deliver quality seed to the companies, listed as follows: they need more than credit for production. They need a range of convenient financial services t ćF EFNBOE GPS SFQBZNFOU FWFSZ GPSUOJHIU which are flexible and can be adapted to their cannot be met because crop production has a seasonal needs. Cash is required for: long gestation period of 7 – 8 months during which repayments cannot be made. On the a) Inputs (foundation seed /fertiliser and crop other hand such demand can easily be met protection products); by retail traders making them more attractive b) Hiring production equipment/labour saving borrowers for SACCOs. machinery, particularly tractors; c) Labour for good crop management and harvesting;

Figure 4: Seed Production Chain: Research – Farmer

NARO Uganda CGIAR Centers Domestic/Export Market

Crops Research Institutes NACRRI, NaSARRI, KZARDC

Field Cert. Seed company Evaluation and National Agro-processors Foundation Seed Farms Performance Trial & Traders

Seed company Large Commercial Output Seed Contract Growers Farmers Market

Seed company Small holder Processing/conditioning Distributors Stockists

Labaratory Cert. Labaratory farmers factory

74 Regional Export Market

Seed Marketing and extension Source: Victoria Seeds Ltd YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL t 'BSNFSTBSFEFQFOEFOUPOSBJOGFEBHSJDVMUVSF are seed sector specific in areas such as financial and exposed to a high risk of default. There is management, new treatment technologies and often no room for restructuring loans in the advocacy are equally important. Strengthening event of crop failure due to adverse weather the industry association will provide a foundation resulting in drought or flooding. for the private seed sector to build capacity in field inspection and laboratory certification, and t $SPQ JOTVSBODF PČFSFE CZ TPNF CBOLT BU reduce dependence on the public sector, enabling 5% premium means the average cost of loan seed companies get accredited to undertake reaching the rural borrower through the certification. Accreditation of the private sector micro finance institution is 40% or more. This will in turn lead to a self-regulating industry. high cost makes the product unattractive. According to the Seeds and Plant Act, 2006, the t 4PNF DPOUSBDU GBSNFST IBWF MJNJUFE BDDFTT NSCS of the Department of Crop Protection in The Issues

to microfinance institutions that in any case MAAIF is mandated to regulate the seed industry with Inputs prefer to serve clients in urban and peri- and is therefore the main institution responsible 03 urban areas for certification. It is responsible for the design and enforcement of certification standards, methods Section 5: Regulatory role in and procedures. The Administration of the NSCS improving the seed business is based at the Department of Crop Protection at the MAAIF Head Office. This is where the NSCS technical senior staff is housed. The staff includes The private seed sector through its umbrella the Head of Seed Certification Service, the Head organisation USTA (Uganda Seed Trade of Seed Testing Laboratory, the officer responsible Association) needs business development services

.... through its umbrella organisation USTA (Uganda Seed Trade Association) needs business development services that will enable .... that will enable the industry address constraints for variety testing (NPT and DUS2) and variety to seed market growth and develop into a strong release and the officer in charge of Crop and resilient private-led industry. Business Inspections. Certification activities are carried development services that are seed industry out according to OECD and ISTA guidelines and specific are non-existent, leaving the sector methods (Uganda seed sector profile). dogged with inadequate human capital in seed technology. However, the NSCS does not issue ISTA certificates because the National Seed Testing Some of the constraints in the private sector Laboratory is not yet accredited to ISTA, despite include: Lack of capacity in the seed companies the efforts to have it accredited having begun in to undertake field inspection, lack of capacity to 2005. This has been very detrimental to the private establish an in-house laboratory, lack of capacity sector because seed companies desiring to export to train out-growers in propagation of certified seeds from Uganda into Kenya are obliged to bring 75 seed; further down the delivery chain, agro- inspectors from Kenya during active growth of the dealers also lack knowledge in proper seed storage, seed crop in order to meet the ISTA standards of and information on good agronomic practices to the Kenyan National Seed Testing Laboratory. enable them effectively provide extension support YEARBOOK 2011 to end user farmers. Other business skills that

2 NPT = National Performance Trials; DUS = Distinctness, Uniformity and Stability AGRICULTURAL FINANCE AGRICULTURAL Plant propagation.

Nevertheless some progress has been made by one governed by the Agricultural Seed and Plant private laboratory, M/S Chemiphar that became Statute (152) that came into force on the 23rd accredited to ISTA in 2010, although its activities September 1994 and was later revised as the Seeds are limited to laboratory certification and not field and Plant Act, 2006, which came into force in June certification. 2007. The Seeds and Plant Act, 2006, provides for the promotion, regulation and control of plant Section 6: Overall policy breeding and variety release, multiplication, conditioning, marketing, importing and quality challenges assurance of seed and other planting material.

Overall an enabling policy environment is The Plant Protection & Health Bill and the Plant essential for promoting the development of well Variety Protection Bill are still with Parliament. functioning agric-input markets. All links in the On the other hand the Seed Regulations are 76 industry from research to farmer need supportive only in draft form at Cabinet level. The absence policy. Still lacking in the Ugandan legal of seed regulations for implementing the Seeds framework is a National Seed Policy, legislation and Plant Act 2006 has permitted the supply of for the protection of plant varieties (PVP Bill) and counterfeit seed in the market place, unabated, regulations for implementing the Seeds and Plant since the perpetrators when apprehended get YEARBOOK 2011 Act 2006. The seed industry in Uganda is basically released from police custody in the absence of any AGRICULTURAL FINANCE AGRICULTURAL legal framework to effect punitive measures. This The Plant Variety Protection Bill should be fast problem is exacerbated by the limited financial tracked, enacted and operationalized to promote resources at MAAIF to inspect seed lots and and protect private investment in research. effectively regulate the entire country. The absence of any legal framework remains a disincentive for the private sector to engage in The Seed Board responsible for overseeing the research because breeding intellectual property National Seed Certification Service is not yet cannot be protected. Absence of a Seed Policy has inaugurated. This as well should be fast tracked led to gaps in seed production since there are no to improve service delivery from the National reliable database, market information or national Seed Certification Service, beginning with the plans provided to guide the private sector in elimination of counterfeit seed and crop protection developing their production plans and investment products from the market and implementation of decisions. Hence USTA leadership should be stringent measures for licensing seed companies assisted to develop capacities to lobby government The Issues

and de-registering those without infrastructure at the highest level for policies conducive to seed with Inputs for quality seed production. In the medium – market development and for integration into the 03 long term the National Seed Certification Service regional seed market. as recommended by the private sector should be transformed into an autonomous agency The Ugandan Government cannot realise its for inspection and certification of agricultural plan to improve agricultural production and inputs. This will strengthen the seed industry and productivity through the transformation of enhance its capacity to capitalize on emerging subsistence based small holder farmers into regional export market opportunities. commercial producers without a strong national seed sector.

77 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Upland rice grown with 50kg N and 15kg P per ha.

3.2 The 1 kg Challenge: Can Financial Services Help Increase the Use of Fertiliser in Ugandan Farming1?

Section 1: Low levels of fertiliser of 2006. Uganda is among the countries with the usage in Uganda most severe soil nutrient depletion in Africa. The estimated average depletion rates for nitrogen verage fertiliser application rate in (N), phosphorus (P) and potassium (K) in SSA are Uganda is 1 kg per ha. In comparison, -22, -2.5 and -15 kg per ha per year, respectively, mean application rates (kg/ha) are 2 and the equivalent rates in Uganda are -21, -8 and in Burundi, 4 in Sudan, 5 in Burkina -43 kg per ha per year2,3,4. This calls for urgent AFaso, 5 in Tanzania, 8 in Rwanda, 15 in Ghana, interventions from different stakeholders to 78 26 in Kenya, 34 in Zimbabwe, 35 in Malawi, and reverse the current trend of declining per capita 44 in South Africa. The data clearly show that food production and crop yield per unit area of fertiliser use in many sub-Saharan African (SSA) production, due to declining soil fertility and land countries is still far below the target of 50 kg of degradation. nutrients per ha set during the Abuja declaration YEARBOOK 2011

1 X!!+9&+8~7J88~7 2 Smaling, E.M.A, S.M. Nandwa, and B.H. Janssen. 1997. Soil fertility in Africa is at stake. In: R. J. Buresh (ed.), Replenishing soil fertility in Africa SSA Special Publication No. 51, Madison, Wisconsin, USA. 3 Wortmann, C.S., and C.K. Kaizzi. 1998. Nutrient balances and expected effects of alternative practices in farming systems of Uganda. Agric. Ecosystem. Environ. 71:115–129. 4 Nkonya, E., C.K. Kaizzi, and J. Pender. 2005. Determinants of nutrient balances in maize farming system in eastern Uganda. Agric. Syst. 85:155–182. AGRICULTURAL FINANCE AGRICULTURAL The cost of fertiliser and the “relatively good” The C:P ratios are generally high for cereals6,7, inherent soil fertility in the agricultural areas of and relatively lower for upland rice and legumes8 Uganda have been cited as reasons for the low because of the higher farm gate price of the latter. consumption of fertiliser in this country. These The EOR for maize decreased from 47 to 25 kg N points are now explored. ha as C:P increased from 10 to 30; for upland rice

Figure 1: Fertilizer Use In Africa by Country Abuja Target - 50kg/ha 50 45 40 35

30 The Issues with Inputs

25 03 20 15 10 Fertilizer Use (kg/ha) Use Fertilizer 5 0 Mali Togo Niger Kenya Sudan Ghana Gabon Eritrea Angola Guinea Algeria Tunisia Malawi Nigeria Senegal Zambia Gambia Rwanda Uganda Burundi Ethiopia Namibia Tanzania Zimbabwe Cameroon Madagascar South Africa South Cote d’Ivoire Cote Mozambique Burkina Faso Burkina Country

Source: 2011 IFDC Report5 High cost of fertiliser affects the amount of 89 to 65 kg N ha as C:P increased from 4 to 10; for fertilisers applied because of the low farm gate beans 27 to 42 kg ha N as C:P increased from 4 to price of produce, and the high opportunity cost 8; for soybean 25 to 18 kg ha P as C:P increased of the money for resource-poor farmers. The cost from 6 to 15; and for groundnut 29 to 23 kg ha of fertiliser is well expressed as the cost of nutrient P as C:P increased from 4 to 8. The C:P is high to farm gate price of produce ratio (C:P) or the compared to USA9. amount of produce which a farmer has to sell to buy 1 kg of nutrient. Since fertiliser prices are high The reconnaissance soil surveys of the late 1950’s and the farm gate prices of produce are generally and early 60’s that covered the whole of Uganda low, farmers have to sell much produce to buy the revealed that over one half of the land surface has required amount of nutrients needed to maximize soils rated as medium10. That is, “soils which will net returns per area of land, or to apply fertiliser at only yield good crops under good management the Economically Optimum Rates (EOR). that is with application of manure, inorganic fertilisers, practising crop rotation and three year fallow”11.

5 The Africa Fertiliser Summit: How much Progress Has Been Made in the Last Five Years? In: Lisa Thigpen (ed). 2011. IFDC Report 79 Volume 36, No. 2:15 & 17. 6 Kaizzi, C.K., J. Byalebeka, O. Semalulu, I. Alou, W. Zimwanguyizza, A. Nansamba, P. Musinguzi, P. Ebanyat, T. Hyuha and C.S. ;![\][!-$595!5!‚!]\Hƒ„J†[! 7 Kaizzi, C.K., J. Byalebeka, O. Semalulu, I. Alou, W. Zimwanguyizza,A. Nansamba, P. Musinguzi, P. Ebanyat, T. Hyuha and C.S. ;![\][!85$595!5!‚!]\H†„J‡\! 8 Kaizzi, C.K., C. Wortmann, J. Byalebeka, O. Semalulu, I. Alou, W., Zimwanguyizza, A. Nansamba, P. Musinguzi, P. Ebanyat, T. Hyuha. 2011. Optimizing smallholder returns to fertiliser use: bean, soybean and groundnut. Field Crops Res. 127:109-119. YEARBOOK 2011 9 Dobermann, A., C.S. Wortmann, R.B. Ferguson, G.W. Hergert, C.A. Shapiro, D.D. Tarkalson and D.T. Walters. 2011. Nitrogen response and economics for irrigated corn in Nebraska. Agron. J. 103:67–75. 10 Harrop, J. 1970. Soils. In: Jameson, J.D. (ed.). Agriculture in Uganda. Oxford University Press, UK. p. 43-71. 11 Stephen, D. 1970. Soil Fertility. In: Jameson, J.D. (ed.) Agriculture in Uganda. Oxford University Press, U.K. p. 72-89. AGRICULTURAL FINANCE AGRICULTURAL Therefore most soils in the country are of low to and eventual purchase by farmers is often medium productivity, mainly due to nitrogen and a full year with substantial transport, phosphorus deficiencies12. Crops will respond to storage, and handling costs. Little fertiliser is application of nitrogen and phosphorus fertilisers supplied to small holders by stockists in rural with increased crop yield resulting in food, communities and prices are high. Furthermore nutrition and income security for farmers and inorganic fertilisers have a seasonal demand. consumers. Application of mineral fertilisers is an If not sold in one season, agro-input dealers effective means to reverse soil nutrient depletion, have to wait for about six months before they supply nutrients to plants and improve land can sell the stock, which ties up operating productivity and has been credited as essential funds and storage space, and calls for an for the sustained increases in per capita food increase in the amount of capital required to production in Asia and Latin America13. conduct business. Financial support to agro- input dealers may be required to overcome Globally, 46% of the N input for crop production this challenge initially although the problem is is from inorganic fertilisers with biological N expected to diminish with increased fertiliser fixation, atmospheric deposition, animal manure use and demand, improved economies of and crop residues being other important sources14. scale, more frequent re-supply, and a better In addition to high C:P ratios, fertiliser use is understanding of the demand. low in Uganda because: low fertiliser supply is related to low demand; the false belief of many b. Very important is good technical advice that Ugandan soils are sufficiently fertile; little on fertiliser use as the optimal choice of emphasis on fertiliser use promotion; inadequate combinations of crop-nutrient-application credit availability; and NGOs and ‘organic rate can greatly increase net returns on fertiliser and environmental groups’ which advocate use. NARO conducted research for six crops that “fertilisers spoil soils”. Compounding this and developed a decision tool for optimizing problem is the lack of experience and knowledge net returns on fertiliser use. This needs to by farmers, extension workers, other service be accompanied by support of enhanced providers and agro-input dealers on proper awareness of the potential for increased fertiliser use. Consequently, many farmers lack profitability and productivity through the knowledge and skills needed to use fertilisers fertiliser use as a component of integrated efficiently. soil fertility management. Such awareness can be created through various means including Section 2: Addressing the high demonstrations and field days, farmer field schools, various media activities, agricultural price of fertiliser programmes at schools and colleges. This will result in increased demand for fertilisers Interventions to reduce the fertiliser cost to grain which will drive increased efficiency in supply. price ratio include: improved fertiliser supply and marketing efficiency, improved technical advice c. Subsidization of fertiliser use may be on crop-nutrient-application rate combinations considered, at least as an interim measure, to that maximize returns on investment; voucher enhance capacity for fertiliser use. The aim of type subsidies on fertiliser use, improved credit a fertiliser subsidy would be to strengthen the availability, and greater marketing efficiency. private fertiliser supply chain by creating more 80 demand for fertiliser and enabling supply to a. Availability of the right fertilisers, of reliable become more efficient. Therefore, a voucher quality, has to be timely but fertilisers are not system that helps farmers buy fertiliser at the readily available to most Ugandan farmers. market price is preferred to offering a separate The procurement process is long and the time subsidised fertiliser supply system. YEARBOOK 2011 between ordering, to importing, distribution,

12 Bekunda, M.A., A. Bationo, and H. Ssali. 1997. Soil fertility management in Africa. a review of selected research trials. p. 63–79. In R.J. Buresh, P.A. 13 Sanchez, and F. Calhoun (ed.). Replenishing soil fertility in Africa. SSSA Spec. Publ. 51 SSSA, Madison, WI.Sanchez, P.A., M.N.A. Izac, I. Valencia, and C. Pieri. 1996. Soil fertility replenishment in Africa; A concept note. p. 200–207 In: S.A. Breth (ed.) Achieving greater impact from research investments in Africa. Sasakawa Africa Assoc, Mexico City, Mexico. AGRICULTURAL FINANCE AGRICULTURAL 148ˆ!]‡‡‡!5$$5<\!‰<Š5!9‹HƒM‹‹]! d. Inadequate financial capacity is a major farmers use less than 1% of the total imported obstacle to fertiliser procurement by small fertiliser (Figure 2 on next page), which is indeed holders who have little purchasing capacity a small market. and little access to finance except maybe at high interest rates (above 26%). Banks are still Importers/Wholesalers reluctant to lend to smallholder farmers due to perceived risks associated with agriculture. These are mainly based in Kampala and Improved credit might be linked to increased with only 2 or 3 in Masaka. An important feature storage capacity and community marketing. of the fertiliser marketing system in Uganda is Commodity prices fluctuate greatly, being low that importers function primarily as brokers at harvest and during seasons with bumper importing fertilisers only after tendering for and harvests. Unfortunately there is currently being awarded a contract by the commercial/estate little buffering of prices due to lack of storage crop growers. Due to market risk and high cost The Issues

infrastructure and supportive policies. of credit, importers do not maintain significant with Inputs inventories of fertiliser for resale. The vast bulk 03 Consequently farmers usually sell much of of what these importers sell is moved on directly their produce immediately after harvest when to the large commercial estates and out-grower prices are generally low in order to meet schemes. The importers do not intentionally immediate financial need. Profitability can be target the smallholder market; it is the excess considerably increased by storage and delaying that trickles down to the smallholders. As noted marketing until prices improve, and by group above, fertiliser wholesaling is mainly conentrated marketing. Credit can be provided, with the in Kampala; virtually all fertiliser sold outside stored produce as collateral, to enable farmers Kampala is sold on retail basis. The absence of a to meet immediate expenses and to have geographically dispersed wholesaling backbone money for fertiliser purchase. This may be is thus a debilitating feature in Uganda’s fertiliser most successful if done on a community basis. market. Support to farmer groups for construction of storage facilities, group marketing, and access Own user importers to credit is needed. These are mainly commercial tea, sugar, tobacco, e. Improved storage is one part of increased flower and rice growers. They typically procure efficiency marketing but good roads, current fertilisers directly, either from Europe or South market information and projections, linking Africa, where they have established trading houses, of farmer groups to traders and processors are or from large suppliers in Kenya. Occasionally, also important. they put out tenders for supply by domestic firms. Part of the fertiliser is given, on credit, to farmers Section 3: The fertiliser supply participating in their outgrowers schemes, chain operating in Uganda deducting the money when smallholder farmers sell their produce to the respective companies. The fertiliser supply chain consists of importers/ Their estimated market share is about 30%. wholesalers, stockists/dealers and agro-input dealers. Smallholder farmers procure fertilisers Retailers mainly from three sources: importers/wholesalers, 81 distributors and institutions that support out- There are only about 1269 input retailers in the grower schemes (Figure 2). country who sell fertilisers. Most retail shops are one-person enterprises sited in small stalls, There are 12 -15 importers of fertilisers to Uganda, and may include sales of fertilisers and other eight own user importers, mainly for plantation/ agricultural inputs (e.g. seeds, pesticides and YEARBOOK 2011 cash crops and, 126915 retailers. Smallholder

15 Uganda National Agro Dealers Association (UNADA) Census Report, 2009. AGRICULTURAL FINANCE AGRICULTURAL Figure 2: Market structure for Fertilizer Inputs in Uganda16

Overseas suppliers EU, UAE, SA

Kenyan Importers

10% 20% 70% Undocumented

Ugandan Commercial Importers Informal Importers

District Level District Level Distributors Distributors

Large Estate Farms Bulk Procurement by and Out grower smaller out grower schemes (Tea, Sugar, Rural Stockists Rural Stockists schemes, high value Rice, Tobacco) market chains, commercial farmers 80% and projects 19% Small Scale Farms

<1%

garden tools), as well as non-agricultural trade before they can place an order, which usually items. Retailers are a potential link between includes a slight surplus amount that ends up on fertiliser importers, dealers and users, but only the open market to be purchased by smallholder very small quantities (less than 1%) pass through farmers. The main reason given by the different this channel. players is lack of sufficient capital, high interest rates and low fertiliser demand in the country. Section 4: Financial services and the fertiliser industry The wholesalers and retailers are poorly financed, 82 and because of the significant fluctuation of fertiliser prices and low profit margins, importers/ Improved financial services to the different players wholesalers have been unwilling to extend credit along the fertiliser supply chain will enable them to to retailers for small purchases of fertiliser. This increase fertiliser stocks year round. The common compounds the problem of fertiliser availability for feature of the fertiliser market as discussed earlier the smallholder sector. Therefore with improved YEARBOOK 2011

is for importers to wait for guaranteed markets

16 Adapted from Uganda Fertiliser Strategy, 2006. MAAIF AGRICULTURAL FINANCE AGRICULTURAL The Issues with Inputs 03

Good yield resulting from the use of compost, made from household waste, as fertilizer.

financial services through credit guarantees and types of financial products required include improved access to credit at favorable terms, the credit guarantees and Letters of Credit. It is importers and dealers will procure more fertilisers important that the importers have at least over both in terms of quantity and types year round, 200 metric tons of fertilisers at any time and which will result in better efficiency in the fertiliser more as use increases. supply chain. b) For agro-dealers, stockists and retailers, The types of investments required include: access to season-long loans at affordable rates or Credit Guarantee Schemes between them a) Capital investments and working capital are and the national importers will enable them required by importers and dealers/wholesalers to stock enough fertilisers. It is important that to construct warehouses to enable them to this group should stock at least 50 metric tons import and maintain sufficient fertiliser stocks of fertilisers. and types year round. Currently in-country 83 stocks are not sufficient to meet the demand c) Special loan arrangements, calling for careful due to the uncertainty in the market and lack loan product design are required to enable of storage, which has discouraged adoptors farmers to purchase fertilisers. Such resulting because there are times when they need loan products could involve collaboration YEARBOOK 2011 fertilisers but the fertiliser is not available. The between farmers, farmer groups and dealers. AGRICULTURAL FINANCE AGRICULTURAL It could also mean that NGOs, Government Uganda shillings 20,500 and several samples agencies, NAADS, and Cooperatives could may be needed per farm due to variability in organize and link farmers to the agro-dealers soil type, land use history, past management and in order to help ensure efficient access to topographic history. This becomes very costly for fertilisers. small holder farmers.

d) Investment in fertiliser re-packaging facilities In short, yields and net returns can be greatly to 2, 5, 10, and 25 kg bags is needed because improved with nitrogen and phosphorus use based some farmers cannot afford the 50 kg bag on official research results and without soil testing common on the market. This will also require on individual farms17. Eventually a detailed soil policy interventions because currently survey is needed for Uganda to enable farmers, repackaging of agro-inputs is not allowed planners and investors to have more detailed soil by law, yet legislation and regulations are information. supposed to be for the benefit of consumers – in this case, farmers. Section 6: Policy issues

e) Investment by the Government in Quality Control facilities is urgently required to ensure Liberalization Policy that farmers get value for their money. Uganda’s liberalization policy has created room Section 5: Is soil testing essential for the private sector to trade in fertiliser with before investment in fertiliser is minimum interference from government. Traded volumes are increasing and the potential for made? economies of scale is being realized. The Uganda government is committed to support private NARO fertiliser research shows a high probability sector-led development in the fertiliser markets of response to fertiliser usage, even without soil through non-distortion policies to promote testing and that soil test results are not highly smallholder demand and facilitate efficient predictive of response to fertiliser. With the supply by removing taxes on fertilisers except current state of soil degradation in Uganda due 6% withholding tax. The draft National Fertiliser to nutrient mining, poor soil management and Strategy recommends going further, by waiving non-use of external inputs, soil analysis is not the withholding tax on fertilisers completely. necessary for highly profitable fertiliser use, especially for nitrogen and phosphorus which Regulatory Framework are the two most limiting nutrients in Ugandan soils. It is well established that crops respond to The regulatory framework for fertilisers in application of the two nutrients across Uganda. Uganda is currently embedded in the Control of Optimum rates for these nutrients are available. Agricultural Chemicals Statute, 1989. However However soil analysis is necessary to determine if the existing Agricultural Chemicals Regulations application of other nutrients such as potassium, (1993) do not specifically address the fertiliser magnesium, calcium and trace elements is likely issues, boiling down to: to be profitable. i. Import fertiliser dealers having to undergo 84 Furthermore, the cost of analyzing one soil unnecessary certification training on safe sample for texture, pH, organic matter, available use and handling of a wide array of agro- phosphorus, exchangeable potassium and chemicals, in order to acquire an import magnesium at National Agricultural Research permit and license. Organisation’s (NARO) National Agricultural

YEARBOOK 2011 Research Laboratories – Kawanda is currently ii. Delays in issuing licenses; there is only one licensing officer in the country, based at

17 National Agricultural Research Laboratories (NARL) - Kawanda, National Agricultural Research Organisation (NARO) AGRICULTURAL FINANCE AGRICULTURAL the office of the Commissioner for Crop Protection in Entebbe. iii. Lack of an appropriate regulatory body for overseeing the fertiliser business, and advising on appropriate import requirements, and quality control at import wholesale and distribution levels.

Therefore there is a need to address the above constraints within the existing policies. The Issues with Inputs 03

85 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Market information accessed through mobile phone.

3.3 What is the Role of Market Information Services in Improving the Returns to Investments in Agricultural Value Chains1?

Section 1: Background used existing structures to collect, analyse and disseminate the Market Information (MI) to arket information forms a pivot the general public. The information was mainly for business development and is a centred on price data and information relating to cornerstone in the understanding production, which was delivered via the extension and the development of strategic service programme. Mmodels for successful business in agricultural 86 value chains. Now a number of private MIS providers have joined the sector with the aim of improving In past years in Uganda the government has been the sourcing and flow of information to those the provider of Market Information Services who operate in agricultural value chains. As (MIS), but this role has now been taken up by the more organisations venture into agri business

YEARBOOK 2011 private sector. The former public sector system development, the need for MIS is increasingly

1 Authors: M.J. Robert Kintu, Enoth D. Mbeine, and Racheal Tukamubona, FIT Uganda Ltd, AGRICULTURAL FINANCE AGRICULTURAL becoming evident. MIS have shown to be of What is Market Information? significant benefit for farmers, traders, financial institutions, NGOs, international donors, agri- Market Information can be defined in several business support agencies and government, but it ways. Market Information has been described as has to be pointed out that to develop an efficient, a business resource that increases the chances for relevant and sustainable MIS is challenging. agricultural chain actors to manage prevailing situations and plan for future market opportunities. While the benefits of such services are immense, In business, Market Information influences two the failure of many countries to operate reliable, basic functions, production and marketing. All accurate and lasting services underlines the chain actors operate their businesses using these difficulties involved. Detailed attention needs to two business functions. be paid to the capacity of the organisations and the counterparts to operate a service, both in terms MIS have the function of collecting and processing The Issues of technical capacity and in terms of ability to market data systematically and continuously, and with Inputs meet recurrent costs. Institutional arrangements of making it available to market participants in a 03 need to be closely examined and the potential for form relevant to their decision making. Market private-sector involvement should be investigated. information that meets the needs of small scale It is critical to consider joint initiatives, e.g. public farmers and other chain actors may include: / private partnerships in delivery and promotion of the service. There is a need to invest in research Information on: in the initial stages of MIS establishment so as to ensure proper usage for its target users. End users t 1SPEVDUQMBOOJOHćJTJTJOGPSNBUJPOPOXIBU of the services need to learn how to optimise their crops and varieties to grow at a given season, use of the information. Therefore information responding to the question of marketability of sensitization and public education in the use and the crop at a given time. interpretation of MI for business is critical. It is also t 1SJDFEFUBJMTPGTFFET GFSUJMJTFST QFTUJDJEFTBOE important to note that adapting the size and scope their availabilities (e.g. stockists within a 10 of the MIS to the available budgetary resources is km radius) likely to result in greater sustainability.

Types of Agricultural Market Information

Agricultural Agricultural Extension Produce Buying and Agricultural Technologies Input Education Marketing Selling Credit

Farm gate Farming Pricing of prices, off technologies seeds Lists of local Variety, crop lorry prices, Banks, MFIs per service type whole sale commodity providers associations prices, retail prices Cost of fertilizers and pesticides Average spot Suppliers sale prices, Financial lists Commercial distances products Officers Bulking store from markets, mileage costs 87 Location of suppliers Transport averages, Terms and Harvest Marketing loading and conditions, methodologies, Local associations in offloading interest rates, standards, Weather Institutions the area prices, season repayment

packaging patterns charts, sales schedules YEARBOOK 2011 planning AGRICULTURAL FINANCE AGRICULTURAL t $VSSFOUQSPEVDUQSJDFT For data to be accurate, they should be collected at t 'PSFDBTUPGNBSLFUUSFOET least thrice a week, say on Mondays, Wednesdays t 4BMFTUJNJOHćJTBTTJTUTGBSNFSTJOFOTVSJOH and Saturdays. The data are delivered from the that they do not cause a market glut. It enables field between 11:00am and 12:00pm on the next them to stagger harvesting and quantity for day (e.g. the Infotrade AgMIS system). marketing. t *NQSPWFE NBSLFUJOH QSBDUJDFT *U JODMVEFT The process of MIS sourcing involves a number of information on improved harvesting methods, aspects, including who should collect information, packaging, forms of transport and storage etc. how often and when should information be t ćF QSPEVDU TFBTPO  QSFEJDUJPOT CBTFE PO collected, where to collect, which products, weather patterns. varieties and qualities should be included, what t (SPVQNBSLFUJOHPQQPSUVOJUJFTćJTFOBCMFT measures or weights to use? small scale farmers to have organized sales of marketable surpluses and bulk transport of Data collection produce. Collection of Market Information includes much Livestock market information more than just food prices. Since this information reaches a wide section of beneficiaries, it needs In Uganda livestock marketing information to be packaged to include all the constant needs is a sub-project of the Livestock Marketing of major stakeholders in the agricultural sector. Component under the National Livestock Below are a number of items that must be Productivity Improvement Project (NLPIP) in considered when collecting market information. the Ministry of Agriculture Animal Industry and Fisheries. Tips for data collection

Collection of livestock data t (FUEBUBFOUSZUPPMTSFBEZ t /PUFCPPLBOEQFO Livestock prices and volumes are collected t 3FDPSEUIFUJNFPGDPMMFDUJOH t *OEJDBUFZPVSOBNF through interviews with traders (usually buyers, t 8SJUF EPXO UIF -PDBUJPO PS OBNF PG for reasons of accuracy) during the peak of a market market day. A trained livestock market monitor t *OEJDBUFUIFEBUF collects data on five cases of each of the dominant t 6TF FČFDUJWF DPNNVOJDBUJPO TLJMMT XIJMF animal breeds, class and grade combination on in the market and with the farmers i.e. observation, listening and giving feedback that market day. Average prices by animal kind, t 6TFBOESFDPSEBWFSBHFTJOUIFNBSLFUT breed, class and grade are then calculated, along t %PVCMFDIFDLĕHVSFT with the total volumes of livestock by animal kind. t 3FDPSEEPXOUIFSFBTPOTGPSUIFDIBOHFT The data are coded and sent into the database in price trends system using SMS, email or posted directly on the t 4FOE UIF EBUB PO B TQFDJĕFE EBUF UP UIF receiver web into the database system. t "MXBZT CVJME SBQQPSU XJUI JOGPSNBUJPO providers so that you can go back for Commercial and food crops information

88 Data collection for commercial crop products and food crops do not differ greatly. The collection Time of collection: Information should be of data normally includes retail and wholesale, collected at the peak of the trading period at the farm gate, and off-lorry prices. A few market same time. Prices go through stages in different information providers have added quality times of the day depending on how busy the standards, where these are reliable. YEARBOOK 2011

market is. Early morning (6:00 - 8:00am) is the AGRICULTURAL FINANCE AGRICULTURAL time when wholesalers are busiest and the market t Regularity: Dissemination of information is very active. At this time prices might be high, as is expected to follow a regular time frame to compared to the very early hours of the morning reach the planning needs of all players. (3:00 - 5:00am) as some wholesalers begin to make t Relevance: MI becomes useful when someone supplies. The price of a commodity at 5:00am will uses it to generate income. not be the same at 7:00am, 10:00am and 2:00pm. t Farmers’ needs: We need to focus not on the information we think farmers need but Day of collection: Just like the above aspect of on what farmers really need. Farmer needs time of collection, prices change during the week include weather forecasts, where to find the depending on a number of factors. Beneficiaries right fertilisers and at the right price and other of market information need to know, for instance, aspects regarding planting. that prices tend to be lower at the beginning t Other needs: The targets for market of the week and rise towards the end; i.e. prices information are not only farmers but also The Issues

for Monday will be lower than Thursday’s. The traders, researchers, government institutions, with Inputs timeliness of reporting this information is the NGOs, relief agencies and donor agencies. An 03 basis for relevance and usefulness of the market ongoing check should be carried out to find information service. out the information needs of these varied groups. Sometimes customized information Data Verification: This process involves checking is warranted. data collection records received to verify that the data are accurate. Issues to look out for include: t 5ZQJOHFSSPST t %BUBFSSPSToFHSFUBJMQSJDFBQQFBSJOHMPXFS than wholesale t &OTVSJOHUIBUUIFPSJHJOPGUIFEBUBJTDMFBSMZ filled out – collector name and market. t 7FSJGZJOHUIBUUIFOBSSBUJPOFYQMBOBUJPOTBSF reflected in the data t $PNQBSFXJUIQSFWJPVTEBUBGPSBOZDIBOHFT and ensure that the narration clearly explains the reason(s) behind change(s).

Data Entry: The data entry clerk enters data into the front end of a database; the back end is stored on the server to which only the data analyst has administrative rights.

Data analysis is expected to incorporate all Checking Market Information. the needs of stakeholders. Below are some of the major aspects to consider when making an Analysis: Data can be analyzed in different ways analysis report: depending on the need and projected use of the information. For example, the weekly bulletin t Historical: Prices make sense to users only for FIT Uganda/Infotrade gives an indication when they show changes in time. Market of commodity consumer prices in key trading 89 information needs to be packaged in such a markets and possible shifts in the market. Further way that the users can use it with confidence analyses can be undertaken to make forecasts, as a base on which to make an agricultural estimate price elasticities and check on scarcity business decision. indicators. For instance in the Market Analysis YEARBOOK 2011

Report published by FIT Uganda, the booklets AGRICULTURAL FINANCE AGRICULTURAL Dry produce on sale.

focus on trends of prices over a period of 12 o Price forecasts and the seasonal demand of months, enabling year on year comparisons2. the commodities on the market; o Reliable historical data as an indication of Relevance of MIS to the provision of future price movements and demand; financial services o Weather forecasts and indication of agribusiness profit (before disbursing a loan); o Times of harvest, optimal sales times and With the growth of the Financial Sector, a predicted market prices at the time of sales, in number of financing institutions are looking for order to plan repayment options; reliable market data, together with production o Input cost information so as to develop a cost and transaction information on different sectors benefit analysis for the commodities financed. and enterprise groups. Market Information plays a leading role in the provision of information It is clear that market information is an input to indicators that lead to appropriate product the design and regular monitoring of performance 90 development for financial packages. Within the of loan products or other financial packages. It agricultural value chains, financial institutions are will influence decisions on: financing agricultural interested in a variety of information indicators production, machinery financing, design and such as: implementation of post-harvest financing – o Prices of agricultural commodities at different including storage and transport. YEARBOOK 2011

stages of the market chain;

2 See Article 2.1 in this Yearbook for a graph indicating Kampala maize prices over years 2009, 2010 and 2011. AGRICULTURAL FINANCE AGRICULTURAL Section 2: Investments in Human Resources: The development of the establishing Market Information MIS requires professional staff ranging from Information System experts, economists, Systems marketing specialists and statisticians who can interpret the data and also package it for different Establishing a MIS requires a good understanding users. In case of FIT Uganda Ltd, some of the of the types of investment components that need services are hired only when needed, to reduce to be considered. The investment involves five the overhead costs. Due to market dynamics, staff critical resources: physical infrastructure, human need to undergo continuous training in various resources, knowledge information, financial aspects of MIS process management to increase resources, and networks and associations. service efficiencies and effectiveness. Training is also extended to the data collectors. FIT developed Physical Infrastructure: The set-up of a MIS will a network of 22 data collectors who are referred require the investor to consider location of the The Issues to as Agricultural Market Information Advisors with Inputs services, which should be in a secure and sizeable (AMIA). These are normally on a service contract 03 space to accommodate both the equipment and with FIT Uganda Ltd and are drawn from the the people. The organisation needs to obtain local community to take on this assignment as a necessary operational licenses to host the service. secondary, part-time activity. In the case of Uganda, this service was previously a government function as a specific responsibility Knowledge and information: As a provider of of the Ministry of Agriculture, Animal Industry MI, the organisation should have the potential and Fisheries through its extension arm for its to provide and also accumulate content that is dissemination, coupled with responsibility of the relevant to its target audience. FIT Uganda Ltd for Ministry of Trade and Industry for the collection example works in partnership with other regional of market data from the various districts, using MIS and international bodies to share experience district officers. and data. Knowledge in the sector is a cost for MIS, as there is continuous need for updating Turning to private sector provision of MIS, certain the data collected or subscribing to other service basic requirements must again be met. For example providers. FIT Uganda Ltd. had to obtain a regulated licence for the use of communication short code 8555 Networks and Associations: It is completely to allow the firm to send and receive messages impossible to be an island of information. Networks using mobile phone based solutions. In addition and collaboration are critical to the successful to the licence the company had to invest in short establishment of sustainable MIS. Strategic messaging software, internet servers, developing a alliances for information sourcing, data sharing backup service, negotiate with the telecom service or dissemination are important for marketing, providers to allow the short code 8555 to integrate market penetration, content development and with their subscribed users. The negotiations accumulation. FIT Uganda Ltd in the past couple included Warid Telecom, Airtel, , of years has established partnerships to assist its MTN Uganda, and Orange Telecom. For each growth and effective service delivery. It is currently of these organizations, FIT Uganda obtained working with NOGAMU for the collection and a working agreement and revenue sharing dissemination of prices of organic commodities, agreement. These negotiations were lengthy and IFPRI for the analysis, research and dissemination sometimes took over eight months before an of data of relevance to policy makers, EAGC for 91 agreement was reached. Infrastructure investment the regional data exchange, AMITSA (Regional includes outright purchases of capital items, Agricultural Input Market Information and leasing of services and obtaining third party rights Transparency System) for regional input data to use other services. exchange and dissemination. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Table 1 Summary of estimated capital costs for establishing an MIS facility

Item Cost US$ Hosting server ( purchased) 4,700 Power back up (services ) 6,500 Software development 58,000 Business name registration 803 Off-the-shelf software 4,500 Expert support in system set up 22,000 Process certification and training 15,500 System security and performance tracking 3,450 TOTAL 115,453

Table 2 Annual running cost for a Ugandan MIS

Item Cost in US$ Backup server 3,700 Backup server maintenance 696 Communication lines 2 12,000 IT Staff (Mgr. IS Manager, SMS operator) 260,241 Staff training 12,000 Data collectors 118,800 Data verification 6,000 Annual training costs 5,510 Process Certification - Annual Audit -ISO 2,500 Analysis and documentation 6,500 Data analysis and publication 10,204 Information sharing and exchange 15,000 Dissemination and publicity (radio, print, TV) 56,000 Media training session in interpretation 14,500 Technical support 5,000 Participation in regional and international fora on MIS 25,000 Financing costs 765 TOTAL 554,416 Financial Resources: There is a large set up cost Managing a MIS offers the possibility of generating for the service, especially with capital items and an income stream from the sale of raw data as well initial expertise. In addition to the capital items, as the packaging of information to sell in report or the firm has to lease or hire some of the services booklet form for specific sectors. 92 on a monthly basis from other third party service providers. This forms part of the recurrent cost of It is worth noting that income generation is not the company. Tables 1 and 2 are estimates of the easy. It may take several years before the service establishment and the annual running cost of an can realize significant revenue. MIS for Uganda. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Section 3: Lessons from history Infotrade/FIT: Infotrade (Information for Trade) is a business name owned by FIT Uganda Limited that was registered with the sole purpose of Provision of market information in the country promoting business and agricultural marketing was provided from the early 1980s until the late information in the country. Infotrade’s work 1990s by two Government ministries – MAAIF involves collecting, analysing, tabulating and and MTTI. However, the government privatised disseminating MI. It is currently the leading Radio Uganda, so the free broadcast of prices agricultural commodity data provider (both ceased. At that time information on prices wholesale and retail) with the largest collection continued to be collected by MAAIF, but was used and dissemination network in the country. It only for policy purposes. provides market data via 8555 short code, email, and website and through partner radio stations. It Later, in 1999, with the support from USAID is also piloting production data collection using a through ACDI-VOCA under the Foodnet The Issues

Farmer Record Management system. with Inputs

project, market prices collected by the project 03 were disseminated using private and community Farmgain Africa: This is a consultancy firm that radios. This product was later moved to CIAT specializes in agri-business, market information, with the support of ABDC/ASPS. and agro-enterprise development. It provides small and large scale farmers with professional Currently, there are about eight MIS providers in services and consultation, specializing in Uganda i.e. AgriNet, Uganda Bureau of Statistics marketing and market information (collection, (UBOS), SNV RIS Uganda, Uganda Commodity analysis and dissemination) and facilitating rural Exchange (UCE), Grameen Foundation, Farmers agro-enterprise development and market linkages. Information Communication Management (FICOM), Farmgrain Africa and Infotrade Farmers Information Communication project: supported by FIT Uganda Ltd. More details of The Farmers Information Communication these providers follow below. (FICOM) pilot project started 2005 with the aim of improving the livelihoods of the members of the Agri-Net: This is a provider of trading or Uganda National Farmers Federation (UNFFE) transaction market information for buyers of and Kayunga District Farmers Association (KDFA) grain commodities. It operates and supports a by strengthening communication between network of traders and farmers in selected regions farmers and their markets and between farmers of the country. and their trade organizations. The programme is now self-sustaining and is administered by the Grameen Foundation (AppLab): Application Kayunga District Farmers Association. Laboratory (AppLab), an initiative of the Grameen Foundation, promotes the use of mobile phones Uganda Bureau of Statistics (UBOS): UBOS to improve the lives and livelihoods of millions produces monthly consumer price indices on the of poor people around the world. In Uganda, basis of data collected from eight urban centres: AppLab promotes the use of the mobile phone Kampala High Income, Kampala Low and for a range of agricultural operations, including Middle Income, Jinja, Mbale, Masaka, , getting to know the prices of crops at various Gulu and . These indices reflect prices of: markets, receiving instantaneous information food, beverages, clothing and footwear, rent, regarding seed-variety, fertiliser, and pesticide fuel and utilities, household and personal goods, 93 availability/application, and communicating transport and communication, education, health, with distant livestock/agriculture specialists for entertainment and others. technical advice. Uganda Commodity Exchange: The Rural YEARBOOK 2011

Information System (RIS) project started in 2003. AGRICULTURAL FINANCE AGRICULTURAL Together with the Uganda Commodity Exchange The Eastern Africa Grain Council (EAGC): (UCE), the objective of RIS is to enable rural EAGC operates as a non-profit, non-political, non- farmers to increase their incomes. The project denominational organisation, which prepares, is about enabling subsistence farmers to adapt disseminates, and promotes the exchange of to a more commercial production and trading information on matters affecting the regional approach. grain industry through its market information service called the Regional Agriculture Trade SNV Uganda: Works with UCE on the rural Intelligence Network (RATIN). information centre projects, supporting 19 rural information centres that access web-based market Challenges information from websites. They also upload their own information collected by member farmers A number of challenges have been cited by the of a particular group. Centres are in West Nile, providers in the MIS sector despite the fact Mbale, Soroti, Kumi, Luwero, Kitgum, Kasese and that the sector has been around for over three Kamwenge. decades. The recent development in mobile and internet technologies have necessitated the Volunteer Effort for Development Concerns need for remodelling the collection, analysis and (VEDCO): VEDCO is an organisation that dissemination systems of the information to the supports enterprise development and commercial public. The costs of remodelling and packaging advocacy. VEDCO has a component of market the MIS are high. The investment produces a very information tailor made for its enterprises, low direct return on capital, since the benefits mainly located in north and central Uganda. accrue to farmers, with poorly-developed systems VEDCO collects information on prices of various of payment from this group of beneficiaries. commodities that are specific to different parts of the country. Information includes location t %FTQJUF UIF EVQMJDBUJPO PG QSPWJEFST  MJUUMF and contacts of buyers. Data are collected twice has been done by the central government a month and a report is compiled showing or regulating ministries to harmonise the market trends and analysis of prices. This is later data collection, analysis and dissemination. distributed with the help of Agricultural Project Different methods and approaches are being Officers to all enterprises, where members buy the promoted by the providers. This diversity bulletin for UShs100 per copy. creates difficulties in comparing the data collected. The Uganda Rural Development and Training t " GFX PG UIF QSPWJEFST IBWF PQFOFE VQ Programme (URDT): This is a non-profit exchange forums and are willing to exchange organisation that provides education and training the systems, knowledge and information for rural development in the very poor Kibale to other users. Others see the service as District of Uganda by teaching people to address businesses/projects and are hesitant to share the interconnectedness of health, education, their lessons and findings. financial self-sufficiency, civic participation and t .PTU PG UIF .*4 QSPWJEFST IBWF TUBSUFE BOE human/gender rights within their lives. been operated as a project, and this hampers efforts aimed at continuity and sustainability Uganda Coffee Development Authority of the service. (UCDA): The Uganda Coffee Development t %FTQJUF UIF BEWFOU PG NPEFSO UFDIOPMPHJFT 94 Authority (UCDA) promotes the development of communication, public dissemination of of the coffee sub-sector through production of Market Information is very expensive and has clean planting materials, support to research very low returns for MIS that have opted for and nursery development, quality assurance and provision in a private sector manner. dissemination of timely market information. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Section 4: Dissemination of MIS Farmers are often confused about the prices Dissemination they hear on the radio. There is frequently an insufficient understanding of the difference between retail prices and wholesale prices or, Dissemination of market information can take indeed, between wholesale and producer (‘farm- different forms ranging from people-based gate’) prices. When a market information service approaches to electronic and print media channels. begins radio broadcasting, the first programme of Whichever channel is selected MIS dissemination market information should be preceded by one or has to be: Regular, Timely and Accurate. two programmes which describe the service and provide farmers with the information necessary Market information dissemination can be done for them to interpret the prices broadcast. using different media: The Issues

Use of Information Communications with Inputs

The media channels used must be relevant to the 03 user of the information. For example, confining Technology (ICT) in MIS dissemination information to newspapers is pointless if many farmers are illiterate. It is insufficient just to Second generation MIS providers have promoted arrange for radio or television broadcasts or the use of Short Messaging Service (SMS). In newspaper columns and then sit back and believe the past this has been a link to traders, but now dissemination is taken care of. Considerable it is extending to farmers. SMS are considered attention needs to be paid to the way in which the to be cheaper and easy to update, but have high data are presented. On the radio, the reading of costs of learning, especially for farmers with long, boring lists of prices can rapidly reduce the limited education backgrounds. The longer term

People Base Electronic Media Print Media t%FWFMPQNFOUĕFMETUBČ t'.3BEJPT t/FXTMFUUFS t$POUBDU'BSNFST t5FMFWJTJPO t1VCMJD/PUJDF#PBSE t4DIPPM5FBDIFST t*OUFSOFU t/FXTQBQFST t1SJWBUF4FDUPS"HSJCVTJOFTT t4.4.PCJMF t1PTUFST t&YUFOTJPO8PSLFST t&NBJMT t1BNQIMFUT t*OGP7JMMBHF#PPUIT t8FC#VTJOFTT5PPMT

In order to ensure that MIS is sustainable, information providers should build good relationships with radio stations. This is because radio has a wide coverage in terms of listeners, resulting in successful dissemination. Secondly, the costs of dissemination will be lowered as the information will be used as value added content to the radio programs as opposed to advertising, making the service cost effective and efficient. audience. Radio broadcasts should concentrate on preference for SMS phone systems is that they the most important crops and/or on crops where can be deployed to provide additional services 95 prices have changed significantly. Price broadcasts like extension, provision of farmer tips and also should be interspersed with some analysis of acting as a business directory. The SMS platform market conditions and opportunities. also offers the provider a simpler means of revenue capture for particular benefit at the YEARBOOK 2011

farmer association level, as the mobile phone AGRICULTURAL FINANCE AGRICULTURAL technology also offers the opportunity for two- performance and efficiency of agriculture. This way communications, which is vital for building sector, which mainly consists of small-holder effective and long-term business relations and for farmers, agro-input suppliers, processors, traders, negotiating sales at distance. transporters etc., meets several challenges in day- to-day activities. Among the common challenges The use of ICTs such as mobile phones, fixed are lack of access for their products, lack of credit, telephone lines and internet connections, has poor infrastructure and also lack of information. increased dramatically over the last 10 years. In The need for market information to mitigate some the year 2000, just 5 people in every 1000 had a of these challenges cannot be ignored. mobile phone subscription. At the end of 2006 that figure had risen to 95 people per 10003. Over the There has however, not been any deliberate efforts same period the number of fixed line subscribers on the part of Government to initiate a conducive just doubled. Given that most of the population policy framework to foster both public and private live in rural areas, it is not surprising to discover investments in the area of MIS for agriculture. The that the ratio of mobile to fixed line phones is 20:1. obligations of the public-private partnerships that have been put in place are not followed, especially A limitation to using SMS in disseminating on the part of Government. agricultural market information is that farmers and traders are not willing to pay for the service. Agricultural policies aimed at developing effective There is also a challenge of the high costs involved and efficient co-operation between farmers in setting up an SMS platform. Infotrade’s SMS should be formulated. With organised farmers platform using the 8555 code has been operational in the country, MIS will go a long way in serving for the last three years, but there is still a lot of their interests in a more cost effective way. publicity required to scale up its use by all chain actors. Government should also take advantage of the advent of new mobile telephone technology Use of the SMS now requires use of the local networks and FM radios, and encourage their languages to enable more people to enjoy access inclusion in services aimed at the agriculture to the information on their mobile phones. There sector, thereby improving the ability to gather and is a high cost of translating the content into the disseminate MIS efficiently. different local and regional languages. References Section 5: Policy environment for MIS 1. FIT Uganda Ltd (2010) Market Information Service, a guide on MIS establishment and The Uganda Government policy to liberalise operation. the economy in the recent past, and the overall 2. Robbins, Peter and Ferris, Shaun (1999) A objective of reducing poverty, provide the essential preliminary study of the maize marketing framework to support MIS. There are currently system in Uganda and the design of a market many agribusiness support agencies, both public information system. Report prepared for CTA/ and private, (NGOs, donors and Government) IITA that have recognised that an improvement in 3. Robbins, Peter and Ferris, Shaun (2004) Developing Market Information Services in 96 the population’s welfare and the economy as a whole can only come about by improving the East Africa: The FOODNET experience. 4. Shepherd, Andrew W. (1997) Market Information Services - Theory and Practice. FAO, Rome YEARBOOK 2011

3 Š9 J‚ [\]] 5 < H\\ $ $ ]\\\ $$ $5<#$! AGRICULTURAL FINANCE AGRICULTURAL The Issues with Inputs 03

Coffee being loaded for the export market.

3.4 The Effects of Favourable International Prices on Investment along the Coffee Value Chain in Uganda1

Section 1: Introduction It is appropriate that the Government of Uganda has prioritized coffee in the National Development lobally, coffee is the second highest Plan (NDP) 2010/11-2014/15, the Agriculture traded commodity after oil. It is a sector Development Strategy and Investment Plan source of livelihood to about 25 million (DSIP) and the National Export Strategy (2008- 3 people worldwide and currently 2012). The Agricultural Finance Yearbook 2009 Ggenerates an estimated global income of close to and other literature aptly describe the structure of US$ 200 billion, a tenth of which is received by the coffee value chain, as well as the achievements 2 and challenges of the coffee sub-sector in Uganda. producing countries (US$ 23.5 billion ). Coffee 97 therefore plays a very important role as a source of income and employment in a number of countries, There is also substantial evidence that commodity Uganda included. price booms (coffee included) have a positive impact on poverty reduction in Uganda (e.g. Bussolo et. al4). YEARBOOK 2011

1 +&<6576-8‚+J-96$7X 2 ICO Market Report, November 2011 3 Munyambonera, Ezra (2010) “Coffee Sector Challenges: Growing and Processing Robusta for the Market” in Agricultural Finance Yearbook 2009, pp. 74-83 4 Bussolo, Maurizio; Godart, Olivier; Lay, Jann and Thiele, Rainer (2006) “The Impact of Commodity Price Changes on Rural Households: the Case of Coffee in Uganda”, World Bank Policy Research Working Paper 4088 FINANCE AGRICULTURAL The Uganda National Household Survey (UNHS) to the previous year. The positive trend in global of 2002/03 shows that immediately after the 2001 Arabica prices can be attributed mostly to reduced global coffee crisis, when prices reached their supply of high quality Colombian milds from lowest levels, the percentage of Ugandans living Colombia and other milds from Central America6. below the poverty line increased from 35 percent to 39 percent before reducing to 31 percent in Graph 1 shows the movement of farm gate prices 2005/06 and further to 23.4 percent in 2009/10 at a from October 2009 to November 2011. Robusta time when coffee prices were at their highest since unprocessed (Kiboko), Fair Average Quality (FAQ 1977. Some studies though assert that farmers tend or clean coffee) and Arabica dry parchment prices to increase consumption rather than investing the all depicted a positive trend during the period. additional resources arising from price booms5. Graph 4 also illustrates a similar trend with the This article provides an insight into the outcomes monthly average unit export value of coffee. This of these big movements in international prices indicates that there is a high positive correlation during 2010 and 2011 in terms of investments in between the export price and farm gate prices. the coffee commodity value chain in Uganda – This may be attributed to price discovery, both on-farm and off-farm. where price transmission of the world market is quite transparent and possibly faster than what Section 2: Trends in international Fafchamps et al (2003) reported earlier. They and local prices: Production argued that movement in international prices is not reflected fully in the farm gate prices received response by farmers. The current situation is different and farmers seem to be receiving information on the Local prices direction of the international market possibly due In 2009, export prices were low mainly due to to increased connectivity, even in rural areas. A the secondary effects of the global financial considerable proportion of farmers are now able and economic crisis. In 2010, farm gate prices, to access market information using their mobile especially for Arabica went up in tandem with phones. relatively higher international prices compared

Graph 1: Monthly Average Coffee Farm Gate Prices October 2009 - November 2011

12,000 10,000 8,000

UShs/Kg 6,000 4,000 2,000 - Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 98 09 09 10 10 10 10 10 10 11 11 11 11 11 Arabica Parchment Linear (Arabica Parchment) Robusta FAQ Linear (Robusta FAQ) Robusta Kiboko Linear (Robusta Kiboko)

YEARBOOK 2011 Source: UCDA database

5 Fafchamps, M., Hill, R. V., Kaudha, A., Nsibirwa, R.W. (2003) The transmission of international commodity prices to domestic producers. Centre for the Study of African Economies (CSAE) Working Paper 2003-14, University of Oxford, Oxford, UK 6 ICO (International Coffee Organisation) Monthly report-, March 2011 AGRICULTURAL FINANCE AGRICULTURAL Graph 2: Farmer’s Share of Export Price (% of World Price)

90 80 70 60 50 40 30 %age 20 10 0 The Issues

1991/921992/931993/941994/951995/961996/971997/981998/991999/002000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/11 with Inputs 03 Value to Farmer (% of World Price) Linear Value to Farmer (% of World Price)

Source: UCDA database

Graph 2 shows farmers’ share of the export price dollar from just less than UShs. 2,000 per dollar since liberalization of the coffee industry in 1991. It in October 2009 to slightly under UShs 2,500 per also depicts a similar trend rising from 45 percent dollar in November 2011 having reached a record immediately after liberalization to over 70 percent high of UShs 2,800 in August-September 2011. which also supports the above argument except in The depreciation of the Uganda shilling against coffee years 2001/02, 2008/09 and 2009/10 when the dollar also contributed to the high farm gate as the the farmers’ share dropped to less than 70 exporters were receiving more local currency for a percent. given dollar return.

Graph 3 shows the average monthly nominal Graphs 4 and 5 illustrate the positive trend of the Bank of Uganda exchange rate and indicates a average monthly unit export revenue and revenue depreciation of the Uganda Shilling against the during the period with a monthly unit average

Graph 3: BOU Monthly Average Mid-Rate Exchange Rate

3,000 2,500 2,000

UShs/$ 1,500 1,000 500 Jul Jul Jun Jun Sep Sep Feb Feb Oct Oct Apr Apr Dec Dec Aug Aug Nov Mar Nov Mar May May Jan-10 Jan-11 Oct-09

Nov-11 99 Month BOU Monthly Average Mid-Rate Exchange Rate Linear (BOU Monthly Average Mid-Rate Exchange Rate)

Source: UCDA database YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL export value ranging from a weighted average International prices value of a low of US$ 1.5 per kilo in October 2009 to above US $ 2 per kilo in November 2011. Graph 6 clearly illustrates the price spread of the Average monthly revenue also ranged from about different types of coffee on the global market. The US $ 20 million in October 2009 to close to US$ widening differential between the other types of 50 million in June 2011 before settling at around coffee7 and Robusta depict relatively high supply US $ 25 million in November 2011.

Graph 4: Unit Export Value for Uganda Coffee October (October 2009 - November 2011)

3.00 2.50 2.00 1.50

US $/Kilo 1.00 0.50 0.00 Jul Jul Jan Jun Jun Sep Sep Feb Feb Oct Apr Apr Dec Dec Aug Aug Nov Mar Nov Mar May May Jan 11 Jan Oct 09 Oct 10 Nov 11 Nov Month Unit Export Value Linear (Unit Export Value)

Source: UCDA database

Graph 5: Coffee Export Value (October 2009 - November 2011)

70,000,000 60,000,000 50,000,000 40,000,000 In US $ In 30,000,000 20,000,000 10,000,000 0 100 Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 09 10 11 11

Coffee Export Value Linear (Coffee Export Value)

YEARBOOK 2011 Source: UCDA database

7 These are Colombian Milds, Other Milds and Brazilian Naturals and Other Arabicas AGRICULTURAL FINANCE AGRICULTURAL Graph 6: Monthly Weighted Average Price Trends for different types of Coffee

350 300 250 200 ICO Composit Price 150 US cents/lb Colombian Mild Arabicas 100 Other Mild Arabicas 50 Brazilian Natural Arabicas The Issues

Robustas with Inputs Monthly Averages - In US cents/lb - In Averages Monthly

0 03

Oct-09Dec-09Feb-10Apr-10Jun-09Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11

Source: UCDA database of Robusta coffee on the market and scarcity of and 2011). There is evidence that volumes the other types most importantly, Colombian increased in 2011 as a positive response of the Milds and other Milds. The price differentials of favourable prices in 2010. Export volumes in 2011 the three types of coffee excluding Robusta were were marginally lower than in 2010, but only in becoming narrower especially in October and November and December of this year. The reason November 20118. is that the lower export prices forced exporters to withhold their stocks in anticipation of higher Data from UCDA, in Graph 7 , show the coffee prices later on. export performance in the last two years (2010

Graph 7: Monthly Coffee Exports in 2010 and 2011

400,000 350,000 300,000 250,000 200,000

60 kg bags 150,000 In 60 Kilo bags 60 Kilo In 100,000 50,000 101 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Robusta 2010 Robusta 2011 Arabica 2010 Arabica

Source: UCDA database YEARBOOK 2011

8 UCDA Monthly reports: September 2010, September 2011 and November 2011 AGRICULTURAL FINANCE AGRICULTURAL A Coffee wet processor.

Section 3: Effect of favourable on top of load shedding. A recent study indicates prices on investment at processor, that 70 percent of the processors are milling for others while 30 percent do provide pre-financing exporter and farm levels to the middlemen to mobilize coffee from the countryside. This has led to some defaults by Investments at Primary Processing middlemen as well as quality deterioration as they Level9 scramble for coffee from farmers. The situation becomes worse if the prices are high (as was the Investment at primary processing level has not case in the last two years). Currently, there are been encouraging. The main constraints are the close to 300 operating primary factories with close high cost of new machinery and excess capacity to 90 percent having just one huller. attributed mostly to saturation of these facilities in some areas, thereby leading to lower throughput. To assess the effect of high farm gate prices on 102 The Agricultural Finance Yearbook 2009 reported the profitability at the primary processing level that a wet processing machine of 3.5 MT/hour and whether favourable farm gate prices had capacity costs about UShs 100m while a machine led to investment, a sample of processors were of 1MT/hour would cost about UShs 40 million. interviewed. They responded that favourable High power tariffs have also affected processors weather in some areas especially south of the YEARBOOK 2011 equator and good prices led to a significant increase

9 Editors’ Note: One major opportunity for investment could be in equipment and machinery for the processing of soluble coffee. 8<5<5<V9! AGRICULTURAL FINANCE AGRICULTURAL in the throughput. The factory owners indicated “Others have been demanding high yielding that the milling charges had also increased from planting material, expanded their acreage12 and an average of UShs 70 per kilo milled to UShs 100 we expect increased production after 2-3 years due to high electricity tariffs and strong demand since, on average, coffee takes that long to mature. from those who needed their services. Some farmers have purchased assets such as motorcycles and other household items”, he said. Investment at Secondary Processing/ Grading Level Asked which intervention areas NUCAFE will focus on, Mr. Muwonge said that emphasis will be Currently, Uganda has 20 grading plants with a placed on re-investment and gender equity within total processing capacity of 192 MT/hour, ranging the farm household. Re-investment will be in form from 2 to 20 MT/hour. Two new grading plants of tarpaulins, fertilisers and pesticides and will involve linking farmer associations to the agro-

have been established. A number of exporters The Issues have also invested heavily in wet mills to ensure inputs dealers. On gender equity the thrust will with Inputs 03 high quality. They have engaged and mobilized be on decision making at the household level and farmers in the form of outgrower schemes. These sharing gender roles and benefits within a farm growers sell ripe cherries to them at competitive household. Access to finance will also be given due prices. attention to enable farmer associations to write bankable business plans which they can present to The quality resulting from improved harvest banks and other financial institutions to acquire and post-harvest practices has enabled exporters the needed production credit. A Netherlands to attract buyers abroad who are willing to pay Trust Fund / International Trade Centre (ITC) a premium for the high quality coffee. This intervention with 120 farmer associations has investment at exporter level may not necessarily ‘access to finance’ as a major component. have been made in 2010 or 2011 only, but exporters have a deliberate strategy to increase The Executive Director NUCAFE, Mr. Joseph productivity and production in order to enhance Nkandu insists that sustainability of coffee profits while also recouping their investments. For production will be enhanced if the farmers instance, Kyagalanyi Coffee Ltd. has invested US own their coffee in what he termed as ‘Farmer $ 0.710 million in Mt Elgon area alone on washing Ownership Model’. This model emphasizes the stations and other plant and equipment including need for farmers to integrate upwards and add hand pulpers, drying tables and tractors on top of value to their coffee. The price boom benefits providing training to farmers on good agricultural those who have ability to negotiate for higher practices. prices when they are aware of the direction of the market13. The key investments at farm level include: Investment at Farm Level (a) Training farmers in good agricultural Investment options at farm level in response to practices: weed control, disease and pests high prices include those aimed at raising yields control, water and soil conservation and and/or reducing costs of production. Asked intercropping to increase nitrogen in the soil; whether farmers who are members of NUCAFE11 (b) Training and business counseling of farmer benefitted from the relatively high farm gate prices associations to be in position to write bankable in the previous two years (2010 and 2011), Mr. business plans that can be presented to banks 103 David Muwonge, the Production and Marketing for funding; Manager responded that indeed they have done so (c) Provision of agro-inputs through linkage with to some extent. They had re-invested in the coffee agro-inputs suppliers; shambas by buying agro-inputs such as fertilisers (d) Strengthening the lease system for farmers to boost their productivity. YEARBOOK 2011 to acquire productivity-enhancing tools and

10 As mentioned by Mr. David Barry, Managing Director, Kyagalanyi Coffee Ltd. 11 NUCAFE-National Union of Coffee Agribusinesses and Farm Enterprises 12 The Production and Marketing Manager estimated that about 40 percent of NUCAFE members had re-invested in their shambas \5$$$9$5$! 13 See Joseph Nkandu (2011), Business Plan for Setting the Pace for Creating Equitable Sharing of Treasures of Coffee through Establishment of a Centre for Agribusiness and Farmer Entrepreneurship Enhancement$$-Š

Social Entrepreneurship and Management, Catholic University, Milan, Italy. FINANCE AGRICULTURAL equipment such as tarpaulins, spray pumps, last 2 years (2010 and 2011) when coffee prices moisture meters and weighing scales; have been relatively high, Mr. Abdul Kyanika, (e) Provision of timely global and domestic the Agricultural Credit Manager, responded that market information to all farmer associations, indeed significant growth in agricultural loan to assist them to be in position to negotiate portfolios has been registered in Centenary Bank for high prices while selling the coffee (price branches in areas where coffee is predominantly discovery); grown. These include: Mityana, Mubende and (f) Establishing nurseries where farmers would Wobulenzi. He however indicated that obtaining purchase high yielding and disease resistant data on agricultural credit extended to coffee varieties to increase productivity and specifically was not readily available. He attributes production; the growth to favourable coffee prices, among (g) Engaging in sustainable (certified) coffees, other factors. the global demand for which is increasing steadily; He emphasized the need for the coffee industry to (h) Establishment of wet mills, not only in Arabica access credit and Centenary Bank has been and growing areas but also in Robusta coffee areas. is still very willing to continue partnering with the coffee industry to increase competitiveness Mr. Tony Mugoya, Executive Director of Uganda of the industry. He was optimistic that once the Coffee Farmers Alliance (UCFA) emphasizes that staff of Centenary Bank become fully aware of the increased productivity can be achieved if farmers coffee calendar and its dynamics, they would be in organize themselves in groups and are linked to position to develop unique products suitable for financial institutions to access credit to buy the the different actors within the coffee value chain. needed agricultural inputs. Group guarantee schemes are used where farmers from a Producer He urged UCDA to ensure that the following are Organisation (PO) guarantee each other to access in place: infrastructure, policies and a conducive credit (input financing) by providing collateral environment for private investment in the coffee such as livestock14. UCFA has partnered with value chain. He proposed that an Agricultural Centenary Bank to implement this. Credit Fund or a Coffee Fund which Centenary Bank could be mandated to manage, could be set up, where farmers and other actors along the coffee value chain can access funds at concessional It has been proven that production credit interest rates. “The Fund could even be accessed contributes significantly to increased coffee more effectively if the Warehouse Receipt System farm productivity. It is in this respect that one (WRS) is embraced fully by the actors”, he stressed. of the strategies to address the DSIP objective of increasing agricultural production and A system of linking up with agro-inputs dealers, productivity is to assist farmers and farmer groups he said, would be another intervention Centenary to increase their access to agricultural finance. This Bank was willing to undertake, if demand for this is also supported by Ugandan coffee stakeholders. were to be proven. In 2006, when Uganda’s coffee exports had slid to only 2 million bags, these identified inputs Mr. Kyanika stressed that once Farmer and credit as one of the 4 thematic areas15 of the Organizations have developed their coffee production campaign to increase coffee entrepreneurial skills, there is likely to be a higher 104 production and exports. This campaign (2006- rate of return on investment as they will be able 2015) targets an annual production of 4.5 million to access financial services. This will be possible if bags by year 2015. they have clear management structures, financial management systems and bankable business Asked whether Centenary Bank has noticed a plans. YEARBOOK 2011 significant increase in agricultural credit in the

14 ‘Agricultural Financing: the Case for Small Scale farmers’ in The Coffee Yearbook 2010/11 15 The other three are: Research, Extension and Farmer Organizations AGRICULTURAL FINANCE AGRICULTURAL In this regard, UCDA has partnered with Uganda to all stakeholders on a daily basis. This is done Export Promotion Board (UEPB), National Union through the UCDA website, e-mails and the SMS of Coffee Agribusinesses and Farm Enterprises facility in partnership with True African. This, (NUCAFE) and the International Trade Centre as mentioned earlier, has led to price discovery (ITC) to build capacity of NUCAFE’s Farmer on part of farmers. Some private companies like Associations (FAs) to access affordable finance. FIT Uganda, Farmgain and Uganda Coffee Trade This will be done through training in financial Federation (UCTF) also disseminate market management; writing bankable business plans information on coffee to their clients. and providing counseling and mentoring services. These interventions are likely to lead to increased The policy implications centre on identification of production and improved quality of coffee and responsibility for management of information – hence higher returns not only of FAs but also including monitoring the accuracy of information other actors who provide services such as WRS disseminated by the private sector. The Issues

managers, bankers, agro-inputs dealers, exporters with Inputs and buyers abroad. Other questions include: 03 t *TUIFSFEJWFSHFODFBNPOHUIFEJČFSFOUTFSWJDF Section 5: Policy implications providers or could there be duplication of duties which may possibly have been avoided?

The government of Uganda has formulated Has UCDA and government invested macroeconomic and sectoral policies and adequately in the agricultural market programmes and also set up an institutional information as reflected in the NDP, DSIP, and framework to stimulate private sector growth – NES?

including for the coffee industry. They include Do we see a strong link between UCDA and the National Development Plan, the National the media in disseminating information and Export Strategy, the National Trade Policy, the which media should be given due priority - draft National Agriculture Policy, the DSIP, the radio or print media or both?

draft National Coffee Policy, the Agricultural Which one has better and shorter return on Technology and Agribusiness Advisory Services investment?

(ATAAS) project and the Warehouse Receipts How does UCDA link with NAADS in System, among others. All these programmes disseminating information, agricultural address timely market information flow to farmers extension and new technologies?

as one of the key competitive factors to increased Generally, to what extent is the public private productivity and profitability. partnership framework for a National Agricultural Market Information Service being Market Information Systems utilized by farmers to reduce information asymmetry? Should development partners like aBi Trust, Uganda Export Promotion Board has Danida, USAID, DFID and others continue established 4 national trade information and to finance agricultural market information export development centres in Gulu, Bushenyi, systems or should the key public institutions Mbale and Arua to disseminate market related like UCDA16 and NAADS increase on their information to potential and actual exporters. budget allocation towards market information The centres are supplemented by radio and print dissemination? media campaigns and also give information on 105 market trends and opportunities. All these are policy questions which need to be addressed. For the coffee sector, UCDA is obligated to analyze both the domestic and international coffee markets and disseminate the information YEARBOOK 2011

16X<H$<5X86<5‰’“‹!H<%]!‹$* years (2010/11-2014/15) AGRICULTURAL FINANCE AGRICULTURAL Extension 3. Draft National Coffee Policy (2011) Ministry of Agriculture, Animal Industry and Agricultural extension services enable farmers Fisheries, December 2011, Entebbe and other value chain actors to achieve higher 4. Draft National Coffee Strategy (2012) returns and improved livelihoods17. Coffee Uganda Coffee Development Authority, farmers in Uganda receive extension services Kampala from traditional extension workers, NAADS, 5. Fafchamps, M., Hill, R. V., Kaudha, A., UCDA Regional Coffee Extension and Technical Nsibirwa, R.W. (2003) The transmission of Officers, NUCAFE, UCFA and some NGOs. The international commodity prices to domestic Issues Paper for the formulation of the National producers. Centre for the Study of African Coffee Policy highlights the inadequacy of coffee Economies (CSAE) Working Paper 2003-14, extension partly because of unclear institutional University of Oxford, Oxford, UK set up. Neither NAADS nor UCDA nor MAAIF 6. ICO Market Report, November 2011 http:// nor local authorities are handling extension dev.ico.org/documents/cmr-0212-e.pdf sufficiently. 7. Kizito-Mayanja, James (2010) “Highlights of the Baseline Coffee Study under the Coffee The UCDA Statute, 1991 is also not clear on how Production Campaign” pp.70-74 in The coffee extension shall be done and the Coffee Coffee Yearbook, 2009/10, Uganda Coffee Regulations, 1994 are silent on the issue. How best Trade Federation, Kampala should UCDA provide technical advice to farmers 8. Nkandu, Joseph (2011) Business Plan for since it has regional managers and coffee extension Setting the Pace for Creating Equitable and technical officers who are the subject matter Sharing of Treasures of Coffee through specialists in their areas? How should UCDA Establishment of a Centre for Agribusiness link with NAADS, NUCAFE, UCFA and other and Farmer Entrepreneurship Enhancement service providers to provide extension services presented for partial fulfillment of MBA in more cost-effectively? How should MAAIF be Social Entrepreneurship and Management, strengthened to intensify its supervisory role on Catholic University, Milan, Italy local governments so that coffee growing and 9. MAAIF Development Strategy and extension are done in accordance with policy Investment Plan (2010/11-2015/16) objectives? Ministry of Agriculture, Animal Industry and Fisheries, March 2010, Entebbe The improvements in coffee production in recent 10. Munyambonera, Ezra (2010) “Coffee Sector years in the Mubende and Mityana areas under the Challenges: Growing and Processing NKG Coffee Alliance - see Munyambonera, Ezra Robusta for the Market” pp. 74-83 in (2010) - have demonstrated that when extension Agricultural Finance Year Book 2009, Bank is carried out well, then the results can be very of Uganda and PMA, Kampala worthwhile. 11. National Development Plan (2010-2014/15) National Planning Authority, April 2010, References Kampala 12. The National Export Strategy (2008-2012) 1. Bussolo M. et al. (2007) “The Impact of Uganda Export Promotion’s Board, October coffee price changes on rural households 2007, Kampala 13. Mugoya, Tony (2011) “Scaling up private 106 in Uganda”pp.293-303 in The Journal of Agricultural Economics Vol. 37 No. 2-3 sector involvement in coffee production” pp. 2. Draft National Agricultural Policy (2011) 36 in The Coffee Yearbook 2010/11, Uganda pp.23-24, Ministry of Agriculture, Animal Coffee Trade Federation, Kampala Industry and Fisheries, December 2011, 14. Uganda National Household Surveys (UNHS Kampala 2002/03; 2005/06 and 2009/10) Uganda YEARBOOK 2011 Bureau of Statistics, Kampala, November 2003, December 2006 and November 2010

17 James Kizito-Mayanja (2010) “Highlights of the Baseline Coffee Study under the Coffee Production Campaign” pp.70-74 in The Coffee Yearbook, 2009/10, Uganda Coffee Trade Federation, Kampala AGRICULTURAL FINANCE AGRICULTURAL Regulated Financial Institutions - Highlights 04 For 2011 Coffee beans being sun-dried.

4.1 Opportunity Bank and its Involvement in Financing the Coffee Value Chain1

2 ! but targeting production is likely to have the greatest impact on household income. In Uganda, ith core support from the Gates the focus has been on coffee, cotton, sugar and and MasterCard Foundations, oil seed production. The OI strategy also involves Opportunity International (OI) engaging with farmers through farmers’ groups, is currently rolling out Rural producer organizations and cooperatives, and WMicroFinance in five African countries: Ghana, working with an extension service provider, input 108 Uganda, Rwanda, Malawi and Mozambique. supplier and an output buyer, to strengthen the relationship and track the flow of produce and In each of these OI is targeting strategic food and finance. cash crops with a view to providing maximum impact on household wellbeing and income. The In the coffee sector, OI, through its Ugandan arm, YEARBOOK 2011 intervention can be at any level of the value chain, Opportunity Bank Uganda, has been working

1 Author: Ocungirwoth, Patrice, Opportunity Bank Uganda 2 Editors’ Note: In an earlier Yearbook there is a description of the innovations in the coffee industry in the Mubende/Mityana areas (ref. Munyambonera, Ezra “Coffee sector challenges: Growing and processing Robusta for the market” Agricultural Finance Yearbook 2009 pp. 74-83). The present article focuses on the perspective of the lending bank. AGRICULTURAL FINANCE AGRICULTURAL with the Uganda Coffee Alliance, itself an initiative Section 2: Procedures and that has grown from the NKG Coffee Alliance, conditions for lending that started working with coffee farmers in the Mityana, Kasanda & Mubende areas in 2005. Key to Opportunity’s strategy for financing coffee The 14,000 farmers (11,000 registered) have been farmers is close liaison with the NKG Coffee organized into 245 producer organizations (POs), Alliance Project, which has been organizing with POs forming initially 24 Depot Committees farmers into the POs and CCs, and providing (DC), later established as Coffee Companies support for their training. Their long term (CCs) for marketing purposes. In 2011 the 24 knowledge of the farmers and groups and the Coffee Companies also established the umbrella database of information on farmers, coffee trees organisation – Uganda Coffee Alliance. and production are important in identifying the clients with whom to engage for the pilot Regulated programme. 04 Financial Institutions

Structure of the Uganda Coffee Alliance farmers

Coffee Company (each with 20 POs)

Producer Organisation Producer Organisation Producer Organisation (each with up to 30 (each with up to 30 (each with up to 30 members) members) members)

During the initial phase, farmers were taught Early on OI recognised that despite farmers Good Agricultural Practices (GAPs) for achieving higher prices (up to 35 percent) for coffee, including pruning, mulching, fertiliser quality coffee that was marketed through the POs application, disease control and post-harvest and CCs direct to the exporters, only about 30 handling, using lead farmers and demonstration percent of their production was being marketed plots with farmer field training days. There has through this channel. The reasons are multiple also been a significant focus on replanting new and complex, but a key factor was the competition coffee varieties and expanding the acreage. In with the traditional coffee traders who are able general farmers’ production has improved from to pay cash to farmers, an important issue for 1kg/tree of dry coffee beans, but most farmers cash-starved farmers relying on seasonal income. are not achieving the 5-8 kg/tree exhibited on With this level of informal selling, OI’s initial the demonstration plots, possibly due to lack of engagement was to provide marketing finance to 109 attention to detail and lack of finance for inputs. the CCs, to encourage farmers to market through the CCs, and to provide a point for recovery of any production finance extended to the PO members. This marketing finance also came with a provision YEARBOOK 2011

that OI would be prepared to finance production AGRICULTURAL FINANCE AGRICULTURAL for members of a PO under the following i. With the majority of NKG Alliance members, conditions: Opportunity Bank offers primarily production loans for input acquisition (seedlings, a) Loans are considered as group loans, with fertilisers, herbicides, pesticides) and for farm individual loans to all members of PO, so production activities (weeding, picking, land that members of the POs cross guarantee one tilling). To these borrowers Opportunity Bank another. extends agricultural finance loans. ii. However there are other large scale farmers b) Other fixed collateral such as the coffee who need financing for bulking from different “shamba”, land and building are taken producer organizations. These borrowers are as collateral where the loan amounts are provided with working capital loans. significantly high. iii. Others require money for the purchase of farm implements and equipment (e.g. dryers, c) Each member has to deposit an amount of coffee hullers, weighing scales). In these cases money, locked in a savings component in asset-based loans are extended. their OI account, which can be used by the member at the end of the loan term.

These borrowers are provided with working capital loans. Others require money for purchase of farm implements and tools, and these are given ...

d) Size of the loans is based upon number of Loan processing procedures trees and the production estimate based upon the quantity and value of coffee sold in the two Individual farmers from POs or members of NKG previous harvest seasons. Alliance project approach Opportunity Bank for funding for their activities. The Bank, through its e) Supply of fertilisers is only for coffee in 1st Relationship Officers (R/Os) arranges for a visit to 3 Loan Cycle . the groups and carries out loan orientation where the group members are taken through a seminar f) OI finances the Coffee Companies to buy on loan management and processes4. After coffee from PO members. completion of the orientation, members open saving accounts with Opportunity Bank, and the g) The POs must sell to the Coffee Company of R/O does individual assessment of clients’ fields. which they are a member. Each farmer is helped to make a budget which is Different types of loans offered 110 scrutinized against the production (acreage and expected yield). The PO members apply through Opportunity Bank provides a wide range of the groups and these applications are endorsed by products to suit different clientele based on their the group executives. However the discretion on needs. the amount to disburse to each applicant is left to YEARBOOK 2011

„<$5“J†&5''959]J[&5' tree/year is due to the adoption and use of fertiliser. We have very little data on total crop produced due to the large percentage of the crop not being sold through the formal channel. Therefore, until Opportunity International (OI) sees the performance of groups during the 1st loan cycle (and proves that the use of fertiliser has been the key factor) we limit the lending to cover the critical item !<V95<#$$$<9$! H$$959$5 farming of coffee and of other agricultural commodities. AGRICULTURAL FINANCE AGRICULTURAL the R/O and the branch to assess after carrying out Linkages with local SACCOs the necessary financial ratio analyses. Once the loans are approved, disbursement can be made, Currently, the delivery channels for loans are either for the whole loan amount approved by the through the POs as groups or individual members loan committees within Opportunity Bank, or in within the POs. There are also some borrowers phases as and when the needs arise (e.g. planting outside of the groups, e.g. bulkers and processors. time, weeding, bulking, marketing etc.). However there are a number of members from some existing SACCOs who borrow as individuals Performance using their personal properties as collateral. Here OI takes a flexible microfinance view on security Repayment rates for the coffee marketing loans to support the farmers. The SACCOs in a way have been averaging over 98 percent, by both the act as a pool from which some of the individual Regulated

CCs and PO’s. This is mainly because payments members can get financing; the SACCO also 04 are made through the respective bank accounts constitutes a useful contact point that enables Financial Institutions held with Opportunity Bank. This means that loan Opportunity Bank staff to readily access clients. repayments are made at source. Furthermore, the One advantage that these SACCO members have bank’s loan training programmes (conducted by is that despite getting loans individually, they bank officials prior to loan assessment) for would- can purchase inputs collectively, thus gaining the be borrowers offer insights into the advantages of advantages of collective bargaining and shared building up good repayment records. transport costs.

These borrowers are provided with working capital loans. Others require money for purchase of farm implements and tools, and these are given ...

The Bill and Melinda Gates Foundation and the Section 3: Typical loan amounts MasterCard Foundation support has undoubtedly and loan tenors facilitated the outreach drive of Opportunity Bank. Having made this point, lending opportunities Typical loan amounts that Opportunity Bank to the coffee sector (as well as to sugar cane advances are between UShs 300,000 – 5,000,000, growers and to the cotton sector) have long been with loan tenors ranging from 6 months to 24 recognised by top management and approved for months. These loans are mostly for purchase implementation. This view contrasts with that of inputs (fertilisers, herbicides, seedlings etc.), of many traditional banks, which have always preparation of land for expansion, labour for viewed lending to the agricultural sector as being picking, purchase of polythene sheets and wire very risky. meshes for drying, and packaging materials. The 111 loan tenors are determined by the individual Opportunity sees the aforementioned sectors as farmer’s cash flow. Some who have other regular having high market potential and the ability to sources of income such as salary, a taxi business, resist market price shocks - as has been proved restaurants, milk sales and other businesses pay over time.

on a monthly basis, while those whose income YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL is only from sales of coffee pay after selling their iv. Geographical dispersion of the farmer crop. This may be either in one lump sum or in groups stretches manpower utilization by equal installments during the buying season. Opportunity Bank and increases operational costs. The farmer groups are located 50-60 Farmers wanting to borrow must have coffee km apart, significantly straining the Bank’s growing experience of at least two seasons. New personnel resources, thus inhibiting outreach. coffee farmers must have other regular income sources that can meet loan commitments before v. Lack of a good saving culture among the the new coffee trees start yielding. For group farmers is another challenge. Most farmers get clients, members must be registered under the excited after a good harvest and sale, and do NKG Coffee Alliance project. not plan for the next season. The majority of them go on lavish spending sprees after being Coffee traders (working capital loans) must have paid. Given that the bank can only recover the had one year’s experience in coffee trade. loan plus interest, whatever remains on the client’s account is at his/her own disposal. Section 4: Challenges vi. Multiple borrowing by clients is yet another i. The major challenge facing financing to challenge. The high appetite for cash, the coffee farmers is the weak structure of without correspondingly well-planned needs the farmer groups. Many groups are poorly assessment, has compelled some farmers to organized with leaders who are not sufficiently get money from multiple lenders. Much of active. Recommendation of group members this finance is for consumption (school fees, for credit is biased in some cases, for example food, social expenses) without going into for group members who in reality have lost production; as such the little earnings they get interest in coffee production. from coffee sales do not meet their obligations and they remain chronically indebted. ii. Side selling by farmers to middlemen who offer higher prices prevents the NKG Coffee vii. There are difficulties with respect to inputs, Alliance from realizing the targeted volume starting with the limited number of reliable of coffee. To address this, the NKG Coffee input suppliers across the country. Expired Alliance invests in training and mobilisation inputs, low quality seeds and chemicals enter of these farmers, as well as providing extension the market. Moreover, there is lack of proper services at their own cost. guidance to farmers in the use of inputs.

iii. The emergence of Coffee Wilt Disease Despite the challenges noted above, Opportunity (CWD) that has sometimes wiped out entire Bank believes that the coffee sector has a bright plantations, aged coffee trees, poor agronomic future. It will be important to continue efforts practices and lack of adequate input use leads to improve agronomic practices, through better 112 to low product volumes and low incomes, extension, coupled with enhancement of farmers’ leaving farmers with meagre margins after business skills through financial literacy training. loan repayments. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL References

1. GIZ / Bank of Uganda (2011), Towards an Effective Framework for Financial Literacy and Financial Consumer Protection in Uganda, Bank of Uganda. 2. Munyambonera, Ezra (2010), “Coffee sector challenges: Growing and processing Robusta for the market” Agricultural Finance Yearbook 2009, Bank of Uganda and Plan for the Modernization of Agriculture, Kampala.

3. Craig F. Churchill, (1999), Client-Focused Regulated

Lending Calmeadow, United States of 04

America. Financial Institutions 4. Halima, Abdallah (2012), “Primary Commodities post negative growth”, Daily Monitor, Business and Finance, Tuesday, January 31, 2012, page 3.

113 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Clean and dried grain in storage.

4.2 Housing Finance Bank Financing of Grain Storage using Warehouse Receipts as Collateral1

Section 1: Background as well as marketing agricultural produce. These structures remained in place until the early 1990s uring the colonial period Ugandan and were supported by a government ministry for farmers were organised on a cooperatives. geographical basis into groupings such as primary societies (based Over time, however, the government instituted 114 Don individual parishes), district societies and a programme of market liberalisation and many regional societies. This was done in concert farmers’ societies have ceased to exist or became with the colonial administration partly for dormant, often through mismanagement and administrative purposes and also as a means of dishonesty. distributing extension services and other inputs YEARBOOK 2011

1 Author: Paul Nuwagaba, Housing Finance Bank AGRICULTURAL FINANCE AGRICULTURAL As a general characteristic, Ugandan farmers Warehouse receipt financing work independently of each other. Individually they produce only small quantities and have little Warehouse receipt financing generally refers or no access to credit. The problem is attributed to the utilisation of these inventories presented in part to the perception of high risk associated in the form of a receipt as collateral for loans. with lending to agriculture but also the failure By creating collateral out of a commodity in a of many formal financial institutions and banks, predominantly low-income, agricultural country in particular, to develop and deliver the right such as Uganda, warehouse receipt financing products to most of those operating in rural areas. provides an alternative to the traditional forms of collateral such as landed property which are The Uganda commodity exchange and largely out of reach for the average farmer or even the warehouse receipt system where they are available, challenges exist in terms Regulated

of acceptability of locations, processing of titles 04

The Uganda Commodity Exchange is the body and even land tenure systems. Financial Institutions mandated by Government to regulate the Warehouse Receipts System under its Act of In addition to the aspect of alternative collateral, 2006. The Warehouse Receipts System (WRS) warehouse receipt financing helps specific value- is a system where licensed warehouses offer chain stakeholders, particularly farmers and cleaning, drying and storage services to various smaller traders, better manage crop marketing by stakeholders that include cooperatives, farmers, utilising a transparent marketing system to access farmer groups, plus small and medium scale more remunerative pricing. This both enhances traders. The grains and pulses (maize, rice, beans, their livelihoods and their capacity to service millet and sorghum) that are delivered at the loans. In turn, these developments make farming warehouse are cleaned, dried, weighed, graded communities more attractive to formal financial and packaged in standardized bags in accordance institutions. with East African Grade Standards 1 and 2. The graded commodity is then stored in a secure area To enable these activities, the Uganda Commodity and a warehouse receipt issued by the warehouse Exchange, working with various partners and operator showing the quantity and quality of the private entities, has in recent years licensed commodity2. warehouses for public use in various locations around the country to receive commodities for Under the Warehouse Receipt Systems Act 2006, cleaning, drying, storage and eventual marketing. the warehouse receipt is a recognizable document Some of these are described in the next section. of title and is transferable from one owner to another. It can also be utilised as a document of Section 2: Licensed warehouse collateral by a financial institution that would facilities: set-up and status thereby use the deposited commodity to secure a loan to the owner. A warehouse in Layibi Gulu was constructed 115

by the Government of Uganda under the then Produce Marketing Board. This facility was licensed in October 2010 to receive maize and beans and is currently leased to the UN World YEARBOOK 2011

2 See also Baine, Christian (2008) “Development of Warehouse Receipt Instruments in Uganda and the Role of the Uganda Commodity Exchange” Agricultural Finance Yearbook 2008, Bank of Uganda and PMA, pp. 25-30 AGRICULTURAL FINANCE AGRICULTURAL Food Programme (WFP) which operates it under Masindi Seed Grain Growers Association, a the “Purchase for Progress” program3. The facility producer organisation, owns and operates a 1,000 was licensed in October 2010 and is equipped with metric tonne warehouse facility in Masindi town a cleaning and drying plant procured through a which was licensed in January 2009 to receive USAID grant to WFP. maize, beans and rice. Similarly this facility was equipped with the support of Agricultural Sector WFP operates a similar facility in that Programme Support II (ASPS II) Danida. was accessed on lease from Government and was previously constructed for the Produce Marketing In Kasese, two licensed facilities are currently Board. It was also licensed in October 2010 to operated by Nyakatonzi Cooperative Union, a receive maize and beans and is equipped under local producer organisation that brings together the same USAID support arrangement with the more than 15,000 farmers and a trading firm World Food Programme. In both cases, the tenure known as Elshaday General Trading Limited. The of the land carrying these warehouse operations 1,000 metric tonne Nyakatonzi facility was built by is on leasehold for varying periods. The Gulu and Government under the Uganda Seed Corporation Tororo warehouses have capacities of 6,000 and and then privatized to the Union during the period 12,000 metric tonnes respectively of divestiture. It was licensed in March 2009 to hold maize and beans after renovations supported In Jinja, Agroways Limited, a private trading firm, by UCE under the European Union Commodity obtained licensing in April 2008 for a 2,000 metric Trading and Warehouse Receipt Systems Project. tonne facility to receive maize, beans and rice. This The cleaning and drying plant for Nyakatonzi was warehouse was equipped with support from the procured by WFP through a USAID grant. Agricultural Sector Programme Support II (ASPS II) Danida. At present, Agroways is expanding its The Elshaday warehouse, a 6,000 metric tonne storage capacity to 5,400 metric tonnes by mid- facility in Kasese, was constructed by the year 2012. Government of Uganda under the Produce Marketing Board and was divested into private hands prior to licensing. As part of preparations for licensing, UCE funded renovations under the EU Commodity Trading and Warehouse Receipt Systems Project to achieve acceptable storage standards. It was licensed in November 2009 to hold maize, beans and rice and it retains its original plant.

In Mbarara, Banyankole Kweterana Cooperative Union, another producer organisation that groups coffee farmers and suppliers in the Ankole area, 116 operates a 1,000 tonne warehouse and factory building that was revived in 1999 after years of neglect. This facility was licensed to receive coffee in March 2010. UCE also commissioned Drying Coffee.

YEARBOOK 2011 renovations to bring it up to standard, under the

3 See Bashaasha, Bernard and Odeke, Elvis (2009) “Developments in WFP’s Purchase for Progress (P4P) Programme” Agricultural Finance Yearbook 2009, BoU and PMA, Kampala AGRICULTURAL FINANCE AGRICULTURAL EU Commodity Trading and Warehouse Receipt organisations have sought storage and financing Systems Project. The Government of Uganda alternatives that seek to lower access barriers for provided a grant that funded procurement of them. This alternative financing model forms the some equipment. basis for financing farmers and farmer groups, using negotiable warehouse receipts issued Another facility of note is a 2,000 tonne warehouse electronically at warehouses licensed by the in Kapchorwa which was only commissioned in Uganda Commodity Exchange (UCE). December 2011 and is due for licensing to handle maize, barley and sorghum. Its construction and The expectation among these different equipping have been supported by USAID through stakeholders is that such a system would lower a grant to WFP. It is owned and operated by the transaction costs, especially as the scale associated

Kapchorwa Commercial Farmers Association, with multiple depositors using a designated Regulated

a 5,000 member association that brings together storage facility would spread the cost among 04

over 25 producer groups drawn from an area of the many actors, but also because the possible Financial Institutions at least 5 districts, and benefits more than 3,000 attraction of financing partners to such a structure farmers. would engender a financing process that entails fewer delays. In all cases where the plant has been provided under grant schemes, these schemes have a Against this background, in March 2010, Housing concession basis of 70:30 whereby the warehouse Finance Bank Limited formally launched a owners/operators are required to pay 30% of the warehouse receipt financing product to the value of the plant within a period of 3 years and banking public. This facility provides loans retain the 70% as a grant. In addition, warehouse and advances to regulated/licensed warehouse operators commit to operating their warehouses depositors of grain, paddy rice, coffee and other as public warehouses under WRS for a period of related commodities as may be determined by the 5 years. Uganda Commodity Exchange, from time to time.

With regard to the grading and fumigation With this product, the Bank sought to create equipment that are made available to these greater choice and relevance in its product mix licensed warehouses, these were purchased by by introducing a product to facilitate its farmer the Uganda Commodity Exchange under the and produce-trader clients and help them meet Commodity Trading and Warehouse Receipts their business and personal obligations, while System Project funded by the European Union utilizing a secure storage mechanism to hold their and the Government of Uganda. commodities until prices increase.

Section 3: Warehouse receipt Over the 22-months period since the product was launched, the bank has served a variety of clients, with a representative spread of locations, 117 Over the years and with the prevalence of a including Kasese, Gulu, Masindi and Jinja. private warehousing model that is utilized largely by larger and more formal traders, smaller grain Of the clients served so far, the key characteristics producers, farmers, village traders and producer and demographics are as follows: YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Table 1: Borrowers of WRS Loans Borrowers Average Loan Sizes (UShs) Percentage Composition Individual farmers 5,250,000 27 Area Cooperative Enterprises 20,000,000 41 Traders 8,750,000 32

the cleaning and drying plants and also enable bank experience the consignee to meet the associated processing, grading and storage costs. To this end, individual Housing Finance Bank was the first formal farmers and village traders either utilize existing financial institution to sign a Memorandum of groups within their respective areas or constitute Understanding with the Uganda Commodity such groups to bulk their produce and process Exchange to finance warehouse receipts. This marketable quantities. was in June 2009. The key features of the product include: The immediate benefits of Housing Finance Bank’s warehouse receipt financing to our producer and t 'JOBODJOH JT NBEF BWBJMBCMF UP MJDFOTFE farmer-clients have been threefold: warehouse depositors of maize, paddy rice, beans, coffee and cotton with a minimum First, it has enabled access to credit for a number tonnage of 3 metric tonnes. of farmers and small traders in Kasese, Jinja and Masindi who ordinarily would not be eligible t "EWBODFTNBEFBSFFRVJWBMFOUUPPGUIF for funding to support their activities. In the value of the commodity held at prevailing case of trader clients, the loans obtained allowed prices. the borrowers to procure more commodity and subsequently increase the potential income t .BYJNVN GBDJMJUZ UFOPST PG  EBZT  available to them at the end of the transactions. months). Second, the Housing Finance Bank loans t "GBSNFSUSBEFSJTSFRVJSFEUPTFMMUISPVHIUIF coincided with an off-taker arrangement between UCE trading floor. WFP and UCE to purchase graded commodity from the licensed warehouses under the “Purchase t 3FQBZNFOU BOE TFUUMFNFOU EPOF UISPVHI B for Progress” programme, thereby providing an formal arrangement between UCE and the opportunity for the small farmers and traders to bank. benefit from a key market.

Since the product was launched, the bank has Third, and indirectly, the participation of farmers made loans of approximately UShs 1 billion. and traders in the Warehouse Receipt System 118 and the expected benefits from lowering overall A key consideration for access to public storage and transaction costs associated with cleaning, drying the facilities therein is the requirement to raise at storage and financing have engendered better least 3 metric tonnes. This requirement lends itself post-harvest handling techniques among some of

YEARBOOK 2011 the borrowers. to the need to process viable quantities through AGRICULTURAL FINANCE AGRICULTURAL However, despite these successes, some challenges Trading floor activity at the Uganda Commodity remain: Exchange is infrequent. This has affected the sustained operationalisation of the Warehouse At year-end 2011, Housing Finance Bank had Receipt System and the ability to conclude a 15-branch network that straddles some of the transactions. As an alternative, the bank utilized major urban centres within the country. Of the an option of direct repayment to the bank without areas currently hosting licensed public warehouses, utilizing the designated “trading floor”. the bank is still not represented in Kasese, Jinja, Tororo and Masindi. In addition, the very nature Despite the best efforts of the Uganda Commodity of the borrowers under the Warehouse Receipt Exchange, there are not enough licensed warehouse System is such that most are based in rural rather locations around the country and at present there than in urban areas. Under these circumstances, is inadequate provision in place for alternative Regulated 4 both the bank and potential borrowers incur transit storage points . To put this in context, this 04

significant costs of travel and sustenance either to has affected the transaction costs, considering that Financial Institutions deliver the product conveniently to the borrower grain must transit over long distances to licensed or to the nearest branch locations to process loans, warehouses before it can qualify to be receipted in case of the borrower. and obtain eligibility for borrowing.

Looking ahead

Greater interaction is needed between the financiers, the Exchange, transit agencies and potential borrowers on the concept of the Warehouse Receipt System and its accruing benefits.

The continued absence of strategic storage infrastructure, coupled with the slow growth in licensed public warehousing capacity throughout the grain-producing corridors in the country continues to impact throughput and the ability of financial institutions to extend warehouse receipt financing to more areas. Farmers/Produce traders were meant to deposit their stocks in the warehouses to enable utilization A liberal grain trade regime in Uganda provides of the facility. The interactions with farmers, an attractive alternative market to farmers and produce traders and the Bank in the course of small traders both within the country and those from neighbouring countries such as South sourcing and originating business were met with 119 excitement towards the features of the product. Sudan, Kenya, the DR Congo and Rwanda. This is However, a general lack of awareness of the compounded by the absence or non-enforcement licensed warehouse sites and the likely benefits in of graded commodity standards across the terms of more remunerative pricing persists. country and within the region. YEARBOOK 2011

4 See also Article 2.1 “The Maize Value Chain” in this Yearbook. AGRICULTURAL FINANCE AGRICULTURAL All stakeholders must join hands to explore Section 5: Partnerships in appropriate infrastructure in form of simplified technologies available to grain-producing areas their importance to increase convenience to farmers and village traders while lowering transaction costs. One Different Partners have contributed to the example is harnessing mobile telephones for achievements so far registered with the Warehouse the dissemination of information and for some Receipt System and financing in Uganda. The financial transactions5. Uganda Commodity Exchange has signed various Memoranda of Understanding with all these The low-levels of internet penetration and usage partners to operationalise the WRS and to enable curtail the ability of the Electronic Warehouse it to run smoothly. 120 Receipt System to take firm hold, especially when such issues as literacy, accessibility and reliability The first partnerships signed were with the are considered. warehouse keepers. It was important to avail facilities where commodities would be received, processed, graded, receipted and stored. YEARBOOK 2011

5 See Article 3.3 in this Yearbook (market information) and Article 6.1 in the Yearbook for 2010%*! AGRICULTURAL FINANCE AGRICULTURAL Partnerships were then signed with the UN within and to countries surrounding Uganda WFP, as a key off-taker to purchase the graded are traded in an unclean and ungraded state. commodities from the warehouses. The UN WFP Policy needs to be put in place and enforced is the largest buyer of quality-oriented food in to control the quality of grain that is traded Uganda. Indeed, the purchasing power of WFP within and beyond the country’s borders. This was the key to kick-starting the system. would engender a reliance on the existing Warehouse Receipt System and its assurance Partnerships were also signed with farmer groups of standards in quality and quantity. It would around the hinterland of the warehouses. On the also bring the wider trading community into whole, the medium and large trading communities the realm of WRS and its financing benefits. are averse to using the system on account of its

transparency and its subsequent effect on their 2) With regard to the legislative environment, in Regulated

margins, so the focus in the interim has been on order to formalize trading both domestically 04

farming communities, producer organizations and regionally, legislation specific to storage Financial Institutions and small traders. must be put in place so that the mandated regulator of the WRS 2006 Act has access to At least four financial institutions including monitor the quality of commodities stored Housing Finance Bank have signed partnerships in both private and public warehouses, with UCE to enable agricultural commodity with penalties put in place for those who do depositors to access finance using their deposited not comply with quality specifications as commodities as collateral, with the depositors prescribed by the law. pledging their receipts to the financial institutions, using the electronic warehouse receipts system. References

UCE is also in the process of signing a new 1. Housing Finance Bank Uganda; Annual partnership with the Government of Uganda Reports, 2008-2010. to construct and equip additional warehousing 2. Khor, Martin; 2005, The Commodities Crisis facilities, as well as subsidize private sector and the Global Trade in Agriculture, Problems warehouse keepers who are willing to get licensed and Proposals. Trade and Development Series under the WRS Act 2006. No. 25, Third World Network. 3. Takamisa, Akiyama, Baffes John, Larson Section 6: Policy and legislative Donald F., Varangis Panos; March 2003, environment Commodity Market Reform in Africa: Some Recent Experience; World Bank Policy The overall policy and legislative environment is Research Paper 2995. in place but still needs some additional work to 4. Jodie, Keane; August 2008, A New Approach improve its efficiency, so that various stakeholders to Global Value Chain Analysis; Working in the value chain can become comfortable in Paper 293, Overseas Development Institute, 121 using this system and thus accessing credit. Two London. pressing items for policy attention are: 5. Coulter J. & Onumah G.E. (2002), The role of warehouse receipt systems in enhanced 1) Trade in grains in Uganda is largely informal. commodity marketing and rural livelihoods

in Africa. “Food Policy” Vol 27 pp. 319-337. YEARBOOK 2011

The majority of the grain and pulses traded both AGRICULTURAL FINANCE AGRICULTURAL 4.3 Centenary Bank - World Bank AgriFin Project1

Section 1: Background Despite these impressive figures, greater investment is needed to exploit the potential of entenary Bank has been at the Uganda’s agricultural sector. In turn this calls for forefront of efforts to extend finance more efforts to boost agricultural financing. The into the rural areas of Uganda for the agricultural sector is key to the development of best part of two decades. Agriculture the country because 75 percent of the population Cplays a much more prominent role in the business stay in rural areas, where agriculture is the main strategy of Centenary Bank than it does for most occupation. The sector employs 70 percent of other banks in the country. Centenary Bank the entire working force, contributes 25 percent 122 allocates almost 20 percent of its loan book to the and 50 percent to the country’s GDP and exports agricultural sector, compared to just 7 percent respectively. for the commercial banking system as a whole in Uganda. Centenary Bank’s agricultural portfolio

YEARBOOK 2011 by the end of last year was standing at UShs89

billion, which is 17 percent of its total portfolio.

1 Author: Abdul Kyanika Nsibambi, Manager Agricultural Lending, Centenary Bank, AGRICULTURAL FINANCE AGRICULTURAL Figure 1. Centenary Bank Growth in Agricultural Portfolio

100

90

80

70

60

UShs bn UShs 50 Regulated

40 04

30 Financial Institutions

20

10

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Centenary Bank financial performance increase in loan portfolio (including agricultural and strategy lending), and cost optimisation.

Despite serving lower end customers, and the Centenary Bank strategy tough economic environment of the year 2011, which was characterised by high inflation, the The main objective of the Bank is to promote Bank’s financial performance was outstanding. and enhance development through microfinance The Bank registered a 63 percent jump in profit to the entire agricultural value chain, especially after tax to UShs 47.9 billion (US $20 million) on farmers and other agribusinesses and MSMEs the back of strong growth in its net interest income. in rural areas. The Bank intends to achieve this This profit figure compares very favourably through innovations to increase rural outreach, with other commercial banks doing business in through product development and through other Uganda. The Bank has continued to expand as best practices in rural lending. part of its forward strategy, with its clientele now numbering 1,133,612, an increase of 13.3 percent. However the challenges to extending services By the end of 2011 it had 39 branches, 8 Service to small holder farmers are still substantial. Centres, 1 Mobile Bank Unit and 96 ATMs at 73 These include: high cost of transactions because locations. clients are located in remote areas and are widely 123 dispersed, poor infrastructure, lack of collateral, According to the Managing Director of Centenary poor entrepreneurship skills, climate change and Bank, the Bank’s impressive performance is many other factors. attributed to good underwriting standards, YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL These obstacles affect Centenary Bank in its efforts i.) Build and reinforce Centenary Bank’s to extend its services to all its target clientele, as per capacities to lend to smallholder agriculture its vision and mission, and calls for support from in a more efficient and cost effective manner; its business partners who include government ii.) Reduce Centenary’s agricultural finance and non-government organizations, as well as portfolio risk through better risk management, international partners. diversification of lending along the value chain and expanding key partnerships (linkage Section 2: Centenary Bank - banking and structured finance); World Bank partnership iii.) Increase rural outreach to small holder farmers and rural entrepreneurs by small The Agriculture Finance Support Facility (AgriFin) lending branches (Service Centers) and is a Global Partnership Program managed by the enhancement of the bank’s e-platform. World Bank. The program was established with the support of a US $20 million grant from the Bill Expected outcomes and Melinda Gates Foundation. The facility co- finances innovative capacity building proposals The project is expected to improve Centenary from financial institutions in Africa and Asia to Bank’s agricultural finance portfolio, including develop their agricultural finance business lines. all aspects of value chain finance. Over the next four years the agricultural portfolio is expected In addition to the direct results in terms of an to double, translating into a growth of US $34 increase in agriculture finance by these financial million, while the number of agricultural finance institutions, these projects are expected to provide clients is projected to increase by approximately practical learning experience to other financial 30,000. The mix of products and services to clients institutions, so as to create a base to replicate will also be improved, and transactions costs and successful models in both continents. It also loan losses reduced. facilitates peer – peer learning, and production and sharing of acquired knowledge in agricultural Achievements to date finance for a wide range of stakeholders. The vision of AgriFin is to increase access to financial The Bank’s board has approved the establishment of services for smallholder farmers and other a fully fledged Agricultural Lending Department, enterprises in rural areas. and the recruitment of staff to manage the department is in progress. The Bank has boosted Centenary Bank’s AgriFin project was launched its Research & Development Department by in Kampala on July 12, 2011. Centenary is recruiting an Agricultural Value Chain Specialist contributing US $1.1 million to the project, to develop agricultural loan products tailored to AgriFin is contributing an additional US $1 specific financial needs of stakeholders in entire million to support the program. chains.

124 Objectives of the Centenary Bank – The procurement process for strategic technical World Bank AgriFin Project assistance and that specifically aimed at new product development has also been started. Centenary Bank’s Agricultural Finance Initiative YEARBOOK 2011 key objectives are to: AGRICULTURAL FINANCE AGRICULTURAL The Bank has so far opened three service centers Benefits – low-cost branches - in rural areas. These are in Koboko, Kumi and Isingiro, and the Bank is The project is within Centenary Bank’s mission to planning to open more this financial year. The support the investment activity of people in rural service centre concept has also been replicated areas, since it focuses on improving the Bank’s in urban centers, and this move, in combination capacity to extend microfinance services to the with the offsite ATMs, is expected to substantially target market. reduce congestion in banking halls. The Bank is also getting international exposure In addition to the progress made under the from sharing its experience with other similar project, Centenary Bank along with the World institutions, in Africa and beyond, while also Bank’s country office, co-hosted AgriFin’s first benefitting in turn from the valuable knowledge Regulated

Annual Meeting, Financing Agriculture Forum, base on rural development built up by international 04 in Kampala, Uganda on March 28-30, 2012. organizations, including the World Bank. Financial Institutions The event focused on market segmentation and product development, and was attended by banks, The components of Centenary’s AgriFin non-government organizations, associations and programme are set out, in summary form, in the donors supporting agriculture finance. text box below.

Components of Centenary Bank’s AgriFin Programme

These were, firstly, creation of a fully-fledged Agricultural Lending Department within the Bank, with strong management capacity and improved linkages to branches. This department, in turn, aims to deliver expectations through the following initiatives:

1. Strategic technical assistance, both short and medium term;

2. Development of new agricultural financial products, tailor made to meet the needs of enterprises along agricultural commodity value chains, with the aim of enhancing the viability and efficiency of inter- dependent businesses in value chains;

3. Capacity building of staff working in other departments of Centenary Bank, to help create a more conducive environment for the lending and loan management operations of the Agricultural Department;

4. Increasing outreach through innovative approaches like smaller branches, enhancement of the e-banking platform, including the creation of an e-banking call center to provide advice and troubleshooting to clients and rollout of innovative e-banking products in rural areas.

125 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL

05 SACCOs and MFIs Mateete SACCO head office, Mateete Town Coucil, Sembabule District.

5.1 Mateete - an Agricultural SACCO Achieving Solid Performance1 Section 1: What is Mateete Market demand SACCO? The SACCO currently has 5,202 group, individual 2 ateete Microfinance Cooperative and institutional members . According to the Trust Ltd (MAMCOT) was General Manager of Mateete SACCO, Mr. registered on 29th October 2002 Busuulwa Lawrence, membership growth is under the Cooperative Societies projected at 9000 members by December 2015. MStatute (1991) and started operations in January This is based on the fact that the operational area 128 2003. The institution is located in Mateete Trading of the SACCO is expanding to the neighbouring Center, Sembabule district, with branches in districts of Masaka and Bukomansimbi served by Lwebitakuli Trading Center in Lwebitakuli district Mateete branch, Lyantonde and Lwengo served by and in Buyaga trading centre in Lyantonde district. Lwebitakuli and Buyaga branches. YEARBOOK 2011

1 Author: Justine Kasoma, BoU/GIZ FSD Programme 2 ‘Institutional members’ include schools AGRICULTURAL FINANCE AGRICULTURAL Competition animal husbandry are predominant. Perennial crops grown include coffee and matooke. On The strategic location of MAMCOT branches in average, each recognised agri-business SACCO the busy trading centers of Mateete, Lwebitakuli member (there are 446 of these) holds 10 acres of and Buyaga gives the SACCO its competitive edge coffee and 4-5 acres of matooke. Seasonal crops, over other institutions in the region. However, including maize, beans, millet, sorghum, peas, competition from informal financial institutions onions and pineapples are grown basically for is noticeable. Although there is inadequate home consumption and the surplus is sold. On information about the informal financial services average each member in this trade has 3-4 acres providers in Sembabule and other neighbouring in these crops. districts, it’s evident that money lenders have a niche among the business community primarily Market

because they provide fast access to credit to SACCOs and MFIs

desperate borrowers. Coffee produce is sold in the local market which 05 is characterised by middlemen. However, some On the formal/semi-formal side, MAMCOT is members have formed cooperatives, for example, faced with competition from Taala ya Mawogola Kibinge Coffee Farmers Cooperative at Kyabakaga SACCO which was initially closed but later and Misanvu Coffee Farmers Cooperative, both reopened in December 2011 in Mateete trading under NUCAFE. center, Lwebitakuli SACCO at Lwebitakuli (Lwebitakuli branch location), Sembabule SACCO Maize is directly supplied to maize millers in at Sembabule, and Mpumudde Elderly SACCO at Kisenyi, Kampala while matooke is mainly bought Mpumudde. direct from the farms by traders who supply it to markets in Kampala. One of the large scale The nearest formal financial institutions, matooke farmers, Mr. Kafeero Thadeus, also Stanbic Bank and FINCA Uganda are located supplies his matooke produce to Uganda Martyrs approximately 20km away in Sembabule town. University, Nkozi. This distance coupled with the poor road network makes MAMCOT the convenient choice for the Animal husbandry is mainly practised in community. Lyantonde district which is in the cattle corridor. Lyantonde district formed Buyaga Cooperative The Board members and management of Farmers Group and set up a collection centre for MAMCOT are aware of these market dynamics, milk. It is transported to Lyantonde town, which and therefore make efforts to consolidate is one of the major collection centres in the region. the already good operational and financial From here it is transported to the Sameer Group performance to deepen and expand outreach in factory in Kampala for processing. order to stay ahead of competition. Products 129 Economic activity The agricultural loans offered by MAMCOT are The major economic activity in the area of coverage very flexible, affordable and customer-tailored, the is agriculture and this is reflected by the percentage terms and conditions are considerate3, with grace YEARBOOK 2011

of agricultural loans at 53.7%. Crop growing and periods that vary with the type of crops grown.

3 Editors’ Note: the reader may notice that this attention to sensible grace periods for agricultural loans was cited in the Yearbook for 2009 (page 118) as being one reason for the success of Kyamuhunga SACCO. Other SACCOs operating in agricultural areas $55$$$5'JJ$5! AGRICULTURAL FINANCE AGRICULTURAL Table 1: Agricultural Loan Grace Periods and Tenors

Purpose Grace period Loan Term - Tenor Maize and Beans 5 months 6 months Coffee 10 months 11 months Cattle 4 months 6 months

NB: All these are working capital loans, disbursed in favourable seasons/periods as agreed upon with the clients and outlined in the lending policy.

The interest rate charged on agricultural loans Section 2: Growth in recent years is lower than that for other loan products; agricultural loans 2.5% per month, other loans As indicated in the MAMCOT management and 3%, both types calculated on a declining balance. account reports, the institution has experienced progressive growth over the past 4 years. Mr. The group/community banking methodology Ssonko Fred, a loan officer at Mateete branch used in MAMCOT is a favorable option for attributes this growth to the quality of their women and youth who have no valuable assets products and services that are customer- tailored to to offer as collateral for small loans to boost their suit the needs and requirements of the community businesses. and activities in which they are engaged.

Table 2: Current MAMCOT Loan Products

Beans and Coffee Cattle School Trade and Transport Solar Housing maize working loan fees commerce working capital loan capital Accessible Aug–Sept Sept-Oct Jan – Dec Jan-Dec Jan–Dec Jan–Dec Jan–Dec Jan–Dec period Feb-Mar Apr-May Loan period 6 mths 11 mths 6 mths 4-6 mths 12 mths 15 mths 12 mths 15 mths Grace period 5 mths 10 mths 4 mths 0 0 0 0 0 Interest rate 2.5% p.m 2.5% p.m 2.5% p.m 3% p.m 3% p.m 3% p.m 3% p.m 3% p.m declining declining declining declining declining declining declining declining Minimum 1M 1M 1M 0.1M 0.1M - 0.1M - amount UShs Maximum 3M 3M 15M 3M 10M * 8M 10M amount UShs Repayment End of End of End of Monthly Monthly Monthly Monthly Monthly frequency period period period

Notes Other enterprises financed include: small scale retail and wholesale shops, milk collection centers, 130 * For motorcycle loans, MAMCOT funds up poultry farming, piggery, goat and sheep farms, to 90% of the cost of the motorcycle and for mobile money kiosks, metal workshops, wood motor vehicle loans, MAMCOT funds up to workshops, lumbering among others. 60% of the cost of the motor vehicle. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Table 3: Distribution and performance of the SACCO loan portfolio 2008 2009 2010 2011 Number Amount Number Amount Number Amount Number Amount of UShs 000 of UShs 000 of UShs 000 of UShs 000 accounts accounts accounts accounts Agriculture 194 178,348 268 303,362 389 367,151 446 550,282 (production, processing and Marketing) Trade and 81 51,573 93 78,138 149 122,787 140 99,624 commerce Education 23 9,824 26 10,008 36 2,743 23 12,048 Housing/property 26 34,889 41 32,385 45 65,230 101 147,947 Health 7 2,295 7 1,370 5 512 4 1,133 19 28,915 64 32,385 122 169,604 177 214,459

Others(transport, SACCOs and MFIs energy) Total 350 305,846 499 536,373 747 738,030 891 1,025,494 05 Portfolio yield 41.6% 34.7% 48.2% 38.2% (Source: MAMCOT management and accounts reports as at 31st December 2011)

Other factors that give MAMCOT a competitive UCA offers routine supervision and edge include: monitoring of the MAMCOT’s services, a) Cultivation of a good public image due to capacity building to staff through quality services and outstanding customer workshops, trainings and seminars as care4; well as training members. It has always b) Providing attractive interest rates on member’s supported MAMCOT in mobilising savings, for example: members and training them through MAMCOT pays 4% per annum on mobilisation meetings and pre-annual voluntary savings, while other institutions general meetings; in the area do not provide this benefit; GIZ provided MAMCOT equipment like Attractive rates on fixed deposits; motorcycles that have greatly improved the movements of the field staff given the poor Term (months) 3 6 9 12 road network in its operational area. It has Interest (per annum) 8% 10% 12% 14% also donated computers and the MBWin system to MAMCOT’s three branches. Finally through technical assistance it has Limited competition for MAMCOT supported MAMCOT and other partner branches in Buyaga and Lwebitakuli; SACCOs in staff development through Has a strong affiliation with Uganda seminars, workshops and training by Cooperative Alliance (UCA), The German experienced trainers and practitioners; International Cooperation (GIZ), Centre MSCL has always been the major source for Private Sector Development Ltd 131 of external funds, with loans extended (CPSDL), The Microfinance Support at subsidized interest rates. (See Table 4 Centre Ltd (MSCL) and Stromme below.) Microfinance East Africa; YEARBOOK 2011

4 -87!<5%‰-<55 their parents), b. practical assistance (help with completing forms), c. general courtesy in receiving and dealing with members inside and outside the SACCO premises and; d. AGM reports are written and distributed in the local language, Luganda, to help members understand the contents more readily. AGRICULTURAL FINANCE AGRICULTURAL Section 3: Governance and The staff members are highly motivated by management MAMCOT’s personnel policy which is dedicated to equal opportunity to all, high staff welfare standards which include performance-based pay. Organisation structure The staff performance scheme is based on The institution is managed through a strong parameters with equal share amongst staff and democratically elected Board, with special members - rewarding performance, delivery and emphasis put on women, the youth and farmers; outreach, growth and quality. These have boosted

Table 4: Mateete SACCO Loans from MSCL and from UCCFS5

Date Type Amount Interest Source Outstanding Of UShs.M Rate % of loan at Dec 2011 Loan UShs.M Mar. 2009 Agricultural 120 9 MSCL 15 Dec. 2009 Commercial 50 13 MSCL 0 Dec. 2010 Commercial 50 13 MSCL 37.069 Nov. 2011 Commercial 100 13 UCCFS 100 Dec. 2011 Agricultural 200 9 MSCL 200 TOTALS 520 352.069 Source: MAMCOT management and accounts reports as at 31st December 2011

it’s currently composed of 7 members. The staff efforts and morale towards achieving set number was increased to 7 members in 2011 targets as a team. The results include growing from 5 members for better representation, having membership, share capital, savings and a expanded to neighbouring districts of Masaka, good quality loan portfolio. In addition the Bukomansimbi, Lyantonde and Lwengo. performance incentives scheme is seen by all the staff as being equitable and fair, emphasising team MAMCOT has highly skilled, qualified and work especially when it comes to loan recovery committed staff in all departments. It values in MAMCOT which is regarded and handled capacity building and has supported the training as BoD/staff member’s business. This explains of staff on the basis of needs related to their the low staff turn-over since 2007 (only 2 staff specific jobs within the SACCO. have left MAMCOT since 2007). This has built a formidable bond of strong team spirit among the staff.

Year 2007 2008 2009 2010 2011 No. of Staff 8 9 9 14 16 132 YEARBOOK 2011

5 UCCFS is the Uganda Central Cooperative Financial Service, that operates the Central Finance Facility – see Article 6.2 in this Yearbook AGRICULTURAL FINANCE AGRICULTURAL Section 4: SACCO performance

Table 5: Financial highlights - Monetary values in UShs

Item 2008 2009 2010 2011 Membership 2260 2871 3697 4944 Savers 1590 2137 2946 4122 Savings 134,411,305 171,386,983 340,927,452 480,906,161 Share capital 174,127,700 238,007,700 311,682,700 400,740,000 Loan portfolio 305,846,569 536,373,230 738,030,473 1,025,494,657 Profits 46,069,756 47,755,296 72,524,359 120,828,440 Total Assets 439,369,604 769,756,079 1,045,718,469 1,580,428,529 Disbursements 866,450,000 1,223,750,000 1,495,915,000 2,245,930,000 Source: MAMCOT SACCO Accounting Records

Table 6: Loan Ageing as at 31st December 2011 SACCOs and MFIs 05 Ageing analysis No. Outstanding balance (UShs) Current loans (not yet due) 820 972,136,709 1-30 Days 60 42,071,668 31-60 Days 10 10,906,211 61-90 Days 0 0 91-180 Days 0 0 >180 Days 1 380,069 TOTAL 1,260 1,025,494,657 Source: MAMCOT SACCO Accounting Records

Table 7: Loan portfolio performance

Item 2008 2009 2010 2011 PAR>1day 34.8% 14% 8% 5.2% PAR>30 days 18.2% 7.8% 2.1% 1.1% On time repayment rate 65.2% 73% 88% 93.5% Source: MAMCOT SACCO Accounting Records

Section 5: Management during “take-on” were cleared and currently the Information Software branch is fully dependent on the computerised system (MBWin). It is envisaged that Lwebitakuli The good performance of MAMCOT as shown branch will hopefully have cleared their suspense in the tables above can partly be attributed accounts by December 2012. The third branch in to the reliable MBWin software currently in Buyaga has also been computerised. use at the SACCO. MAMCOT acquired the MBWin software as a donation from GIZ – FSD Mr. Kibuye George Wilson, the accountant of Programme in November 2007 for the Mateete MAMCOT believes that computerization was branch (head office) and in August 2009 for the a major turning point in the success story of 133 Lwebitakuli branch. Initially, MAMCOT ran MAMCOT, since then the PAR > 30Days has both the computerised system and the manual continued to fall from 18.2% in 2008 to 1.1% in system concurrently until 2010 (for Mateete 2011, loan repayment has also steadily improved branch) when all the suspense accounts created from 65.2% in 2008 to 93.5% in 2011. However, YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL to further ease the work of the accountant, the Challenges: MBWin software should be enhanced with the newly introduced branch consolidation module. However, MAMCOT still faces numerous challenges that affect its operations. The loan tracking reports in the MBWin system have been of great help to the credit department 1. According to Ms. Naluwo Gorreth the credit as confirmed by Mr. Kainamura Elias, the senior supervisor, MAMCOT faces competition loans officer at the head office, “This report helps from credit giving NGOs for example, me to identify loan installments falling due in Sembabule District Farmers Association, a specified period of time, say one week, which Lutheran World Federation, informal money reminds me to visit those clients or give them a call lenders and other microfinance institutions. before their installments fall due reminding them of However, most of these entities charge high their forth-coming obligations”. interest rates. Therefore, MAMCOT has a challenge to offer a big range of products so The computerised records provide quick access as to retain the current members as well as to clients’ information which greatly reduces the attract new ones. time spent by a client in carrying out a single transaction. This is highly appreciated by the staff 2. Diversion of loan funds is another challenge. and the members served; the records are easily Some borrowers tend to use loans for purposes accessible and accurate thus reducing the time not meant for the loan, resulting sometimes spent on any given transaction. in delinquency. This is mitigated by offering training to prospective borrowers before The MBWin software makes is easy to identify disbursement of loans. mistakes/errors or intended fraud because once a transaction is entered into the system it cannot be 3. Poor microfinance practices among erased and can easily be traced to the source. This competitors have also posed a risk to the reduces fraud tendencies. operations of MAMCOT, for example recently Taala ya Mawogola SACCO which The Staff of MAMCOT have confirmed that is approximately 200 metres from MAMCOT the MBWin system is user friendly as most head office in Mateete Town Council was of the transactions are guided, which reduces temporarily closed due to mismanagement unnecessary errors. The reports (trial balances, of member funds, Victoria Basin Savings balance sheet, income statements, general ledger, and Microfinance Cooperative Trust closed loan status, loan ageing, loan tracking, installment the Lyantonde branch, to mention but a few. forecast report etc) are easily retrievable from the This has created fear and mistrust regarding system. Additionally, daily cash balancing at close SACCOs among members of the public, thus of day is far easier and takes less time compared to negatively affecting MAMCOT. the manual system. 134 4. Unsatisfactory repayment rate (given that The MBWin system also keeps a record of loan the industrial benchmark is 95% compared clients’ previous repayment records which helps to MAMCOT’s 93%) as a result of changes in the loan officers to make an informed judgment weather since MAMCOT’s biggest percentage

YEARBOOK 2011 when appraising such clients for subsequent loans. of the loan portfolio lies in agriculture (53.7%). AGRICULTURAL FINANCE AGRICULTURAL Based on the fact that Sembabule district falls share capital base. The fruits of these efforts are in the dry Ankole corridor, farmers in most tangible having attained a 400M share capital cases are faced with prolonged drought and mark as at 31st December 2011. However sometimes extremely heavy rains which lead the demand for loanable funds has exceeded to flooding. the available capital, leading to acquisition of loans from both Microfinance Centre Limited 5. Additionally, farmers may fail to get ready (MSCL) and Uganda Central Cooperative market for their produce coupled with price Financial Services Limited (UCCFS) to bridge fluctuations leading to default. Despite this the gap. difficulty, MAMCOT is successfully instilling the culture of zero tolerance to default in 2. The abrupt temporary closure ofTaala ya its staff and members. During pre-loan Mawogola SACCO created a lot of fear in the

disbursement trainings, members are advised community affecting the liquidity position SACCOs and MFIs

to start up or have other businesses that can of MAMCOT SACCO as some members 05 finance the loan, other than the business to be withdrew their savings. MAMCOT SACCO financed by the loan, to mitigate default. had no option but to seek significant external funds from MSCL in December 2011, as 6. Multiple borrowing and forgery have shown in Table 4 above. also affected the SACCO to some extent. Sometimes borrowers forge signatures of 3. The loan facilities acquired have greatly guarantors and this requires a lot of effort helped MAMCOT meet their members’ from the loans officers to ensure that this does credit needs. This has been eased by dedicated not happen as it would affect the performance and experienced Board members and of the SACCO. management, good book keeping by the SACCO, and an outstanding loan portfolio 7. Insufficient loanable funds are another performance which has enabled them to challenge. MAMCOT receives many access loanable funds whenever the need applications that cannot be handled within arises. the time frame of members’ needs. 4. However the SACCO still faces a problem 8. The inclusion rate for female clients still leaves of high interest rates on the borrowed funds scope for improvement. There is need to which in turn means high interest rates implement a loan product that is specifically charged to borrowing members. for women, as developed by MSCL. This is a purely women loans product and involves In conclusion, through Board and staff women in groups of 10 – 20. The loan is commitment, SACCOs, if well governed and designed to be flexible, but is designed with managed on the basis of the core cooperative tight risk control features.6 principles, can stand the test of time and contribute to the growth of the financial sector in Uganda. 135 External borrowing 1. Due to the high and ever increasing demand for credit, MAMCOT continues to dedicate

considerable efforts to build a dependable YEARBOOK 2011

6 < $$ 5 5 $ $9 5 <! Among these are: UCA, GIZ/FSD Programme, Mountains of the Moon University etc. AGRICULTURAL FINANCE AGRICULTURAL Preparing to have a meeting.

5.2 SACCOs and MFIs: How a Focus on Gender Can Improve SACCOs’ Services to their Members1

gandan SACCOs are generally in contribute to the improvement of their lives. poor shape. Required remedies are By definition, a “community” consists of men, varied. This article describes one women and children. However, when looking basic but often over-looked approach at the representation of men and women on Uto improving both SACCOs and the communities membership, governance and management they are intended to serve. levels of Ugandan SACCOs, one can hardly ever find more than 30 percent of women on

136 Section 1: Gender (in)equality in any of the three levels. This is usually due to a SACCOs and in Ugandan society combination of reasons - some of them inherent to the institution (such as SACCO products, SACCOs are usually created in order to ease policies and procedures which exclude women the access to affordable financial services for or make SACCOs unattractive to them), some YEARBOOK 2011 people in rural communities and thereby to of them anchored in the communities (such as

1 Author: Lisa Peterlechner, GIZ FSD Programme, Bank of Uganda AGRICULTURAL FINANCE AGRICULTURAL gender division of roles at family level that assigns This entails the concept that“all human beings, financial management to men). both men and women, are free to develop their personal abilities and make choices without the This imbalance is not unique to SACCOs and limitations set by stereotypes, rigid gender roles and is reflected in other areas of Ugandan society. prejudices. Gender equality means that the different Despite the fact that Uganda is doing well on behaviour, aspirations and needs of women and gender equality in a worldwide comparison2, men are considered, valued and favoured equally. It Ugandan women are still underrepresented on does not mean that women and men have to become executive, judiciary and legislative levels and are the same, but that their rights, responsibilities and thus less involved in decision making processes. opportunities will not depend on whether they are For instance, of all Ugandan ministerial positions, born male or female.”7 27 percent are held by women, 73 percent are 3

held by men ; of all Ugandan judges, 17 percent Different rationales support the idea of gender SACCOs and MFIs are women, 83 percent are men4; of all Ugandan equality. Firstly, gender equality can be considered 05 legislators, 34 percent are women, 66 percent as a Human Right. All human beings, i.e. men and are men5. Women in Uganda moreover own and women, are entitled to equal rights and protections, access fewer resources. For instance, they hold and to a live in dignity, free from discrimination. only 7 percent of registered land in Uganda while Secondly, it has been found that gender men hold 93 percent. Despite the fact that they equality contributes to economic development. work between 12 and 18 hours a day, compared to Worldwide, countries with greater gender equality 8 to 10 hours for men, they earn around 31 percent tend to have lower poverty and mortality rates. In less than men. Finally, 70 percent of agricultural the case of Uganda, it is suggested that if gender labour is being done by Ugandan women, while inequalities were removed, the GDP growth rate 70 percent of decisions concerning marketing would increase by an estimated 2 percent8,9. crops are done by Ugandan men6. The most widely spread strategy to reach gender Section 2: Gender equality and its equality is gender mainstreaming. “Gender relevance to society mainstreaming is the process of assessing the implications for women and men for any planned Neglecting women in the access to and control action. It is a strategy for taking into account over resources has generally been recognised to women’s and men’s concerns and experiences in the have a negative impact not only on the condition design, implementation, monitoring and evaluation and advancement of women but on society as of policies and programs so that women and men a whole. Focus has thus been put on gender benefit equally. The ultimate goal is to achieve 10 equality, the equality between men and women. gender equality.”

27‰<‰‰$#[\]\55&„„]„H<&+9%&‡‹* (rank 46). 137 3 Parliament of Uganda website: www.parliament.go.ug 4 Judiciary of Uganda website: www.judicature.go.ug 5 Parliament of Uganda website: www.parliament.go.ug 6 “Gender and Economic Growth in Uganda: Unleashing the Power of Women”, Directions in Development, The World Bank, 2006 7 ABC of Women Worker’s Rights and Gender Equality, ILO, Geneva, 2000. 8 To put this in context, the estimated economic growth rate for Uganda in 2010 was 5.2%, so a 2% increase in growth rate in reality YEARBOOK 2011 is a very substantial improvement. (Source CIA World Factbook, Jan 2012) 9 Gender and Growth Assessment for Uganda; A Gender Perspective on Legal and Administrative Barriers to Investment, International Finance Corporation and the World Bank, 2005 10 Agreed Conclusions on Gender Mainstreaming, ECOSOC, 1997. AGRICULTURAL FINANCE AGRICULTURAL t 0QFOJOHVQGPSXPNFOBU#PBSEMFWFMBMMPXT for a better representation of the membership. t 0QFOJOHVQGPSXPNFOPONBOBHFNFOUBOE staff level allows SACCOs to tap into a bigger pool of qualified human resources. t )BWJOHCPUINFOBOEXPNFOJONBOBHFNFOU and staff allows better taking into account the needs of men and women in SACCO products, procedures and policies. t %FWFMPQJOH ĕOBODJBM QSPEVDUT XIJDI correspond to the needs of both men and women will be used by more people, increasing the turnover of the SACCO. FemaleTwo ladymanager Board of a smallMembers SACCO of close a tosmall Lira, t "EBQUJOH QSPDFEVSFT UIBU BSF FRVBMMZ NorthernSACCO Ugandaclose to Lira, Northern Uganda. favourable for both men and women eases access to SACCO services and tends to Gender, gender equality and gender main- increase membership. streaming is thus, contrary to common perception, t 5BSHFUJOH NFO BOE XPNFO FČFDUJWFMZ JO not about women only. If it is true that women mobilisation campaigns will attract more have, in many areas, been the disadvantaged sex, members and lead to growth of the SACCO. and special focus thus needs to be placed on their t 4"$$0TXIJDIUBSHFUNFOBOEXPNFOBOE needs, it would be counterproductive to thereby offer services which respond more closely to neglect the needs of men. For instance, women- their needs and contribute more effectively only targeted microfinance programmes may be to local economic development (which is the justified as a positive measure to bridge a major mission of many SACCOs). gender gap. However, one must keep in mind the possible perverse effect if men are excluded from Moreover, some SACCOs report an improvement such programmes, such as hijacking loans by men, in their financial results when increasing their household violence, and/or delegation of income female participation as women are said to be more responsibilities from men to women. Gender reliable in paying back loans and also demonstrate based interventions thus ideally target men and better saving performance (which decreases the 11 women , keeping in mind their different needs cost for loanable funds). and priorities. Gender gaps in SACCOs and their Section 3: Gender equality and its reasons relevance to SACCOs In order for a SACCO to “Gender mainstream” its Benefits to SACCOs operations, it first needs to identify its gender gaps 138 and think about how to best address them. A study If gender mainstreaming is important for society carried out by the GIZ FSD Programme in 2009 in general, it is equally important for SACCOs. and 2010 within its then 8 partner SACCOs tried Gender mainstreaming benefits SACCOs on to identify gender gaps within these SACCOs, YEARBOOK 2011

different levels:

11 Binns, Helen (1997), European Commission Directorate General VIII Development, Brussels. AGRICULTURAL FINANCE AGRICULTURAL identify possible reasons for these imbalances and At the governance level, only one SACCO had suggest possible solutions for them. a female board chairperson, and only two had female treasurers. No more than three out of The findings indicated that at the membership the eight examined SACCOs met the minimum level, females accounted for less than 30 percent requirement of at least one third female board of the individual members except in two of the members stated in the bylaws. Barriers for female examined SACCOs. Individual females accounted participation and influence on the board included: for less than 30 percent of the savings portfolio in almost all the SACCOs. All SACCOs, except for t XPNFOCFJOHBNJOPSJUZBUNFNCFSTIJQMFWFM one, had less than 25 percent of their borrowers being females with individual accounts. In all t OFHBUJWFTUFSFPUZQFTBCPVUXPNFOTBCJMJUZUP SACCOs, the outstanding loan portfolio by lead;

females was less than 23 percent. SACCOs and MFIs

t MPXTFMGFTUFFNEVFUPQPPSMFWFMPGFEVDBUJPO 05 Barriers for female participation at the membership level included t MBDLPGMFBEFSTIJQTLJMMT t HFOEFS EJWJTJPO PG SPMFT BU GBNJMZ MFWFM UIBU At the management level, only one SACCO had assigns financial management to men; a female overall manager, and none had female credit officers. Women mostly held the lowest t NBMFEPNJOBUJPOBOEPWFSDPOUSPMPGXPNFO  positions like SACCO assistants, cashiers, and denying them freedom to make income support staff. Barriers to their participation in choices or open accounts; management and credit officer positions included: t TQPVTBM JOUFSGFSFODF PG NFO JO XPNFOT t MPXMFWFMTPGFEVDBUJPO income generating activities that drives t MBDLPGSFMFWBOUTLJMMT women to hide their financial dealings by t OFHBUJWF TUFSFPUZQFT BCPVU XPNFOT BCJMJUZ avoiding the use of SACCOs; to effectively hold management and credit officer positions. t XPNFOT MBDL PG QSPQFSUZ SJHIUT IJOEFSJOH them from borrowing due to lack of collateral; Recommendations towards increased gender equality in SACCOs t JOBEFRVBUF VOEFSTUBOEJOH PG 4"$$0T CZ women; The study provides a set of recommendations, addressing gender mainstreaming in SACCOs in t QSPEVDUT QPMJDJFTBOEQSPDFEVSFTUIBUFYDMVEF line with the Uganda Gender Policy (2007) and women or make SACCOs unattractive to targeted measures for women’s empowerment. them; Four areas of intervention were recommended: 139 t GFBSBOENJTUSVTUPG4"$$0TCZXPNFOEVF to illiteracy and low self esteem; Firstly, SACCOs need to gender mainstream their operations, which includes the integration t MBDLPGCVTJOFTTTLJMMTBNPOHXPNFO YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL of gender issues into their strategic and business Section 4: Gender mainstreaming plans, the generation of gender-disaggregated in SACCOs – a pilot experience data, as well as the development of gender- sensitive indicators, gender responsive budgets Based on the recommendations of the study, the and monitoring and evaluation frameworks. In GIZ FSD programme, together with its partners12, order to do so successfully, political will needs developed a strategy with the objective to increase to be created through the provision of gender gender equality among SACCOs. In order to trainings to SACCO staff, management and board. test the recommendations first, the programme identified a limited number of partners and Secondly, in order to increase women’s activities for a pilot project. Taking into account participation at membership level, SACCOs could budget- and time limitations, as well as strengths intervene in a number of ways. To overcome and weaknesses of partner organisations, it was obstacles arising out of patriarchy, men should decided to focus on the institutionalisation of be engaged, for example through a media gender within the SACCOs and on activities campaign where men talk about the benefits of which aim at increasing the female membership living with financially empowered women. To of the SACCOs as two first essential steps towards attract more women to SACCOs, women-friendly increased gender equality within SACCOs. The financial products can be developed, female following activities were carried out: board members can be deployed to mobilize and sensitize fellow women, and staff can be 1) Gender training (expected short term trained in customer services to make the SACCO outcome: SACCO board and management environment friendly for women. Moreover, are sensitized towards gender issues): UCA it should be ensured that financial literacy carried out gender trainings for board and programmes are gender sensitive and reach rural staff members in the three pilot SACCOs. women as well as men. The trainings were preceded by a training needs analysis. The objective of the trainings Thirdly, for increasing women’s participation was to equip SACCO officials and members at governance level, awareness and confidence with knowledge and skills to enhance their building of women, leadership trainings for understanding of the role of gender in women, and exposure visits to other SACCOs with SACCO activities; to establish a common strong female board members were recommended. understanding of key gender concepts and Also, board operational procedures such as issues in the development context, and to frequency, timing and venue of board meetings equip SACCO officials with knowledge on could be changed in order to make them suitable how to mainstream gender within their for women in line with their reproductive roles. institutions.

Lastly, women’s participation at the operational 2) Gender audits and policy (expected short level, especially in management and as credit term outcome: SACCOs have a gender policy 140 officers, could be increased through advanced which is used and applied): Gender gaps trainings for promising female staff and through within the institutional framework of the better linking of female microfinance students to SACCOs were identified through discussions microfinance institutions. with the board members, management YEARBOOK 2011

and selected members as well as a review of

125$”%*-5%-*5;” %;*$5$•-&-X$”!%--X787*- Services Cooperative Society (MUHAME SACCO), Iceme Rural Farmers’ SACCO as pilot SACCOs. AGRICULTURAL FINANCE AGRICULTURAL SACCOs and MFIs 05

Gender training in MAMIDECOT SACCO.

relevant documents. Based on this analysis, mobilisation campaigns): AMFIU facilitated elements for a policy were proposed to the one day workshops for the three pilot SACCOs SACCOs for their review, approval by the in order to improve their communication and board and dissemination. The policy includes mobilisation strategy so as to more effectively statements on the following key areas: Gender target men and women. Different channels mainstreaming, women empowerment, and messages which target men and women leadership and management gender expertise, were identified and discussed. Channels sex disaggregated data, decision making identified included radio programmes and and power, information and knowledge on spots, sensitization of organized groups in gender, sexual harassment, education and the community, and the use of local council training and networking with gender related strategies. institutions. 141 4) Targeting behavioural change through 3) Gender sensitive communications and radio campaigns (expected short term mobilisation strategy (expected short term outcome: more women are willing to join outcome: women are consciously targeted in SACCOs, more men are in favour of their YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL women joining SACCOs): One of the issues Long term outcome: Increase in female identified during the gender study was the participation power relationship between men and women and the refusal of many men to have their The project was designed in the understanding wives join a SACCO. AMFIU was thus tasked that the expected outcome could be found in to develop a radio campaign together with the long term only. For most changes observed, MAMIDECOT SACCO13. The objective it is important to note that they cannot be fully was to initiate behaviour changes of men attributed to the pilot interventions. All SACCOs and women as they realize the benefits of operate in a multi-partner environment where women accessing services from a SACCO. they engage in different projects simultaneously. Radio spots were developed with the support of a communication expert, translated into t "MM4"$$0TOPXSFTQFDUUIFXPNFORVPUB Luganda, tested within the SACCO and aired on their board, i.e. they all have three female out over a period of six weeks, seven days a board members (out of nine). The chairperson week, three times a day. of all three SACCOs is male, whereas the vice chairperson is female. Moreover, women are 5) Training of Trainers for the training represented on all major committees. This of savings groups (expected short term represents an increase in female participation outcome: women are trained in savings and on board level, as at the time of the gender loan associations and thereby enabled to join study, two out of the three SACCOs had only SACCOs): Many people and especially women two female board members. are not able to join a SACCO as they lack basic financial literacy skills and particularly t 0ONBOBHFNFOUBOETUBČMFWFM OPTJHOJĕDBOU the knowledge and understanding of savings changes could be observed. and loans. Thus, UWT was tasked to train five community based facilitators per SACCO t 0O B NFNCFSTIJQ MFWFM  4"$$0 NBOBHFST  who would then mobilize and train groups board and staff members all reported an within the SACCOs’ operational areas and important increase in female membership eventually link the groups to the SACCOs. during and after the interventions. When analyzing the data from the SACCOs, this The pilot was implemented during the first increase could only be confirmed for group two quarters of 2011 and evaluated in the third accounts. As the majority of group members and fourth quarters. The evaluation drew on were usually women, there was indeed a monitoring reports provided by implementing certain increase in female membership which partners, field visits to the three pilot SACCOs and could be directly attributed to the project. At an evaluation workshop with key stakeholders. least 500 women and 370 men have joined the During the evaluation, not all of the short term SACCOs via a group as a direct consequence outcomes could be effectively measured as the of the intervention14. When looking at 142 evaluation tools did not extend to men and individual accounts, the proportion of new women within the communities. However, as female members as compared to new male the SACCOs are in very close contact with the members seemed to be slightly increasing. community members, their responses were used

YEARBOOK 2011 as a proxy.

13 Due to budgetary reasons, this activity could only be conducted with one of the pilot SACCOs. 14 Here, only groups which have been mobilized and trained by community based facilitators belonging to the project, and which have then been linked to the SACCOs, have been taken into account. Thus, a direct attribution to the project is possible. AGRICULTURAL FINANCE AGRICULTURAL Short term outcomes Women are trained in savings and loan associations and thereby enabled to join SACCO Board and management are sensitized SACCOs: More than 900 women and 300 men towards gender issues: During the key have been trained in basic savings and loan informant interviews with SACCO board and methodologies and more than 500 women and management, all of those interviewed clearly 370 men have joined the SACCO via a group pronounced themselves in favour of increased account. female participation within their SACCO. All of them were aware of the fact that women “Positive externality”: Even if this was not an are disadvantaged. Sam Kahindi, chairman of explicit intention of the pilot project, the gender Muhame SACCO stated: “Women are more training seemed to have opened the eyes of the involved in economic activities but are less SACCO leaders for other vulnerable groups like

appreciated. The fruits of their labour feed the men disabled people. Iceme SACCO, for instance, SACCOs and MFIs

more than themselves”. Moreover, all of them were has decided to provide for a representative of the 05 in a position to bring forward arguments as to why disabled community on the board. increased female membership is necessary and would benefit the SACCO. To the question why Challenges there should be a specific focus on women, Jason Katobe, branch manager of Kaberebere branch, Complexity of the project: The design of the Muhame SACCO, responded: “Most of the women project was too complex in terms of implementing don’t default; even if the repayment is late, they will partners (three implementing partners) and communicate; women are good savers and good at activities. This led to some overlaps and mobilising other members”. communication problems.

SACCOs have a gender policy which is used Short timeframe: Awareness creation and and applied: The SACCO’s now all have a gender especially behavioural change require a lot of time. policy. However, at the time of the evaluation, it The timeframe for the pilot project (six months) was only partially applied. was too short in this respect.

Women are consciously targeted in mobilisation Lack of ownership and involvement of SACCOs: campaigns: As a consequence of the gender Despite the fact that the SACCO managers were training and the communication strategy involved in the process right from the beginning workshop, SACCO board and management on, they sometimes did not feel as the rightful describe themselves now as dedicated to the owners of the project. Especially in the detailed mobilisation of men and women. planning and implementation of activities they were not sufficiently considered. (This was More women are willing to join SACCOs, partially also due to the complexity of the project.) more men are in favour of their women joining In consequence, lack of commitment from their 143 SACCOs: Some of the interviewed have observed side could be occasionally observed. a more favourable response of men towards women who want to join a SACCO and actively Different SACCO contexts: The three pilot engage in it. SACCOs were very different in terms of size,

structure, foreknowledge of gender issues, etc. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL This was not sufficiently taken into account in the the SACCOs with possible financial support design phase. Already existing knowledge and provided by the implementing partner/ structures could have been put into better use. funder.

Recommendations Monitoring and evaluation: Indicators should be agreed during a joint planning exercise with the Ensure clarity of responsibilities between the SACCO (can be part of the training). This joint implementing organisation and SACCOs through: planning exercise would allow the SACCO to set t  BMJHONFOU PG TUSBUFHJD QMBOT PG GVOEJOH  its priorities, and all partners to work towards implementing and benefitting partners; joint objectives. t JNQSPWFE DPNNVOJDBUJPO CFUXFFO implementing organisation(s) and SACCOs Inclusion of youth and young adults: Gender especially through stronger engagement of mainstreaming is targeted towards taking into field officers; account the differences between men and women. t JOUFOTJWF  DPOTUBOU BOE DPOUJOVPVT However, wherever appropriate, young men and involvement and engagement of SACCO women can also be specifically targeted by the managers; interventions. t DPTUTIBSJOH t EFTJHOBUJPO PG B HFOEFS GPDBM QFSTPO QFS Section 5: The Way forward SACCO. Based on the findings of the evaluation, i.e. the Simplify the project design by: best practices and lessons learnt from the pilot, a t IBWJOH POMZ POF JNQMFNFOUJOH QBSUOFS JO scaled-up project was designed, to be implemented order to avoid conflicting timelines, unclear by UCA and funded by aBi Trust and the GIZ FSD responsibilities, a multitude of contact programme. persons, overlapping activities; A nationwide call for expression of interest was t DPNCJOJOH TJNJMBS BDUJWJUJFT  FH JOTUFBE PG organized for which any SACCOs either member having an initial study, a training needs analysis of UCA or partner of the GIZ FSD programme15 and a gender audit, one comprehensive with a membership beyond 1000 members and baseline survey should be conducted in each a sincere motivation for gender mainstreaming of the participating SACCOs, pointing out the as well as a willingness to contribute from their gender issues and needs. This survey would own resources could apply. Implementation of inform about the training (training needs), the scaled- up project will start in the 2nd quarter the policy (gender audit) and provide baseline 2012 and will be organized in two phases. During data for effective monitoring; the first phase:

t "QQMZJOH UIF QSJODJQMF PG TVCTJEJBSJUZ 'PS 1. Each of the participating SACCO will sign a 144 each activity, it first needs to be checked if the MoU with UCA. SACCO could implement the activity on its own – at a lower cost. Only if this is not the 2. UCA will train a gender focal point in each case, funding / support from the implementing SACCO who will work alongside the UCA

YEARBOOK 2011 partner should be provided. For instance,

field officer and the SACCO manager. radio campaigns can be implemented by

15 At the time of writing (February 2012) this is still under consideration AGRICULTURAL FINANCE AGRICULTURAL 3. UCA will conduct a baseline survey in each 3. Support the revision of SACCOs’ mobilisation SACCO (combining gender audit, training and communication strategy. needs analysis and baseline). 4. Train community based facilitators who 4. A two-day gender training for SACCO staff mobilize and train groups in basic savings and board will be organized during which and lending methodology, explain SACCO participants will be introduced to gender procedures and products including relevant and its relevance for SACCOs and work on gender aspects. identifying the gender gaps within their own SACCO. 5. Support the development of gender sensitive products. 5. A mystery shopper will come to each of the

SACCOs to observe the work environment 6. Talk on governance before the elections at the SACCOs and MFIs

there and give recommendations on how to annual general meeting. 05 render the work environment more women- friendly. 7. Support the implementation of radio programmes focusing on behavioural change. 6. In a one day workshop, the sample gender policy (already developed during the pilot) 8. Organise an exchange visit to a model SACCO will be refined according to the specificities within Uganda. of each SACCO and further actions will be planned together with the SACCO. All activities will be thoroughly monitored and an evaluation is to take place at the end of the project, Activities of the second phase are optional and whereby the best performing SACCO is to receive depend on the outcome of the action planning at an award for its efforts. the end of phase one: 1. Advise on the revision of membership Through this scale-up, it is hoped to extend gender requirements. mainstreaming to a majority of big SACCOs in Uganda and thereby improve their services for the 2. Advise on affirmative action for recruitment communities in which they operate. of new staff members.

145 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Women participating in a village savings and loan association.

5.3 Savings Groups Filling an Important Gap in Financial Services1

Section 1: What is a Savings ASCAs”3, are distinguished by the following Group? additional characteristics:

avings Groups2 (SGs) or Village Saving t ćFZBSFPęFOUSBJOFEPWFSBQFSJPEPGBCPVU and Loan Associations (VSLAs) are self- a year in specific procedures for managing selected groups of fifteen to thirty people their meetings and keeping their funds secure who come together on a regular basis – by a facilitating agency, usually a local or Susually weekly, fortnightly or monthly – to save international NGO. 146 and to borrow. t ćFZVTFBshare system, in which members Many traditional groups do this also. Savings can save up to five times a minimum amount Groups, technically “time-bound distributing set by the group. For instance, if the minimum YEARBOOK 2011

1 Authors: Paul Rippey and Grace Majara 2 The term “Savings Group” was adopted as a generic term by industry consensus in 2010 to include all the various forms and brand names used to refer to time-bound distributing ASCAs. Some of the terms commonly used are Village Saving and Loan Association, or VSLA, used by CARE and Plan International in many countries, and sometimes shortened to SLA or VSL; Saving and Internal Lending Communities, or SILCs, used by CRS worldwide; Community Based Saving Groups, or CBSGs, used by Aga Khan Foundation worldwide; Community Saving Groups (CSG), widely used by all agencies in Kenya; and Saving for Change ‰$<97#! 3 AGRICULTURAL FINANCE AGRICULTURAL ASCA is the acronym used for an accumulating savings and credit association. amount is UShs 200, the members could save 200, 400, 600, 800, or 1000, but would not be allowed to save UShs 370. The share system helps facilitate bookkeeping for non- professional bookkeepers, and reduces errors. Having a maximum amount reduces the chance of dominance by members with the capacity to save more. t #FDBVTFUIFJOUFSFTUPOUIFMPBOTJTSFUVSOFEUP the members, it allows their loan fund to grow and members earn a substantial premium on

their savings. SACCOs and MFIs

Female manager of a small SACCO close to Lira, 05 t "MMNFNCFSTXJUOFTTFWFSZUSBOTBDUJPOJOUIF Northern Uganda A VSLA meeting. meetings to the extent possible. Meetings are guided by agreed upon orderly procedures, problem some flexibility in loan repayment. usually with contributions to a welfare fund In general, SGs have avoided both the massive first, then savings, loan repayments, followed defaults and the harsh repayment enforcement by lending. methods that have plagued other forms of financial services. t .FNCFSTBMTPSFTFSWFUJNFGPSPUIFSBDUJWJUJFT  including addressing local social problems, t .FNCFSTDBOCPSSPXGSPNUIFHSPVQGVOET resolving any conflicts within the group, and All loans are approved by consensus or periodic elections. majority, and are made at an interest rate set by the group, usually 5 or 10 percent per t (SPVQTBSFWFSZUSBOTQBSFOU"MMSFDPSETBOE month. Loans are for a short period, one to excess funds are kept in a lock box with three three months. Members will not approve locks, and three separate members, chosen loans if there are good reasons to think that by the group, each keeping one of the keys. the loan is not safe, or not in the interest of the The box can only be opened in the meeting member or of the group. A member in need of in front of all members by the three key a loan is given a maximum of three times his keepers. This assures members that no one or her savings to minimize the risk of failure has conducted any transaction, or changed to pay back the loan. any recorded transaction, unless the entire group has witnessed it. t "CPVUPODFQFSZFBS POBEBUFDIPTFOCZUIF group, there is a share-out or distribution of t .BOBHFNFOUTFSWFTUIFJOUFSFTUPGNFNCFST all funds belonging to the group, with each 147 Groups provide strong social support to member receiving her or his savings, plus a save regularly, and to repay loans on time. proportional share of any interest earned. The However, members understand that it may be distribution is sometimes called the “action their fate to encounter difficulties in future, so audit” because it is an opportunity to resolve

they will allow members with a serious social YEARBOOK 2011 any dispute, and verify that the savings of AGRICULTURAL FINANCE AGRICULTURAL members are intact in the form of physical CARE Uganda, Savings Groups are currently money that they hold in their hands. Members being promoted by a number of development also use the action audit to assess leadership agencies, both International NGOs (CRS, PLAN, performance and review group operations, PACT, World Vision, Child Fund, Danish Church including internal rules and regulations, the Aid, GOAL, IRC among others), national NGOs share value, interest rate and membership. (UWESO and NUDIPU) and district level NGOs and CBOs covering all the regions in Uganda. Savings Groups have grown very fast in the last The implementing agencies report having formed five years, in large part because of the interest 22,106 savings groups in Uganda, with 598,878 of donors who see them as a way of bringing members. financial services to people who otherwise cannot be reached. While Savings Groups are found The VSLA model was introduced in Uganda in primarily across Africa, they are spreading to response to the gaps that exist within the financial Latin America, Asia, with even a small number sector in the rural and marginalized parts of the of groups in Europe. There are now known to be country. The gaps result from: the difficulties about five million members in Africa, but many and cost in taking financial services to poor and more groups probably exist, formed by members remote communities; the inconvenience, distance, themselves, who share the approach with their and fees involved in working with other financial relatives and neighbours. service providers; the emphasis of banks and MFIs on credit as opposed to savings, exposing the poor Members report that one of the things they like to greater risks and expense; and the need for best about savings groups is the savings discipline; collateral that poor people do not have. peer pressure forces members to work hard and get money to save at least the minimum amount set Savings Groups focus on savings, asset building by the group. They use their savings and loans for and the provision of credit proportional to the productive activities; for “income smoothing” – needs and repayment capacities of the borrowers. that is, helping them get through difficult seasons; Groups are low-cost and simple to manage. Some or for health or other emergencies. The lump sums members move on from SGs to formal and wider that they receive from both savings and loans financial services, while others abandon other enable members to take advantage of investment institutions in favour of Savings Groups. Many opportunities or to ease their insecurity and stress. people use multiple financial services, including In either case, they help increase family stability savings groups. Over time, VSLAs have proved and security, creating the conditions through their effectiveness in improving self-respect of which farmers have the courage and willingness individual members and helping to build up social to invest in agriculture. capital within communities, particularly among women. In Uganda SGs experience builds on traditional savings practices. SGs are known as Kalulu/ Section 2: Target membership 148 kilimba/bolicup in Northern Uganda, kweterekera in Central and Yahura/biika o’yeguze/o’yehore VSLAs are able to serve households in remote in the West. The VSLA model in Uganda dates rural areas with low and irregular income, whose back to 1998 with a pilot project in Arua district, main economic activity is agriculture. Members

YEARBOOK 2011 West Nile region by CARE International. Besides

of these households want to amass lump sums for AGRICULTURAL FINANCE AGRICULTURAL produce, operating stalls with merchandise and food stuffs in local markets, retail kiosks, operating small eating houses located at the trading centres, and road side businesses like frying snacks (pancakes, cassava chips etc.). Interest on VSLA loans ranges from 5 to 10 percent and it is payable on a monthly basis i.e. after every 4 weeks.

Interest earned on loans forms part of the profit that is shared out by the members at the end of the cycle. VSLA members indicate that some of the common uses of the share out include: SACCOs and MFIs 05 Women making their contribution. t BDRVJTJUJPO PG BTTFUT MJLF MBOE  CJDZDMFT  mobile phones, ox ploughs; investments and emergencies, and so they need t DPOTUSVDUJPOBOESFOPWBUJPOPGIPVTFT access to financial services, but the transactions t TUBSU VQ PS EJWFSTJĕDBUJPO PG CVTJOFTT they require are too small to make them attractive enterprises; customers for Savings and Credit Cooperatives t BDRVJTJUJPO PG IPVTFIPME VUFOTJMT MJLF (SACCOs) or for formal financial institutions. furniture, cups, plates, saucepans, VSLA members are predominantly women; mattresses and blankets; existing VSLAs4 have a ratio of female to male t QBZNFOUPGTDIPPMGFFT members of 7:3. This is important because women are thought to constitute about 70 percent of the Uganda has had one of the first rigorous agricultural workforce. Through VSLAs, these evaluations ever done of the impact of VSLAs. women access financial services for their first The study5 was conducted by the American time; some have built up their assets enough to be firm, Innovations for Poverty Action (IPA), attractive clients for SACCOs, MFIs and banks. and consisted of a randomized control test, in However, the 30 percent of VSLA members who which – through the agreement of the various are male are also an important group of people – VSLA training agencies – some parishes or about 180,000 men, also overwhelmingly farmers. clusters of parishes were chosen at random in Kumi, Bukedea, Kamuli, Kamwenge, Kanungu, Section 3: Use of loans and share Rukungiri and Bushenyi Districts to receive -outs VSLA training, while others were temporarily excluded from training. In this respect, the Loans study resembled the rigorous testing that is done for new drugs or medical protocols, such as prevention or treatment of HIV/AIDS. 149 CARE reports that some of the common enterprises that VSLA members finance with their The study found that the median weekly savings loans are investment in agricultural production, contribution is UShs 2000, and that almost all selling and buying of seasonal agricultural YEARBOOK 2011

4 i.e. those established under the CARE FSDU-funded project (2006-2007) 5 Information from this as yet unpublished study presented here is from “Impact of Village Savings and Lending Associations: Preliminary Findings from Uganda”, a slide presentation given at the Arusha Savings Group Summit, October 4-6 2011, Arusha Tanzania, and kindly made available by Thuysbaert, Bram and Savonitto, Benni. AGRICULTURAL FINANCE AGRICULTURAL of the members (89 percent) had borrowed at least return on savings among VSLAs in Uganda is 63 once. The median loan amount UShs is 40,000, percent, which is high compared to other African and the principal uses of loans were as set out in countries and presumably indicates good training Table 1:

Table 1: Uses of loans by VSLA members

Female Adults Male Adults Education 27 % Education 22 % Health 19% Health 17 % Agricultural Spending 12% Agricultural Spending 12 % Commerce/Enterprise 9% Commerce/Enterprise 14% Debts Reimbursement 9% Debt Reimbursement 6%

Share-outs by the facilitating agencies, and good commitment The study revealed that some 55 percent of by the groups themselves. Average annualized members had received a share-out. The main uses savings per member in Uganda are $486. of the share-out are set out in Table 2.

Table 2: Uses of share-outs by VSLA members

Female Adults Male Adults Education 18% Livestock 18% Livestock 17% Food Consumption 17% Food Consumption 13% Education 15% Housework/repairs 12% Commerce/Enterprise 12% Commerce/Enterprise 9% Housework/repairs 9%

The share-out, being based on the member’s Savings Groups have a very low failure rate, savings, is liquidity without the disadvantages of and in fact tend to grow spontaneously after a loan. A loan is a lump sum that must be repaid the facilitating agency has moved on. The most in a specified period of time; the share-out is authoritative research in this area is the panel study an asset, which does not need to be repaid. The of 400 groups in six countries being conducted by share-out, therefore, is better suited to investment VSL Associates with support from the Bill and in agriculture or other productive activities, Melinda Gates Foundation7. In this study of 332 especially those with a long business cycle or an randomly selected groups mobilized in the last uncertain cash flow. quarter of 2009, the groups are monitored yearly to measure key indicators including membership, Section 4: Sustainability savings and lending. In the first two years of the study, survival rate is 98 percent i.e. out of the VSLAs are formed against a firm foundation of 332 VSLAs monitored, only six have dissolved. 150 self selection, training, constant supervision and During the same period, total membership in quality control by implementing agencies. All these the groups has risen from 7261 to 7621, total create a favourable ground for high performance savings from USD 182,589 to 251,933, and the in terms of savings and loans. Average annualized average outstanding loan size from USD 36.30 to

YEARBOOK 2011 43.10. The findings indicate that although a small

6 Access Africa CARE USA progress report Dec 2010. 7 Reported on the SAVIX information exchange at http://www.savingsgroups.com. AGRICULTURAL FINANCE AGRICULTURAL number of groups break up, most groups grow the same time, the study showed no significant stronger, and overall access to financial services change in ownership of livestock, or use of through Savings Groups increases, as they add agricultural inputs; these findings are consistent new members. with similar studies that have been made of other forms of microfinance, including microcredit, Section 5: Impact which suggest that the notion that finance alone will alleviate poverty or lead to business The IPA study mentioned above provides Uganda creation, in the absence of market development, with some of the most reliable preliminary data and technical and business training, has been on impact. exaggerated. Financial services should be seen as supporting other efforts to improve agricultural Not surprisingly, the study showed little productivity, but not sufficient in themselves to

measurable impact from the presence of VSLAs. increase productivity. SACCOs and MFIs

The study covered only two years, 2009-2011, 05 and thus looks at very short term results; some However, other studies and much anecdotal VSLA experts, notably Hugh Allen, argue that information suggest that VSLAs have positive results only begin to be apparent in the third and cumulative impacts at both individual and year of VSLA membership, after groups have household levels. These include: mastered procedures in the first year, and built their confidence and savings in the second year8. t DIBOHFT JO MJGFTUZMF OVUSJUJPO  DMPUIJOH  housing); t KPJOUEFDJTJPONBLJOHBNPOHNBSSJFEDPVQMFT t JODSFBTFEBQQSFDJBUJPOGPSUIFWBMVFTPGIBSE work and shared responsibilities ; t SFEVDFEHFOEFSCBTFEWJPMFODF t JODSFBTFE DPOUSPM CZ XPNFO PG IPVTFIPME assets and resources; t XPNFOT TFMGFTUFFN FOIBODFNFOU BOE improved uptake of leadership roles, by women, in the communities;

Finally, VSLAs can multiply their impact by serving as a platform for other development interventions, Village Savings and Loan Association meeting. because they impact large numbers of hard-to- reach people, are easy to find, are disciplined, Nonetheless, the IPA study represents the most organized, transparent and punctual. Also, there rigorous study to date of the impacts of Savings are bonds of trust between the facilitating agency Groups. and the VSLAs, so the members are receptive to 151 new messages. Among the results that were observed were that in the VSLA villages, people were less likely to sell For all these reasons, facilitating agencies are using their crops to fund health expenditures, and more their groups for other development activities. For

instance, Uganda Women’s Effort to Save Orphans YEARBOOK 2011

likely to pay for health costs with a VSLA loan. At

8 Editors’ Note: This view deserves to be better known and appreciated than is believed to be the case. The principle, of course, applies to many development initiatives and models. It should prompt governments and development agencies to avoid looking 9V&J#! AGRICULTURAL FINANCE AGRICULTURAL (UWESO), with over 50,000 VSLA members in 38 as their principal reason for being in an informal districts, regularly introduces other development group, that it gave them the “strength to save”. initiatives to their groups, including adult literacy, water tanks, agriculture, health screening, and Savings Groups meet the needs of proximity, high promotion of solar-powered lamps. Other local return on investment, flexibility, transparency, NGOs around Africa do the same. Because of the and social support to save regularly. Other sorts interest in using VSLAs as a platform for other of institution may provide other desired services, activities, the Aga Khan Foundation launched a in which case members are likely to use both learning initiative to discover the principles and institutions, rather than choose only one. One practices that could make such linkages safe and researcher11 found that “… informal groups beneficial. The learning initiative conducted ten and formal financial institutions are not simply studies and desk reviews, and culminated in a substitutes for each other, but that clients value study9 which points to the dangers in financial both, and that these different institutional forms linkages in which the group’s savings are placed at may even be complementary”. risk. It concludes that other sorts of linkages can be successful if certain good practices are observed. Saving Groups increase financial literacy. It has been argued12 that “regular meetings keep financial Section 6: Financial inclusion management at the front of members’ minds” and that members learn about money management Savings Groups were originally envisioned as an through their participation. Loans are approved affordable way of bringing financial services to by all members, so the members serve as a de facto poor, remote populations. At a cost-per-member credit committee, learning to assess borrowing often under 20 dollars, they compare favourably capacity. Also, since many VSLA members have with the costs of creating other forms of financial experience with SACCOs and MFIs, they can services. However, savings groups are more than compare and contrast the credit and savings simply a way of reaching the hard-to-reach; in practices of the various institutional forms, and fact, they become permanent village institutions bring some of the discipline and transparency of valued by members. savings groups to other institutions when they choose to join them. The 2009 FinAccess study10 in Kenya showed that about a quarter (26.8 percent) of people who used Only a few years ago, it seemed that there was no financial services used only informal mechanisms. effective way to bring financial services to rural However, almost another quarter (23.3 percent) areas. Now there are several good ways, including use informal services in addition to formal and Savings Groups, mobile phone banking, and semi-formal services. Growth in the informal better outreach by SACCOs, banks and MFIs. sector is strong in areas that are served by banks, Competition among these options is an excellent MFIs and SACCOs as well as in unserved areas. development that will ease the lives of farmers, Not surprisingly, people want access to more than 152 one form of financial service. The same study showed that more than half of respondents gave YEARBOOK 2011 9 Rippey, Paul and Fowler, Ben (April 2011) Beyond Financial Services: A Synthesis of Studies on the Integration of Savings Groups and Other Developmental Activities, Aga Khan Foundation, Geneva. Available to download at http://bit.ly/uQz7jN. 10 FSD Kenya (2009) “FinAccess 2009 Survey”. Available to download at !&9!5' 11-&&-&&%*O9&$+9P8X+989 and analysis from FinAccess 2009, Nairobi. Available to download at !&9!5' 12 Recently and notably by Suzanne Andrews at $''5J!5'<5'[\]]']]'[‡'5J5$JJJ AGRICULTURAL FINANCE AGRICULTURAL and provide a necessary support for increasing To ensure continuous technical support to rural productivity. the existing VSLAs and those that are newly formed, in order to address the above mentioned Section 7: The way forward methodological drift, CARE and CRS are trying out models in which fee-for-service trainers are There is convincing evidence that VSLAs rapidly left behind after VSLA projects end. These models reach a critical mass and then become part of could be studied further and where necessary the culture, with the methodology spreading adopted. spontaneously from person to person. In an Aga Khan Foundation (AKF) study in Kenya13, 43 out Agricultural promoters should look at the of 44 groups were still active after two years, and possibility of using the networks of Savings group members had formed another 37 groups Groups in Uganda as platforms for disseminating

spontaneously and independently. Another study agricultural information and new practices. This SACCOs and MFIs 14

in Zanzibar found that the number of groups can be a way to gain substantial outreach, but must 05 had increased from 47 to 158 in the four years be done with care and caution; some guidelines after the facilitating agency had left the area; one are documented in the AKF study cited above. of the original groups had failed but was being Promoters should also be careful of interventions reconstituted. In fact, every study that has looked that increase the risk to the group, in particular by at the question has shown that members continue using the group’s assets as a guarantee for a loan or to spread the VSLA concept after the facilitating a purchase. agency has left the area. Finally, promoters should consider reversing the There is, however, some evidence that group direction: rather than add agricultural services procedures in second generation groups drift to savings groups, it is often more appropriate away from some of the practices they were to provide VSLA training to farmers groups, as taught. The Kenya study just mentioned found CARE has already done successfully. that punctuality, use of lock-box, and respect for other procedures were less in second generation There is little doubt that VSLAs have become part groups, and other studies have suggested similar of the permanent social and financial landscape findings, although not all. Oxfam in Mali15 finds in Uganda. They do not compete with any other that second generation groups perform about as service, but rather strengthen the member’s and well as first generation groups. household’s capacities to participate more fully in the rural economy.

153 YEARBOOK 2011 13 Odell, Marcia Larson and Rippey, Paul (2010) “Beyond Financial Services: The Permanence and Value of Savings Groups in CARE Kenya’s COSAMO Programme”, Paper prepared for the Aga Khan Foundation Learning Initiative on linkages between savings groups and other activities. 14 Anyango, Ezra; Esipisu, Ezekiel; Opoku, Lydia; Johnson, Susan; Malkamaki, Markku; and Musoke, Christopher (2006). “Village Savings and Loan Associations in Zanzibar” Nairobi and Uganda. Report on a joint study conducted by. Decentralized Financial Services and FSD Uganda. 15 Ashe, Jeffrey (August 2011) “The Savings Group Revolution: Financial Inclusion without Financial Institutions”. Paper prepared for the Global Microcredit Summit, November 14-17 2011, Valladolid, Spain. Available at http://bit.ly/swDJIF AGRICULTURAL FINANCE AGRICULTURAL

06 Research and Innovations Farmers picking cotton.

6.1 Micro-factoring: Kenyan Example of using this Product to Improve Agricultural Value Chain Financing1

Section 1: The product: What is This is how it works: micro-factoring? 1. You deliver goods or services to your customer and issue an invoice. actoring is a form of business financing 2. You sell your invoice to a factoring company, where you sell your invoices to a factoring which immediately advances you the first company in exchange for immediate instalment, between 70 and 90 percent of the payment. It eliminates the 30–90 days gross value of the invoice. 156 Fthat your customers take to pay your invoices, and 3. The factoring company sends the invoice to provides you with the working capital you need to the customer. You receive the first payment in run your business. Factoring is a common practice as little as 48 hours. for big business, but is revolutionary for micro 4. After 30–90 days, the customer pays the entrepreneurs. A service tailored as a product for full amount of the invoice to the factoring YEARBOOK 2011

farmers and other micro-entrepreneurs is termed company as per prior arrangement with the micro-factoring. seller.

1 Author: Beatrice Obara, CEO – De Deby Green Ventures Capital Ltd. (DGV Capital Ltd.) Kenya AGRICULTURAL FINANCE AGRICULTURAL Access to adequate and timely financial services Section 2: The rural and for all actors in agricultural commodity value chains has proved to be a key element for success. This implies that not only large producers and necessitating micro-factoring traders but also small producers need access to appropriate financial services to make optimal Without finance, farmers may not be able to buy use of value addition opportunities and resulting good seeds, hire workers, or invest in equipment. income generation. Such finance is, however, For traders, a lack of finance may mean that they not always available, and chain actors working cannot pay cash when they take delivery of the crops in agricultural and rural value chains frequently – so the farmers may sell their crops elsewhere. complain about a lack of access to financial For small-scale processors, a lack of finance services. may mean they cannot expand their operations. Private financial institutions have tended to regard Research In response to this gap in finance, there has been such micro-entrepreneurs as unbankable. Banks 06 a tendency for companies worldwide to focus did not think they were creditworthy – micro- and Innovations on certain parts (or actors) in agricultural value entrepreneurs have no credit histories or collateral chains and directly finance either producers or to offer; many are illiterate, so cannot fill in the traders. While this specialization may be a good necessary paperwork. For bankers it is easier and short-term solution to a burning problem, one more lucrative to provide a handful of large loans may also question whether this will provide to well-established businesses, rather than lots of enough perspective for sustainability and scaling small loans to such micro-entrepreneurs (Yunus, up of chain interventions needed to reach out 2007 pp. 47-48). to many millions of small rural producers and processors. One can also question whether An additional problem is that these businesses are such financing mechanisms will contribute in the countryside. Agriculture is a risky business. to the desired empowerment of small rural Drought, heavy rain, pests and diseases, unreliable producers and processors, or rather increase their input supplies, lack of storage and cooling facilities, dependency on larger chain actors. bumpy roads, fluctuating prices, seasonality of many crops, all make the financial outcome of In this article the link between chain actors and farming unpredictable (Fries and Akin 2004), financial institutions is described as a means to so most banks are reluctant to finance crops and deepening financial services for value chains. livestock. They have few staff or branches in the Value chain finance aims to address perceived countryside, and distances are large, pushing up constraints and risks by providing innovative ways transaction costs. of delivering financial services to rural producers and agribusinesses. It means linking financial The bad reputation of agricultural credit does institutions to the transaction points in the value not help either. From the 1950s to the late 1980s, chain, offering financial services to support the public bodies intervened extensively in rural product flow, and building on the established credit markets in developing countries, especially relationships in the chain. It means that the in Africa. Governments and international product flow in the value chain is used as a carrier donors used heavy subsidies to promote rural and collateral to provide financial services. lending. Credit was cheap, and it often went to the wrong people, at the wrong time, for the wrong purposes. When farmers had difficulty 157 in repaying their loans, or deliberately defaulted on their repayments, no measures were taken against them. Due to low repayment rates and bad allocation, rural credit programmes became

permanently dependent on external resources, YEARBOOK 2011

and were not a viable operation for private banks. AGRICULTURAL FINANCE AGRICULTURAL The result is a serious and long-lasting rural finance from where they are taken to a processing plant gap (UNCTAD 2004) that constrains realizing the for ginning. economic potential of agriculture. The perception of agriculture as risky means a loss to the farmers An example follows from Kenya... and other entrepreneurs, to the local and national economy and to the financial sector. It hinders Ninety-four percent of Rachuonyo’s households agricultural development and blocks attempts to depend on rainfed agriculture for their livelihoods. reduce poverty. Improved financial markets in Each family has about 80 acres (32 ha) of land. On rural areas would stimulate agricultural and rural 10–12 acres (4–5 ha) they grow cotton, yielding growth, leading to economic growth and less US $1,250/year, which is 80 percent of their poverty (USAID 2005). income. On another 6–8 acres (2.4–3.2 ha) they grow sorghum, maize and legumes, mainly for With commercial banks reluctant to lend to the home consumption. The rest of the land is left rural poor, and public agricultural development fallow for grazing. banks closed because of bad performance, it took microfinance institutions to prove that the asset- However, Kenya’s smallholder cotton growers face poor are bankable. With the use of new lending a problem: they find it difficult to get paid on time. techniques, the microfinance industry showed Some have to wait for months before they finally that lending to micro-entrepreneurs is not only receive their money. The long delay makes it hard feasible, but can even be an attractive market for them to feed their families in the meantime, opportunity. or to invest in improving their farm enterprises. They often sell at low prices to traders; in these Financing value chains transactions farmers are in a poor position to bargain. They need cash urgently, do not know In general, there are three types of finance for the the prevailing market rates, and have no access to actors in the value chain: alternative sources of finance.

a) Chain liquidity: Short-term loans from Similar problems face producers of many other suppliers or buyers within the value chain types of agricultural products. Farmers have b) Agricultural finance: Financial services from to invest up front, wait a whole season before commercial banks, microfinance institutions harvesting the produce, then wait again for the and other financial institutions buyer to pay. That limits their productivity and c) Value chain finance:2 Financial services output, and means that they are forced to sell at that are based on meeting financial needs low prices to intermediaries who can give them (usually short term) as product moves across cash immediately. transaction points and gains value through processing, storage, transport and marketing. Factoring as a solution

Micro-factoring as a value chain liquidity De Deby Green Ventures Capital Ltd (DGV Capital solution Ltd.) has developed solutions to this problem. It provides an innovative financing arrangement Given reasonable weather conditions and good known as “invoice factoring” that offers short- term financial services to smallholders and other 158 husbandry, one would expect cotton growing to provide growers with worthwhile incomes. During actors in the value chain. the picking seasons (August–December and March–May), the white burst balls can be plucked DGV Capital Ltd. has adapted this service for from the cotton bushes once every 2 weeks. The various commodities in Kenya: cotton (mainly in farmers take sacks of cotton to collection centres the semi-arid areas in Kenya), tea (in the Kericho YEARBOOK 2011 area in Rift Valley province), fish (Lake Victoria),

285<!!575http://www. !5'5'5'5JJJ'JJ'' AGRICULTURAL FINANCE AGRICULTURAL Partnerships

Current partnerships include: t ,FOZB $PNNFSDJBM #BOL  CBOLJOH BOE payment systems t 1PTU#BOLQBZNFOUTZTUFNT t &RVJUZ#BOLQBZNFOUTZTUFNT t ,3FQ#BOLCBOLMPBO t $PUUPO %FWFMPQNFOU "VUIPSJUZ   DPUUPO regulation, seed certification and distribution t /BLVNBUU )PMEJOHT -UE CVZFS PG WBSJPVT items

t 5VTLFS.BUUSFTTFT-UECVZFSPGWBSJPVTJUFNT Research

t &BTU "GSJDB (SBJO $PVODJM  QPMJDZ BOE 06

advocacy and Innovations t .BLVFOJ (JOOFSJFT -UE  MJOU BOE TFFE Cotton ready for harvesting. processing and horticulture, coffee and dairying (Central DGV Capital Ltd is looking forward to working Kenya). The firm also partners with money with development and commercial partners in the transfer platforms as well as with companies following core areas: offering modern technology in farming and t *OGPSNBUJPOUFDIOPMPHZDBQBDJUZ services to enable the production of timely, quality enhancement products. t )VNBOTLJMMBOEDBQBDJUZEFWFMPQNFOU t 4USBUFHJD QBSUOFSTIJQT BOE JOWFTUPS SFMBUJPOT Section 3: Supply side to grow the portfolio.

Factoring addresses key bottlenecks in agricultural Micro-factoring is already operational within value chains. A greater volume of produce DGV Capital Ltd. The Partnerships Policy of now moves more smoothly than before, and the firm is aimed at up-scaling the benefits with payments are made on time. The strong linkage the direct vision of commercializing and rolling between the different actors cultivates a culture of out the product to other financial players in the responsibility in the chain. The chain provides a market. clear communication channel, keeping everyone informed about pricing and the quality required. Experiences and challenges

In implementing this innovative project, DGV Sensitization: Factoring is a new financial service Capital Ltd. encountered the following challenges: in Kenya, and many people shy away from it. This is not because of its complexity but due to a lack t 1SPQFSTUSVDUVSFPGBGBDUPSJOHIPVTFJTMBDLJOH of knowledge. Many people view factoring as a due to the huge investment capital needed for kind of loan. DGV Capital Ltd tries to educate set up; the public by organizing forums as part of its t )VNBO DBQBDJUZ UP GVMMZ JNQMFNFOU UIF marketing work. 159 project; t 5FDIOJDBM DBQBDJUZ JO BDUVBMJ[JOH UIF Complexity of the groups: A lot of effort is needed envisioned output and support in shopping to mobilize the producers into business groups for strategic partners. before the factoring service can be introduced. This is costly and time-consuming. Most financial YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL institutions do not have the patience to do this Section 4: Performance groundwork; they rely on NGOs to establish the required relationships within the groups. Target market Lack of regulation policy: Factoring can be abused. It is not regulated by banking laws, and The factoring house serves SMEs within Kenya so unscrupulous operators could use it to defraud with linkages to the following sectors: clients. DGV Capital Ltd is pushing for more factoring houses to be set up to have enough t "HSPCBTFEQSPEVDFSTBOEQSPDFTTPST weight to lobby for regulations on aspects such as t .BOVGBDUVSJOHTFDUPS capital base, dispute-settlement procedures and t 8IPMFTBMFST BOE PUIFS TVQQMJFST DPNNPOMZ licensing. referred to as “middle men”.

Lack of investors: Because factoring is new to Project outreach Kenya, potential investors lack information, and are therefore unwilling to put money into this Currently, DGV Capital Ltd is reaching about form of financial service. We are currently using 3000 small-scale producers through 24 SMEs and trading finance facilities from K-Rep Bank and 7 buyers (institutions) with a commercial fund of the COB fund through Pride Africa from IFAD KShs 8,000,000 provided by the La Roschel De Funding on Innovations. Deby Enterprises Ltd and RAVI (Rural African Ventures Investments) through Pride Africa – Lessons (IFAD Innovation Fund). The turnover in the last year stood at KShs 29 million. The outlook for a) Factoring can be used to alleviate smallholder significant expansion is promising. farmers’ cash-flow problems. Such farmers lack hard collateral to secure finance from Project viability banks and other financial institutions. The factoring invoice provides security that DGV Capital Ltd is in its second year now and enables the farmers to obtain funds. can clearly and confidently list the following as the direct benefits to both SMEs and buyers. b) Factoring complements other innovative services such as M-PESA and Bank agency Benefits to SMEs money transfers. These enable financial services to reach large numbers of widely t ćFZ BSF BCMF UP DPOWFSU UIFJS JOWPJDFT scattered farmers who lack bank accounts. into instant cash ahead of due dates, thus enhancing working capital. c) Factoring is flexible enough to be easily replicated to other commodities. t ćFZHBJODPOUSPMPWFSUIFJSDBTIĘPX

d) Factoring builds the capacity of farmers, t ćF VODFSUBJOUZ PG EFCU DPMMFDUJPO BOE UIF producers/small traders and other actors and related expenses is removed and therefore strengthens the value chain. Policy makers expenses can easily be projected. should develop legislation to regulate and 160 promote the industry. t "T B ĕOBODJOH BMUFSOBUJWF  GBDUPSJOH JT competitive with bank lending rates.

t ćFZIBWFBDDFTTUPBOETVTUBJONBJOTUSFBN markets which engage in volume buying YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL as they are able to continuously supply the So far DGV Capital Ltd has had no Government required quantity and quality of products or donor assistance. owing to support of factoring facility. The IFAD-supported fund for working capital is Benefits to buyers through an intermediary, and attracts commercial interest rates. t #VZFST CFOFĕU XJUI JODSFBTFE QSPEVDUJPO capacity as the factoring facility ensures Factoring methodology can be sustainable and steady and sustained supply of raw materials can be replicated in several sectors and countries. and other inputs. It is straightforward to set up, as long as first, the necessary trust has been built amongst the players t .BJOTUSFBN CVZFST CFDPNF NPSF JOUFSFTUFE and second, partnerships have been developed

in buying from small-scale producers, as with reliable banking institutions. Research

there is no pressure to pay cash on delivery of 06 products. References and Innovations t 7PMVNF CVZFST DBO QVSDIBTF GSPN TNBMM 1. Yunus, M. (2007) Creating a world without scale producers as part of practising social poverty. Social business and the future corporate responsibility and doing so in a of capitalism. Public Affairs, New York profitable manner. 2. UNCTAD (2004) Financing commodity based trade and development: Innovative agriculture Final points financing mechanisms. Report prepared by the UNCTAD secretariat for the Expert Meeting on Financing Commodity-Based Factoring at the farmer and SME levels is new in Trade and Development: Innovative Financing Kenya, with DGV Capital Ltd. being the innovator. Mechanisms. Geneva, 16–17 Nov 2004. TD/B/ It is a profit making company that was established COM.1/EM.24/2, 3 Sep 2004. UNCTAD, in December 2009 to support the development Geneva. of Micro and Small Enterprises (MSEs) in Kenya 3. USAID (2005) Value chain finance. RAFI Notes for wealth creation. DGV Capital Ltd supports 2, USAID Washington, DC the MSE sector with micro financial services, 4. Fries, B, and B. Akin ( 2004) “Value chains and consultancy in business development services their significance for addressing the rural finance and money transfers, focusing on innovative and challenge”. MicroREPORT 20. Accelerated unique methodologies. Microenterprise Advancement Project, USAID Washington DC

161 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Artisans of a Women’s Association in Rushere.

6.2 Linkages between SACCOs and the Central Finance Facility Promoted by the Uganda Cooperative Alliance1

Section 1: What is a CFF/UCCFS? by the members - mainly cooperatives. UCCFS has a Board of Governors (elected from the ganda Central Cooperative Financial membership) at the top and a team of dedicated Services Limited (UCCFS) is a and professional staff who manage the day to day Central Finance Facility (CFF) running of the facility. At the moment, it has its that is fully registered as a tertiary head office housed under UCA in Kampala and 162 Ucooperative under the Cooperative Statute of 1991 eight regional offices in other parts of the country2. in Uganda. It started its operations in the year 2008 Its objectives include: with the overriding goal of providing financial services to the entire cooperative movement in the a) provision of financial services including country. The facility has a financial pool created liquidity management to its members; YEARBOOK 2011

1 Author: Samuel Sentumbwe, Uganda Cooperative Alliance (UCA). 2 Editors’ Note: The mechanism described in this article, though based on a sound model used in many countries, still has to get 55555$! AGRICULTURAL FINANCE AGRICULTURAL b) provision of linkage and payment the Uganda Cooperative Alliance, (an umbrella arrangements to all its members; organisation for cooperatives in Uganda). UCCFS is currently in contact with other development c) supply of any other cooperative support partners in a bid to further its goals and objectives. services demanded and approved by the membership. Section 2: The linkage between UCCFS and SACCOs. This initiative was started and promoted by the Uganda Cooperative Alliance (UCA) after Despite many SACCOs having accounts with realising that there was a big financing gap in Tier 1 financial institutions, many of them have the cooperative sector which had been caused by not been able to access finance to enable them Research the closure of the Cooperative Bank by the Bank to achieve a satisfactory financial position. This of Uganda. It was set up with the intention of 06 is because the short term nature of most of the and Innovations providing services similar to those provided by credit from financial institutions is in many cases the former Cooperative Bank Limited. However, not suitable to the operational demands of the this time it is starting from the grass roots SACCO members. This is where the CFF comes and is offering services in a more transparent, into the picture. Despite the fact that UCCFS professional and therefore sustainable manner. also provides financial services to facilitate non- The pool of funds has been mobilised by its financial cooperatives, the Area Cooperative members, who in turn access the funds when Enterprises3, most of the credit has gone through need arises. Funds are raised through sale of SACCOs, due to the fact that they are closer to shares, acceptance of deposits and/or savings that the end users and are therefore better suited to periodically earn interest. Indeed, the procedures monitor loan performance. So we can also state are similar and in line with the norms and that UCCFS is linked to and serves the small scale practices of formal deposit-taking institutions. farmer through SACCOs. A lot of emphasis has The promoters, including the UCA, envisage that also been put on financing the small scale farmer with time and proper management the UCCFS through already tested and successful models. will grow to fully serve as the Cooperative Bank Working closely with UCA, most of the SACCOs in Uganda. that have benefited from this facility are those that are embedded in the tripartite model being The concept and systems being used by the UCCFS promoted by UCA as explained in Fig 1 on the have already attracted support from internationally next page. recognised financial institutions like Rabobank, one of the world’s leading banks. Rabobank has In this model, there are basically 3 types of provided funding to the facility’s activities and services being offered in sequence by the 3 entities, offered a long term loan at a very competitive SACCOs, ACEs and RPOs. interest rate. It has also received technical assistance in form of capacity building from other Linkage A - The Rural Producer Organizations 163 development partners including: Agriterra (a (RPO) A primary society is made up of a Dutch NGO); Canadian Cooperative Association minimum of 30 farmers who focus on producing (CCA); International Cooperative Alliance (ICA); up to three agricultural products. These are Swedish Cooperative Centre (SCC); the Swedish smaller cooperatives formed at village or parish

International Development Agency (Sida) and YEARBOOK 2011 level and their major role is to till their land and

3 See also Were, Nathan, “Area Cooperative Enterprises: Are these an Effective Tool for Agricultural Transformation in Uganda?” pp 151-160 in Roberts, Richard and Ocaya, Robert (Eds.) (2011) Agricultural Finance Yearbook 2010, German International Cooperation, Bank of Uganda and Plan for the Modernization of Agriculture, Agribusiness Initiative Trust, Kampala. AGRICULTURAL FINANCE AGRICULTURAL Figure 1: Structure of co-operative entities

Uganda Central Cooperative Financial Services Ltd

DD

Area Cooperative Enterprises (ACEs) SACCOS B & Unions Savings & Credit Bulking, Marketing & Value Addition

C A Rural Producer Organisations (RPO) Production

avail the agreed amounts of agricultural produce. SACCO through paying membership fees, buying The amounts produced are usually agreed upon shares and making deposits. Since the financial with the ACE before the actual production starts. institution is owned by the farmers, the SACCO is Produce from all the member RPOs is collected at supposed to provide financial services at the best the ACE stores. possible terms to its members. The farmers also stand to benefit by earning dividends accruing Linkage B - The Area Cooperative Enterprise from the SACCO’s operations. However, despite (ACE) A secondary level cooperative whose this arrangement, many SACCO’s do not have membership is made up of several RPOs does the financial capacity to meet loan demands and the value addition (bulking, cleaning, grading, in most cases cannot easily provide term finance. packaging etc.) and the marketing of the produce This is when the CFF then comes in to boost the on behalf of its members. It also issues a receipt to capital position of its members. the farmers that acts as collateral to the SACCO in case one of its member farmers needs credit. Linkage D - The linkage between UCCFS and The Saving and Credit Cooperative (SACCO) SACCOs in Agricultural Finance provides credit services using the receipts UCCFS mobilises deposits from its membership issued by the ACE as collateral. The sales of the through membership fees, buying shares, farmers’ produce are done through the SACCO mobilising savings and term deposits. It has which makes the final payments to the farmers, managed to grow its capital base because the deducting sums owing for loan repayment and rates it offers are very competitive with the open interest. market rates (both on the demand and supply 164 sides of the market). The fact that members Linkage C - The SACCO with which the RPOs stand to earn dividends from the CFF’s earnings and ACE partner is owned by farmers in the further consolidates the organisation’s position. RPOs and is usually run at sub-county level. Apart from supervising and auditing its members The farmers-members provide funds to the

YEARBOOK 2011 UCCFS has served its members in several other

ways including: AGRICULTURAL FINANCE AGRICULTURAL commercial bank procedures did not help. The CFF has therefore designed specific products to help SACCO’s manage their liquidity.

b) Short term contract financing: UCCFS also provides credit products directly to some ACEs to enable them meet short term supply contracts with their clients like schools, government institutions, processing companies etc. Credit is usually given to support the value addition processes including drying, grading, packaging, transportation Research etc. 06 and Innovations

c) Term finance: One of the main problems A small holder farmer. hindering agricultural production has been the lack of improved agricultural technologies, equipment and infrastructure. a) Liquidity management: Many of the SACCO’s UCCFS is currently offering credit facilities in the country do not have enough operating to its member ACEs to purchase better post- capital to meet the financial demands of their harvest handling machinery like driers, clients. The SACCO’s in the model above are grading and packaging machines as well as even in a more difficult situation because most building better warehouses. In some cases crop seasons start and end around the same the RPOs have accessed better farming period of time. This is not helped by the fact equipment like tractors in form of leasing that most of the country’s small scale farmers through their ACEs. It is however important are compelled to sell their products during to note that despite a high demand for this the harvest season (at very low prices) to meet product the activity of the CFF in this area has their financial demands due to lack of proper been limited by its financial resources. infrastructure to hold onto the produce past the peak production periods. d) Promotion of Insurance Services: In conjunction with Sanlam Assurance, the old The model tries to address this issue by age insurance scheme was commissioned providing a credit service to the farmers during among UCCFS members. This insurance such periods and allowing the ACE to sell at a product protects the SACCO’s, its members later date when the prices are better. However, and their families from losses in the event on the other hand the high demand for loans of the death of a borrower. The insurance exerts pressure on the SACCO’s loanable indemnity offsets the debt of the beneficiary funds. In the past many SACCOs would resort in case of death or inability to pay due to 165 to ad hoc and highly risky financial practices injuries sustained during the loan period. In like borrowing from money lenders (many of the absence of such insurance the SACCO whom are not licensed or regulated) to meet management would just liquidate the farmer’s

their financial demands. The slow and lengthy collateral. This is an easily-understood YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL insurance product and its introduction will It is also important to note that there are other undoubtedly have an educative benefit for players, including the Government, that are keenly farmers. interested in increasing access to financial services especially among the poor/rural Ugandans. To e) Training: In addition, the CFF is involved in achieve this, there is need for a concerted effort mobilising for the formation of more financial between the various organizations and players cooperatives, offering training in financial from the private and public sectors. One of the cooperative management, helping the possible partnerships where the CFF could play a SACCOs in product development, facilitating significant role is one with the MSC - as discussed horizontal integration among its members and below. also becoming a major platform in advocating for financial cooperative development. Partnership with Government’s Micro- finance Support Centre (MSC)? f) Flexible and Fixed Deposits: In a move to promote the saving culture, UCCFS offers The Micro-finance Support Centre Limited is a flexible and fixed deposit products in a manner Government-owned company that is working similar to that used by the commercial banks. towards reducing poverty by improving farmers’ The fixed deposits attract a higher interest rate access to credit. Indeed, MSC is one of the than ordinary saving. The rates are negotiated main implementers of the Prosperity for all depending on the amount and period. Programme (PFA), working largely through SACCOs. However, MSC has experienced Section 3: The future various challenges, among others in its interface with SACCOs. Many informed observers are The future of this organisation lies in the of the opinion that the Government’s sound continued strengthening/improvement of the broad policy for harnessing SACCOs to provide systems currently in place as well as support financial services in rural areas has not yet from government, other private sector players, produced a significant impact4 on a national level. development partners and the general public. It Though coming from very different roots, both is hoped that the CFF will achieve its main goal MSC and the UCCFS seek to support SACCOs of becoming the major lender, and the primary with financial services. It is therefore pertinent depository of cooperatives in Uganda within the to ask whether scope exists for a public-private next five years. partnership between the two entities. Clearly such a partnership should have very clear operational At the moment membership to UCCFS is growing guidelines, so that the autonomy of the UCCFS at an annual rate of ten percent and its portfolio would not be affected and its close links to its has more than tripled since its inception. However, membership maintained. it’s still serving a small portion of the potential clientele. Moreover it has limited capacity to offer Final points 166 long term agricultural financial products, due to its limited financial resources. Therefore, for the It is hoped that over the years, UCCFS will have CFF to play a bigger and more significant role significant impact on agricultural development in providing agricultural finance there is need in Uganda through provision of tailored financial YEARBOOK 2011

to grow in terms of both outreach and financial products. Many entities including Government capacity.

4 Andrew Obara, ‘Failing SACCOs: Who cares?’ pp 126-132 in Roberts, Richard and Ocaya, Robert (Eds.) (2011) Agricultural Finance Yearbook 2010, German International Cooperation, Bank of Uganda, Plan for the Modernization of Agriculture and Agribusiness Initiative Trust, Kampala. AGRICULTURAL FINANCE AGRICULTURAL have agricultural finance on their agenda and it support at institutional and policy levels by the is important that they explore various avenues of Government of Uganda as well as development expanding financial services in new directions, agencies. The institutional support should only using new technology and innovations to serve be for purposes of strengthening the facility and more clients in remote communities, and offering should not go beyond that level. them an ever-wider range of products. At policy level the emphasis should be on In conclusion, the concept of the CFF has been improving the formal legislative structure for tested in many parts of the world. It has shown SACCOs as a special type of cooperative, SACCOs very positive results in small and dispersed are not well served by the current Cooperative farming communities just like those in Uganda. Act of 1991. There is a parallel need to revise The ground has been set by UCCFS and what and modernise the Cooperative Act of 1991 (to Research remains to be done is to further tailor the concept regulate the RPOs, ACEs and Unions) to match 06 and Innovations to Uganda’s socio-economic environment, provide the current development patterns.

167 YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL Inspection of part of a tea plantation.

1 6.3 Human Resources for Agricultural Banking

Section 1: Introduction Access to finance is one of the ingredients that would reduce the barriers on the supply side. The he world needs more productive, better absence of reasonable financial services – the right managed agricultural enterprises. products, delivered in a sensible way – makes it Global population is now 7 billion, out another ‘wedge’ between potential and actual food of which an estimated 33 million are production. TUgandans, a number estimated to double in the next 23 years. Therefore Uganda is expected to be It is a contributing factor not only to persistent home to 60 to 70 million by 2035; the world will poverty, but also to food price inflation which then have over 9 billion. curtails development. Just think of the current 168 inflation scenario in East Africa (see Schmidt The major setbacks to feeding these expanding 2011, with further references). populations are on the supply side of agricultural markets (Economist 2011). Farm yields, sustainable This Yearbook provides a platform to discuss and environmental management (see Kabaseke 2011), track the trends of various aspects of agricultural production and its finance. This article addresses

YEARBOOK 2011 transport and other linkages between producers and consumers all drive a wedge between the the question, “How best can financial institutions potential and actual food production. (FIs) get the human resources for creating, handling

1 Authors: Januario Ntungwa, TRIAS Uganda, Kampala, and Oliver Schmidt, Mountains of the Moon University, . AGRICULTURAL FINANCE AGRICULTURAL and delivering the financial services required by Accordingly, few FIs give agricultural finance agricultural enterprises?” Section 2 lays out the a prominent place in their business planning. challenges; Section 3 presents the competencies Rather it is an added area, often included largely that an agro-finance expert needs; Section 4 for public relations reasons, especially as regards discusses how FI business models shape FI career the Government. perspectives through marking down the relevance of agri-finance competencies; Section 5 offers a Staff members do not build agri-finance comparative discussion of the case of Uganda’s competencies, because it does not help their Centenary Bank and India’s KBS Local Area Bank; careers. Business models – prime determinants Section 6 highlights implications for the design of of those careers – sideline and downplay agri- academic and non-academic courses; Section 7 finance. Even if the FIs are nudged to pay attention highlights policy implications. to it, they have a narrow entry-point, because

there are limited competencies among their staff. Research

Section 2: The challenges of 06 Obviously, agri-finance experts exist. But they and Innovations $% practically always exist outside of the FIs. They are a scarce and hence expensive resource In the light of the fundamental task of feeding which is provided by bilateral and international humanity of the future, would it not be reasonable development aid agencies. Because they are to expect the best and finest young performers expensive, there is no way FIs can have them on to flock to become agri-finance experts, to be their regular pay-roll. After all, they are not even part of these exciting and fulfilling challenges? core to the business model. FIs located in rural Reasonable as it might be, it is a futile expectation. areas could and perhaps should have remodelled Agri-finance does not enjoy any particular their business, but they have limited financial prominence. Those who are becoming bankers resources and more often than not simply copy – which for simplicity in this paper includes all and paste the existing finance business models. people working in financial service industries – appear to favour a belief that becoming rich and The same challenges reflect on universities. cynical is both fundamental and absorbing a task. Agriculture and finance/banking are different faculties that hardly speak to each other. The Admittedly, the previous statement is rather a problem is even compounded by a concentration polemic cliché. But as is characteristic for any on theory rather than on practice in most cliché, it has a grain of truth in it. The motivation institutions of tertiary education. Even the few and attitude and concept of how bankers see the that have attempted to include practical sessions world are fundamentally different from motivation in the courses have difficulties in getting FIs to and attitude and concept of how the world works accept placement of the students to practise the for agro-entrepreneurs and other agriculturalists. theory. They are separated by an information divide and mutual suspicion. Accordingly, they graduate either bankers or agriculturalists – who then continue to not speak This has structural implications for the FIs. The to each other. The continued absence of interest time and placement it takes to become an agro- from FIs in agri-finance skills has hampered the finance expert are largely lost on the usual career motivation of universities to design courses that paths in FI. It compares to maternal (or in our bridge the gap. 169 modern times paternal) leave. Nice for you, we appreciate the idea of having a manager who did Thus, specialised agri-finance training remains the it, but it will not help you on the way to becoming domain of highly paid (because they are scarce) that manager; you will have to work twice as hard specialists. The training courses they run are

as those on the career ladder who did not do it. YEARBOOK 2011 singular, non-permanent events in the day-to-day business of FIs – and probably of agri-businesses AGRICULTURAL FINANCE AGRICULTURAL detail should not be limited to numerical, but also extend to understanding the general and specific conditions of the borrower (the market and its opportunities the borrower’s management capacity to grow over time).

However, these are colourings added to the core competency of a banker. The core competency is breaking down any request for a loan into a numerical scheme based on cash flows, collateral and capital. That requires the banker to focus on measurable aspects of the loan applicant; to be strict and impartial in recording them, and to instil at the level of appraisal that the bank will be fierce in recovering the borrowed amounts with interest within the agreed period. An agricultural officer working with a farmer. In broader terms, a banker is a risk manager. Risk as well – and their effect on the structure described is uncertainty organized by numbers. The banker above remains elusive and uncertain. assesses risk in order to manage it. The banker is inclined to take minimal risk. That gives way to Section 3: An overview of the the above outlined profile in assessing credit. Let us remember, though, that the banker manages !$ other people’s money, more precisely savings. He/ expert she does not manage risks for his/her own sake but on behalf of the general public who have entrusted “A competency model describes the combination their savings to the bank. of knowledge, skills and characteristics needed to effectively perform a role in an organisation and Agriculturalists’ core competencies is used as a human resource tool for selection, training and development, appraisal and succession The agriculturalist, on the other hand, pursues planning”. (Sanghi 2007) an enterprise that is subject to a great degree of uncertainty. Returns to the agricultural enterprise Bankers’ core competencies are always a function of the environment that is beyond the control of man. Pre-harvest, the A good banker must have the competencies to enterprise may face heavy rains or thunderstorms assess ‘the five C’s: character, capacity (cash-flow), or drought or locusts and other insects; post- collateral, conditions, and capital. These are the harvest it may be subject to contamination during areas that determine credit risk, i.e. the probability transport and storage, e.g. fungus or insects that a borrower will be able, capable and inclined infiltrating harvest stores. to repay a loan. Above all, she/he must assert her/ himself, be good with figures and have a clear Although the effects of these events, and some sense of his/her business. of the events themselves, can be contained or 170 mitigated, they remain difficult to quantify. This is not to say that is all that a banker needs; Turning these uncertainties into measurable risk he/she should also have inter-personal skills in is costly in terms of the data required. assessing a person’s character and in inclining a borrower to be trusted and open in his dealings YEARBOOK 2011 with the bank. The capacity to gather and process AGRICULTURAL FINANCE AGRICULTURAL The agriculturalist, therefore, needs technical of technology: Some idiosyncratic skills may be expertise specific to his enterprise and its negatively correlated to some forms of technology. environmental conditions, resilience and stress A ‘green thumb’ does not make a skilled mechanic. tolerance, and tenacity. skills and was equipped Also, idiosyncratic skills may not be easily scalable to gather and utilize information from a broad – the farmer who does well on half an acre may do range of sources. However, these skills may not be poorly on five acres. readily found among small-scale farmers. In summary, the agri-finance expert has the Agri-finance experts’ core competencies competencies to overcome the usual information divide and mutual suspicion between bankers and agriculturalists: Agri-finance experts must be conversant and comfortable with the profiles above, i.e. the

- On the personal level, the agri-finance Research core competencies of both the banker and the expert understands core competencies that agriculturalist. The agri-finance expert analyses 06 shape the respective characters of bankers and Innovations the two means of managing environmental risk and agriculturalists and enables him/her to of the agricultural enterprise: technology and communicate effectively to both. He/she can idiosyncratic skills of the agriculturalist. translate either party’s analytical perspective of the agricultural enterprise into the terms of Technology can be easily observed – does the other. the enterprise own a tractor, how are stores constructed, which irrigation or pesticides or - On the technical level, the agri-finance expert fertiliser does it apply? Also observable is the commands specific personality and market minimum optimal enterprise size required for a intelligence that is required to understand the given technology. In the context of Uganda, up- agricultural enterprises. scaling to that required enterprise size meets the challenges of land ownership like securing a land title. The procedures are sometimes unclear, always Section 4: Business model and lengthy and inevitably a source of uncertainty human resources investment that adds to the opportunity cost of technology. Yet, the land-title is another ‘observable’ that the In the light of the previous section, why should banker demands both to ensure that the borrower it be difficult to train agri-finance experts? After has access to the most basic production factor all, the banker – or the agriculturalist, for that (land) and also as collateral for credit. matter – already possesses half of the necessary competencies. He/she only’ needs to acquire Idiosyncratic skills, however, are by definition the other half. Alas, in the small word ‘only’ is unobservable. How does the agriculturalist incorporated a formidable challenge, which absorb the balance of his enterprise eco-system? becomes visible when we consider the business How well does he know where and when and models of financial institutions. how much to manipulate it, so that his crops and livestock prosper? These can be assessed either by The business model of the bank is embodied in following his performance over several seasons, if its balance sheet. Classically, bankers turn short- not years, or by sharing some of those skills, and term liabilities, i.e. savings, into long(er)-term hence turning them into ‘observables’. These two credit; MDIs and SACCOs aspire to move to the 171 are inter-related. same business model. The most terrible thing that can happen to bankers is that savers call in their Furthermore, the agri-finance expert will money all at once. Banking business will only work understand the relationship between the if it can avoid that event from coming to pass. In idiosyncratic skills observed and the application order to manage this, bankers give credit that is YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL repaid by a very regular, short-term schedule and/ who are socially-minded, have created finance or give credit that has a low risk of default. These facilities specifically geared towards small-scale two are obviously closely related. agriculture – though this is beginning to change.

Lending to agricultural enterprises usually Business model and career path demonstrates one or both of the following: Staffing and staff development decisions are taken - Agricultural enterprises have irregular cash by both management and employees themselves flows, depending on seasonality of their crops, – based on the business model that shapes the they regularly require medium or long-term enterprise. Management will allocate resources schedules; for staff positions and staff development to credit officers who can be deployed flexibly. Hence - Environmental risk of the agricultural promotion will rest on putting the bankers’ core enterprise translates into portfolio risk. This is competencies to profitable use. because an environmental calamity could hit all agricultural loans in the lender’s portfolio, Credit officers, therefore, will aspire to deepen at the same time. their core competencies and to further their careers by overseeing profitable loan portfolios. The logical effect is that credit to agricultural enterprises is significantly more expensive. But Their best strategy is to: even if that interest premium would be paid by farmers, the bank may not be inclined to offer it, - Focus on credit to enterprises that repay in because of its HR requirement. As pointed out, the short-term patterns and/or that offer well- bank would need staff with specific competencies. structured collateral, e.g. borrowers such as Hiring such staff members raises its costs, because shops and other trading businesses. they are less flexibly deployed. Hence promotion will relatively be more costly to maintain. - Signal numerical competencies by acquiring degrees in finance and accounting; in Moreover, the opportunity costs are prohibitive. particular the professional certification Any bank has scarce loan funds which its stages offered by the Institute of Chartered management chooses to allocate to this or that Accountants (see Kakungulu 2010). sector and risk profile. Lending to agriculture effectively means to apportion a larger part of Senior bank managers who built their career on the portfolio to higher risk and staffing cost. The these two cornerstones are likely to assess business management might even be questioned by owners opportunities in the same light. It will be difficult and funders over its fiduciary responsibility if it for them to see potential for innovation in agri- makes such choices. finance, and hence they are not very likely to create staff development opportunities for agri- Microfinance business model finance experts.

In the microfinance segment, we would expect Section 5: Changing motivation a stronger drive towards agricultural lending. and attitude of FIs towards agri- After all, credit-only-MFIs are largely financed 172 by investors, not savers, who should have an entrepreneurial drive towards untapped markets. But, so far, that is not the case. The pre-dominant Agricultural finance is possible if financial MFI business model is to borrow medium-term institutions combine a dedicated developmental and lend short-term. Few MF investors, even those vision and mission with innovation and a re- YEARBOOK 2011

thinking of the profitability of the customer, AGRICULTURAL FINANCE AGRICULTURAL considering a range of financial products (notably The additional cost of this strategy, compared savings and payment services). Under such a to ‘conventional banking’, has been absorbed strategic outlook, which must be rooted with the on the one hand by lower dividends for owners, investors/owners of the FI, the investment in agri- and on the other hand by financial inputs from finance expertise becomes a business necessity, development agencies. For example, Sida and GIZ rather than a nuisance. subsidised the development costs of a traction loan product.

It can surely be argued that the outstanding reputation of Centenary Bank as the only commercial bank with a substantial outreach to Ugandans beyond the high- and/or salary-income

strata partly rests on its agri-finance efforts. As Research such, these efforts have sustained the robust 06

average annual growth rate of 14.9 percent, by and Innovations Centenary Bank’s savings portfolio3.

The case of Krishna Bhima Samruddhi Local Area Bank Ltd (KBSLAB)4

KBSLAB operates in 4 rural districts in Southern India, which have been classified by At the market. the government among India’s poorest districts. KBSLAB is part of the BASIX group which The case of Centenary Bank, Uganda promotes ‘livelihood services’ through various avenues, including agricultural extension and In Uganda, Centenary Bank has long been microfinance. BASIX incorporated KBSLAB in a leading provider of agricultural finance2. 1999. In 2001 it was licensed by the central bank Centenary Rural Development Trust, registered and started operating. Today it reaches out to as a financial institution in 1983, started operating about 1,500 villages. in 1986. It was transformed into a commercial bank in 1993 (MixMarket 2011). In 1998 – after Being a bank, KBSLAB provides products across 12 years of operation – the owners of Centenary four financial instruments; i.e. savings, credit, Bank took the strategic decision to increase the insurance and micro-pensions. Its loans include agricultural loan portfolio from 9 to 20 percent. four products designed for agricultural activities Based on that strategy, the bank management re- of groups and individuals, including crop shaped the business model; among other actions production and agri-investment. it developed an agricultural finance pilot that was run successfully at its branch in Mbale. However, KBSLAB itself and through ‘BASIX sister organizations’ also provides agricultural Centenary Bank at board and management levels extension services, among others advice for has since put guidelines in place to continuously productivity enhancement through increase in aim at the strategic objective of 20 percent loan yields or reduction in costs, alternate market portfolio in agriculture, instituting structures to linkages, (i.e. input supply and output sales) 173 support the development of agri-finance products. and supporting producer groups to establish It has employed over 150 agri-finance specialists, sustainable institutional linkages for better impact continuously trained and provided them with of livelihood promotion services (i.e. formation physical facilities to serve small holder farmers. and management of cooperatives). These YEARBOOK 2011

agricultural extension services are provided in the value chains of dairy, raising of sheep and goats, and crop production.

2 See also articles on Centenary Bank in the Yearbooks 2007 (Article 2.7), 2009 (Article 2.1) and 2010 (Article 2.1) and this Yearbook (Article 4.3). These articles give further details on the operations and approaches of Centenary Bank. 3 Author’s calculation, prices of 2005, based on Blatter/Kumwesiga/Mbabazi (2006) and AMFIU (2011).

4 Based on BASIX and KBSLAB websites: www.basixindia.com; www.kbsbankindia.com. FINANCE AGRICULTURAL KBSLAB operates, for a bank, with a relatively (Eastern Region) and Mountains of the Moon small profit, but its strategic focus is defined by (Western Region) offer microfinance courses. the specific role it plays within the BASIX group. University Business School offers a It is the only group-company that is allowed to postgraduate course (Master) in banking and mobilize savings from the public, which covered investment, Mountains of the Moon University over 95 percent of its loan portfolio (2010). offers an undergraduate (Bachelor) in banking and development finance. Section 6: Design of academic and non-academic courses for agri- Mountains of the Moon University (MMU) has geared its microfinance courses to current and future employees of rural MFIs, in particular SACCOs. Its Academic Certificate in Rural There is no academic agri-finance course in Microfinance has a course unit ‘Savings and Uganda. Issues of agri-finance are mostly provided Credit in Agro-Value-Creation’; its Diploma by trainers. Most of these trainers have themselves in Rural Microfinance has two course units acquired the skills in careers that combine finance, covering agricultural value chain analysis, basics rural development and/or agriculture. They have of farm management and agricultural extension. often been employed for some years by banks and/ These course units are designed and delivered in or with international development agencies and collaboration with MMU’s School of Agriculture. many of them have a background as agricultural entrepreneurs. MMU has also considered creating a specific course, e. g. a post graduate diploma, for agri- Based on demand, they have designed their finance experts; as well as Academic Certificates trainings in 3-5 day modules, which come roughly geared to staff of agricultural marketing in two kinds: associations which would, for example, provide in-depth training on contract farming. However, - Training of financial skills for farmers, which the demand for such courses has so far been found range from financial literacy for informal to be limited. Also, student numbers for the Rural savings groups to basic financial institution Microfinance courses have so far been moderate; management skills for board members it has sometimes been argued – though only based and staff of SACCOs. These trainings are on anecdotal evidence – that the course title was usually paid for by development agencies or not appealing. government. - Training of agricultural skills for bankers, MMU, as Uganda’s first (and so far only) which enable them to analyse a range of community based university, has made a deliberate agricultural enterprises and to communicate effort to offer courses that are needed, rather effectively with their owners. These trainings than just fashionable. But ultimately, it depends are usually paid for by financial institutions, on attracting enough income from tuition – maybe subsidised by development agencies. or from other funders – to run its operations. MMU’s strategy is therefore to partner with FIs to Regularly, the same trainers work as consultants, market specific agri-finance courses to the FI staff so that the training modules are part of a larger members, as part and parcel of staff development. package that may include mentoring, monitoring 174 and reporting, and product development. Section 7: Policy implications Most of the 27 Ugandan universities offer courses Staffing and staff development decisions are made in finance and accounting; – by both management and employees themselves Business School, , Uganda Martyrs’ – based on the business model that shapes the YEARBOOK 2011

(all Central Region), Islamic University Uganda AGRICULTURAL FINANCE AGRICULTURAL enterprise. In banks and MFIs, the business References model favours short-term over long-term loans; and short- over long-term or flexible repayment 1. AMFIU (2011) The Uganda Microfinance schedules. Directory 2011/12, AMFIU, Kampala. 2. Blatter, Robert, Mbabazi, Jacqueline and That incentive structure might change if banks Kumwesiga, Carol (2006) “The State of and MFIs accessed very low cost (or long-term) Microfinance in Uganda: Analysing AMFIU finance or if they faced reducing profit margins in members” AMFIU Working Paper No. 5, the pre-dominant credit business. The former is, AMFIU, Kampala. by and large, not the case because the opportunity 3. Economist (2011): “A tale of three islands - cost of agricultural finance are low-risk, low-cost The world’s population will reach 7 billion government bonds. The situation encourages at the end of October. Don’t panic”, in: The

most Ugandan bank managements to ‘do more of Economist, print edition, Oct. 22nd 2011. Research the same’ (intensify short-term lending and keep

4. Kabaseke, Clovis (2011) “Vulnerability of 06 more government bonds) rather than to innovate food systems due to climate change in the and Innovations into new areas, e. g. agriculture finance. Rwenzori region” in: Meier zu Selhausen, F. / Karugaba, D. (eds.) Regional and Political Under such a scenario, the cost of building Economics, Yearbook of School of Business a workforce that has specific skills to assess and Management Studies, Vol. 2, Mountains agricultural enterprises looks prohibitively high; of the Moon University, Fort Portal. moreover it ultimately adds to the perceived risk 5. Kakungulu, Yunusu (2010)”Accounting of venturing into that area. Accordingly, the scope profession and careers” in: Karugaba, D. / for agri-finance training providers remains very Schmidt, O. (eds.) Career Perspectives in limited. Accounting, (Micro) Finance and other Sectors, Yearbook of School of Business and For an alternative scenario, FI investors and Management Studies, Vol. 1, Mountains of owners need to embrace principally different the Moon University, Fort Portal. strategies which give way to agriculture-focused 6. MixMarket (2011) www.mixmarket.org/mfi/ business models. The cases of Centenary Bank and centenary-bank; date accessed 22 Oct 2011. KSB LAB show that such strategies are feasible. 7. Sanghi, Seema (2007) The handbook of competency mapping, 2nd. Edition, SAGE, Financial institutions’ interface with the New Delhi agricultural sector can be further enhanced by a 8. Schmidt, Oliver (2011) “A very brief guide supportive regulatory framework – after all, the to inflation” in: Meier zu Selhausen, F. / obstacles that befall FIs with regard to agriculture Karugaba, D. (eds.) Regional and Political apply in principle to the FI-regulators. Economics, Yearbook of School of Business and Management Studies, Vol. 2, Mountains Training providers, in particular universities of the Moon University, Fort Portal. can be valuable partners both in developing and implementing such business models and in the formation of the required HR, once the FIs strategic direction points to agri-finance. However, they need incentives in the form of a clear demand for graduates with the special competencies 175 demanded in agricultural banking. This needs to be matched with career path opportunities in FIs that attract first class candidates. YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL List of Abbreviations and Acronyms

AAC African Agricultural Capital Ltd. aBi Trust Agribusiness Initiative Trust ABDC Agri-Business Development Component ACE Area Cooperative Enterprise ACDI-VOCA Agricultural Cooperative Development International - Volunteers in Overseas Cooperative Assistance ADB (AfDB) African Development Bank AFAP Agricultural Finance Action Plan AFS Agricultural Finance Strategy AKF Aga Khan Foundation AMFIU Association of Microfinance Institutions of Uganda APEP Agricultural Productivity Enhancement Programme (former USAID project) ARDC Aquaculture Research & Development Center ASCA Accumulating savings and credit association ASPS Agricultural Sector Programme Support (former Danida project) BAT British American Tobacco Uganda BoU Bank of Uganda BMZ Germany Federal Ministry for Economic Cooperation and Development bn Billion CAADP The Comprehensive Africa Agriculture Development Programme CARE CARE International is a development NGO CBO Community-based organisation CDO Cotton Development Organisation CFC Common Fund for Commodities CGAP Consultative Group to Assist the Poor CGIAR Consultative Group on International Agricultural Research CIAT International Center for Tropical Agriculture CICS Competitiveness and Investment Climate Strategy COREC Coffee Research Centre CORI Coffee Research Institute CPC Cane production contract CRS Catholic Relief Services CSO Civil society organisation 176 CWD Coffee Wilt Disease Danida Danish International Development Agency DCA Development Credit Authority (USAID) DED (former) German Development Service dfcu Development Finance Corporation of Uganda YEARBOOK 2011 DFID Department for International Development (UK) AGRICULTURAL FINANCE AGRICULTURAL KCA KACOFA IT ISTA IRC INGO IMFP ILO IFRS IFPRI IDEA Technical Cooperation) From 2011GTZhasmerged into above. GIZ–see ICRC ICO (formerly GTZ,DED and Inwent) IAP HR GTZ GIZ GoU GOAL GDP GAPS FSP FSDU FSD FoT FoB FISH FINCA FI FCR FAQ FAO EADB EAGC EAC DSIP DRC DP DFR Financial institution Information technology Development partner Human resources Index of agricultural production provider Financial service International Organisation Labour agency) (aUNspecialized International Committee, Rescue an NGO Free on board (FoB/R is:free on board rail) Free on truck Deutsche Gesellschaft für Deutsche Gesellschaft Internationale Zusammenarbeit GmbH Financial System Development Programme (BoU/GIZ) International Coffee Organisation Forwarder’s Certificate of Receipt Fair average quality –coffee Food and Agriculture Organisation of United the Nations East African community African East Deutsche Gesellschaft für Deutsche Gesellschaft Technische Zusammenarbeit GmbH (German Government of Uganda Kaweri Coffee Alliance Democratic Republic of Congo the Gross Domestic Product International Financial Reporting Standards International Testing Seed Association Department of Resources Fisheries Fisheries Investment Fisheries for Sustainable Harvest (former USAIDproject) Development Strategy and Investment Programme -MAAIF International Committee of RedCross the Investment inDeveloping Agriculture Export (former USAIDProject) Integrated Management Fisheries Plan Financial Sector Deepening Uganda Financial Deepening Sector (former DFID project) International Food Policy Research Institute International non-governmental organisation East African Development African East Bank AnINGO focusing on poorest the of sections populations Good agricultural practices Good Grain Council Africa Eastern Foundation for Community Assistance (MDI) Kapchorwa Commercial Farmers Association 177 AGRICULTURAL FINANCE YEARBOOK 2011 List of Abbreviations and Acronyms KCFASP Kaweri Coffee Alliance Support Project KSL Kinyara Sugar Ltd KYAPS Kyamuhunga Peoples Savings and Credit Cooperative Society KYC Know your customer LEAD Livelihoods and Enterprise for Agricultural Development (USAID) LC Letter of credit MAAIF Ministry of Agriculture, Animal Industry and Fisheries MAMCOT Mateete Microfinance Cooperative Trust Ltd MBWin FAO/GTZ Microbanking system (MIS) MCAP Matching Grant Facility for Capacity Building MDI Microfinance Deposit-Taking Institution (Tier 3 financial institution) MF Microfinance MFI Microfinance Institution (Tier 4 financial institution) MFPED (Also MoFPED) Ministry of Finance, Planning and Economic Development MFW4A Making Finance Work for Africa Initiative MI Market information MIS Management Information System /Market Information System MoFPED Ministry of Finance, Planning and Economic Development MOP Microfinance Outreach Plan MSCL(MSC) Microfinance Support Centre Ltd MSME Micro, small and medium enterprises (see also SME) MT Metric tonne MTCS Medium Term Competitiveness Strategy MTTI Ministry of Tourism, Trade and Industry NAADS National Agricultural Advisory Services NaFIRRI National Fisheries Resources Research Institute NARO National Agricultural Research Organisation NDA National Drugs Authority NDP National Development Plan NGO Non-governmental organisation NKG Neumann Kaffee Gruppe NOGAMU National Organic Agricultural Movement of Uganda NRM National Resistance Movement (the ruling party in Uganda) NSCS National Seed Certification Service NUCAFE National Union of Coffee Agribusinesses and Farm Enterprises. (founded in 1995 as the Uganda Coffee Farmers Association (UCFA). 178 NUDIPU National Union of Disabled Persons of Uganda OECD Organisation for Economic Cooperation and Development (Paris) OPV Open-pollinated variety – of seed P4P Purchase for Progress – WFP scheme p.a. Per annum YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL PACT An INGO that focuses on building communities PAR Portfolio at risk pcm Per calendar month PEAP Poverty Eradication Action Plan PFA Prosperity for All Programme (formerly known as Bonna Baggagawale) PLAN An INGO with a special interest in the welfare of children PMA Plan for Modernisation of Agriculture PMS Performance Monitoring System (for Tier 4 institutions in aggregate) PMT Performance Monitoring Tool (for Tier 4 institutions) PO Partner organisation (MSCL terminology) PRDP Peace, Recovery and Development Plan – for Northern Uganda PRSP Poverty Reduction Strategy Paper – World Bank RATIN Regional Agricultural Trade Intelligence Network and Acronyms RMSP Rural Microfinance Support Project (ADB/GoU) List of Abbreviations RPO Rural Production Organisation (see also ACE) SACCO Savings and Credit Cooperative (Tier 4 financial institution) SCOPE Strengthening the Competitiveness of Enterprise Development (former USAID project) SHG Self-help group Sida Swedish International Development Co-operation Agency SIDI Solidarité Internationale pour le Développement et l’Investissement SME Small / medium enterprise SPEED (Also Rural SPEED) Support for Private Enterprise Expansion and Development(former USAID project) SPS Sanitary and phyto-sanitary UCA Uganda Cooperative Alliance UCB Uganda Commercial Bank (now defunct) UCDA Uganda Coffee Development Authority UCE Uganda Commodity Exchange UCFA Uganda Coffee Farmers Alliance UCGEA Uganda Cotton Ginners and Exporters Association UCOP Unit cost of production UCSCU Uganda Cooperative Savings and Credit Union UCTF Uganda Coffee Trade Federation UDB Uganda Development Bank UShs (UGX) Uganda Shillings UIB Uganda Institute of Bankers 179 UML Uganda Microfinance Ltd. now Equity Bank UMU Uganda Martyrs’ University UN United Nations UNADA Uganda National Agro-input Dealers Association YEARBOOK 2011

AGRICULTURAL FINANCE AGRICULTURAL UNBS Uganda National Bureau of Standards UNCTAD United Nations Conference on Trade and Development UNEX Union Export Services Ltd. - coffee export organisation for coops UNHS Uganda National Household Survey URA URM Upland Rice Millers Ltd USAID United States Agency for International Development USD United States Dollar – also US$ USTA Uganda Seed Trade Association UWESO Uganda Women’s Efforts to Save Orphans VAT Value Added Tax WFP World Food Programme WII Weather index insurance

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AGRICULTURAL FINANCE AGRICULTURAL Published by 1. Deutsche Gesellschaft für 2. Bank of Uganda Internationale Zusammearbeit (GIZ) P.O. Box 7120 Kampala GmbH Phone: +256414258441/6 Email: [email protected] 3. Plan for Modernisation of Agriculture Bonn and Eschborn, Germany Secretariat P.O. Box 5675 Kampala Friedrich-Ebert-Alle 40 Phone: +256414252263/4 53113 Bonn, Germany Email: [email protected] Phone: +492284460-0 Fax: +49 2284460-17 66 4. The AgriBusiness Initiative (aBi) Trust Towers Inprint Dag-Hammarskjold-Weg 1-5 Plot 37 Nakasero Road 65760 Eschborn P.O. Box 29851, Kampala Phone: +49 619679-0 Phone: +256312351600 Fax: +49619679-11 15 Fax: +256312351620 Responsible www.abitrust.com Christian Königsperger Editors GIZ Financial System Development Dr. Richard Roberts and Robert Ocaya Programme Bank of Uganda 37/45 Kampala Road P.O.Box 27650 Kampala, Uganda Special thanks to the authors who provided Phone: +256414253840 the pictures Email: christian.kö[email protected] Printed by On behalf of Vision Group, Kampala The German Federal Ministry of Economic Cooperation and Development (BMZ) Uganda, Kampala July 2012

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