AGRICULTURAL FINANCE YEARBOOK 2011 AGRICULTURAL FINANCE: 20COPING WITH01 ECONOMIC REALITIES11 Bank of Uganda 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 Kampala 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 Centenary Bank - 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 Bank of Uganda 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