Agricultural Finance in Uganda The Way Forward Richard L. Meyer Richard Roberts Adam Mugume FSD Series No 13 c Financial Systmes Development (FSD) Programme 2004 Responsible: Peter Rhode Publisher: German Technical Co-operation (gtz) Swedish International Development Agency (Sida) Financial Systems Development (FSD) Programme 37/43 Kampala Road P.O. Box 27650 Kampala, Uganda Email:[email protected] Layout / Cover design: Acha Graphics P.O. Box 23363 Kampala, Uganda Email: [email protected] Printer: Quick Color Print PO Box 3015 Kampala, Uganda Email:[email protected] Agricultural Finance in Uganda - The Way Forward Table of Contents Table of Contents I List of Tables II List of Figures III Abbreviations and Acronyms IV Executive Summary VII Chapter 1 Introduction 1 1.1 Background 1 1.2 Objectives of the Study 1 1.3 Approach and Organization of the Study 1 1.3 Structure of the Report 2 Chapter 2 Macroeconomic Issues and Financial Sector Performance 3 2.1 General Description 3 2.2 Policies and Challenges in the Financial Sector 5 2.3 The Suppliers of Agricultural and Rural Financial Services 9 2.4 Using Land as Loan Collateral 12 2.5 Conclusions 12 Chapter 3 The Demand for Financial Services 15 3.1 Overview 15 3.2 The Demand – Input and Output Trading Markets 16 3.3 The Demand – Production Stage (Farmers) 20 3.4 Summary of Main Points on Demand 23 Chapter 4 Supplying Financial Services to Agriculture and Rural Areas 25 4.1 Introduction 25 4.2 The Suppliers of Agricultural and Rural Financial Services 25 4.3 Expanding the Frontier of Formal Finance 28 4.4 Summary of Main Points About the Supply of Financial Services 35 Chapter 5 Conclusions and Recommendations 37 5.1 Introduction to Conclusions and Recommendations 37 5.2 Cluster One: Long-Term Strategic Plan for Financial Services to the Agricultural 37 Sector, and Related Issues 5.3 Cluster Two: Issues for Attention by Legislators, Government Ministries and the 40 BoU 5.4 Cluster Three: Unfinished Business 42 References 43 Annexes 46 I Agricultural Finance in Uganda - The Way Forward List of Tables Table 2.1 The Structure of the Banking Industry (as of 31 Dec. 2002) 6 Table 2.2 Suppliers of Financial Services and their Rural Clientele 11 Table 3.1 Numbers of Farmers and Traders by Commodity 16 Table 3.2 Comparative Fertilizer Use in Uganda and in Neighboring Countries 17 (Kg fertilizer per cultivated ha per annum) 17 Table 3.3 Cost of Delivered Fertilizer 17 Table 3.4 Traders’ Demands for Financial Services 21 Table 3.5 Some Indicative Returns to Investment in Crops 21 Table 3.6 Farmers’ Demands for Financial Services 21 Table 4.1 Loan Sizes, Interest Rates, and Operating Costs by Category of Sup- 29 plier II Agricultural Finance in Uganda - The Way Forward List of Figures Figure 2.1 Loans and Advances of Commercial Banks to Economic Sec- 5 tors (percentage) Figure 2.2 Key Financial Sector Indicators, 1993-2002 7 Figure 2.3 Credit, TBs, Excess Reserves, Intermediation Margin and In- 8 flation, 1993-2002 Figure 2.4 Structure of Interest Rates, December 1994 - September 2003 8 Figure 2.5 Structure of Commercial Bank Income, 1997-2002 9 III Agricultural Finance in Uganda - The Way Forward ABBREVIATIONS AND ACRONYMS ACDI/VOCA Agricultural Cooperation Development International/Voluntary Overseas Cooperative Assistance ADB Africa Development Bank AFMIN African Microfinance Network AFRACA Africa Rural and Agricultural Finance Association AMFIU Association of Microfinance Institutions in Uganda ASCA Accumulating Savings and Credit Associations BoU Bank of Uganda CBA Community Business Advisor CBO Community Based Organization CDO Cotton Development Organization CERUDEB Centenary Rural Development Bank COMESA Common Market for East and Southern Africa CREAM Consultancy for Rural Enterprise Activities and Management Ltd DANIDA Danish International Development Agency DCA Development Credit Authority DFCU Development Finance Company of Uganda DFD Development Finance Department of the Bank of Uganda DFID Department for International Development EIB European Investment Bank EPTD Environment and Production Technology Division of IFPRI EU European Union FAO Food and Agriculture Organization FINCA Foundation for International and Community Assistance FSA Financial Services Association FSAIU Financial Services Association International Uganda Ltd FSD Financial System Development Program GoU Government of Uganda GTZ German Technical Cooperation HIPC Heavily Indebted Poor Countries Initiative ICRC International Committee of the Red Cross IFAD International Fund for Agricultural Development IFPRI International Food Policy Research Institute IITA International Institute of Tropical Agriculture JENGA Joint Encouragement of New Gainful Activities (CARE project, West Africa) IV Agricultural Finance in Uganda - The Way Forward KfW German Development Bank MAAIF Ministry of Agriculture, Animal Industry and Fisheries MCC Microfinance Competence Centre MDI Microfinance Deposit-taking Institution MFPED Ministry of Finance, Planning and Economic Development MFI Microfinance Institution MMD Mata Masu Dubara (program of CARE in Niger) MSCL MicroSupport Centre Ltd MTCS Medium Term Competitiveness Strategy NAADS National Agricultural Advisory Services NARO National Agricultural Research Organizations NPA Non-Performing Assets PMA Plan for Modernisation of Agriculture PMT Performance Monitoring Tool PEAP Poverty Eradication Action Plan RMFSP Rural Microfinance Support Program ROSCA Rotating Savings and Credit Association SACCO Savings and Credit Cooperative Sida Swedish International Development Agency SLA Savings and Loan Association SME Small and Medium Enterprise SOE State-Owned Enterprise SPEED Support for Private Enterprise Expansion and Development Project SUFFICE Support to Feasible Financial Institutions and Capacity-Building Program(EU) TB Treasury Bill UCA Uganda Cooperative Alliance UCB Uganda Commercial Bank UCCA Uganda Change Agents Association UCDA Uganda Coffee Development Authority UCSCU Uganda Cooperative Savings and Credit Union UGT Uganda Grain Traders UIB Uganda Institute of Bankers UMU Uganda Microfinance Union UPE Universal Primary Education V Agricultural Finance in Uganda - The Way Forward UNDP United Nations Development Program USAID United States Agency for International Development UWFT Uganda Women’s Finance Trust WFP World Food Program WOCCU World Council of Credit Unions VI Agricultural Finance in Uganda - The Way Forward Executive Summary This report presents the findings of a study commis- The ratio of customers to bank branches has risen sioned by the Bank of Uganda (BoU)/GTZ/Sida Fi- sharply as the number of bank branches has been nancial System Development Program and KfW that substantially reduced. Attractive rates paid on was designed to investigate the development of self- treasury bills and the underlying weakness of the sustainable agricultural finance in Uganda. The ob- banks to successfully screen clients and enforce loan jective of the study is to identify the major bottle- contracts have led to high levels of excess reserves necks and draft a medium-term strategy for the sup- being held by banks and in banks heavily investing port of agricultural finance. It was undertaken against in risk-free assets rather than advancing loans. Real the backdrop of success that the government has interest rates on loans are high so demand is limited achieved, working in conjunction with several inter- to lightly leveraged firms realizing high rates of re- national donors, in strengthening microfinance ser- turns on investments. The four largest commercial vices for the poor. banks are foreign-owned. They compete and engage in inter-bank transactions amongst themselves, are the market leaders and hold 70 percent of total com- Macroeconomic and Financial Policies and Per- mercial bank assets. The remaining smaller com- formance mercial banks, also mostly foreign-owned, compete Since 1987, Uganda has been undertaking major for the remaining market niches. The commercial policy reforms designed to create a more liberal banks limit their exposure to agriculture and rural market-oriented economy and reverse the previous areas by making loans to the larger processing and inward-looking, import substitution development strat- export firms, some input supply companies and a egy. Major policy measures have been taken to few large farmers. develop an effective, efficient and competitive finan- The emergence of microfinance has been a more cial system. The government has reduced its roles positive development in the financial sector, espe- as owner of financial institutions and allocator of cially for those concerned about access to formal financial resources. The BoU (Bank of Uganda) has financial services by small firms and households, been given the mandate and the tools to play a more which comprise most of the economy. Even here, effective role in overseeing the development of the however, agriculture and the rural economy have been financial system, and to regulate and supervise the largely unaffected up to now because most major financial institutions. The country is among microfinance institutions (MFIs) have focused their the world’s leaders in working through the complex operations in urban and peri-urban areas, their loan issues of developing and regulating microfinance. asset portfolios being heavily concentrated in short- The economy responded well to the changes in de- term working capital loans for trading and commer- velopment strategy during the 1990s when compara- cial enterprises