Michael Atingi-Ego, the Bank of Uganda Deputy Governor
The Bank of Uganda is considering making amendments to the Agriculture Credit Facility (ACF) to increase the rate at which the public is taking up loans under the scheme.
ACF was introduced in 2009 at a time when the commercial bank interest rates were increasing to levels too high for farmers to afford, while the banks were also not very willing to lend to the agriculture sector due to the assumed risks involved.
The main risks to agriculture are weather changes and disease outbreaks, which can affect the yield any season, making loan repayment difficult. In addition, most of the farmers in Uganda are smallholders, with limited ownership of collateral acceptable for commercial banks, limited documentation, and financial records, among others.
The Bank of Uganda Deputy Governor, Michael Atingi-Ego says since the launch of the facility 14 years ago, it has recorded some achievements, though not to expectations due to various reasons.
Until now, at least 11 commercial banks have declined to participate in the project to which the government, through the Bank of Uganda contributes 50 percent and the other half of the loan is contributed by the participating institution.
As of December 2022, a total of 751 billion Shillings has been disbursed to 2,970 eligible agricultural projects, out of the loan applications worth a total of 1.1 trillion shillings.
Over the years, several amendments have been made, including lowering the minimum loan period to six months and the maximum to 8 years, to attract the participating financial institutions (PFIs) to lend more.
The minimum was mainly targeting microfinance institutions which by nature lend for short terms. The maximum interest rate was also raised from the initial 10 percent to 12 percent in response to demands by the PFIs. The head of the ACF at BOU, Winnie Muliisa says there has been faster growth over the last five years.
At least 222 billion Shillings of the 751 billion Shillings has been lent out to smallholder farmers in primary agriculture production according to her, and this has been aided by the introduction of “block allocation” which enables individual farmers to get loans under a group arrangement.
Like with other government projects administered through commercial banks, the banks have been accused by the intending borrowers of unwillingness to market the ACF.
This adds to the fact that only 22 out of the eligible 33 institutions have taken up the facility.
Muliisa says some banks instead usually tell the clients that the money is not available and give them the option of going for the commercial loans provided by the respective lender.
The facility operates as a refinancing product where the lender lends the clients all the money approved for a loan, and later the bank is reimbursed by BOU, without any interest charge. Following the amendments, the availability of cheap cash, and the risk taken over by the government, BOU is still puzzled as to why the facility has not performed as expected, saying 3000 beneficiaries are too low compared to the need at hand.
Muliisa says even without the physical collateral that the banks prefer, there are other sources of security that they can apply, including the creditworthiness of the borrower, group guarantee, and others methods.
Speaking at an interaction between the regulator and the bankers, representatives of the participating banks made some proposals for further amendments so as to make the ACF more attractive.
Margaret Asekenyi, the head of agribusinesses at ABSA Bank presented a recommendation from a group of five commercial banks, which suggested doubling the block allocation amount for small borrowers at each bank, as well as increasing the minimum individual loan to 50 million Shillings.
Another group of banks also suggested an increase in the facility (loan processing) fees from 0.5 to at least 0.75 percent to make the loans more profitable to them. They also supported the inclusion of tree-growing among the benefiting activities.
Another group of five banks whose proposals were presented by Tropical Bank’s Jamil Ndyang, also proposed that the interest rate under the ACF be raised from the current 12 percent to at least 15 percent.
Bank of Uganda’s Executive Director of Finance, Richard Byarugaba said some of the proposals cannot pass because they would be making the ACF more expensive and further discourage borrowing. The amendments to consider, according to him, may include the inclusion of tree planting.