Uganda: Strength in Numbers

The success of group schemes is making financiers re-think their fear of lending to farmers The year 2010 was bad for Mike Lyazi Lumu, a coffee and maize farmer with 20 acres of cultivated land in Kibaale district. He borrowed Shs 3million from micro-finance to grow maize, bananas and coffee, hoping to pay back and make a handsome profit. He did pay back, but ... "I benefited next to nothing," a disappointed Lumu told The Independent recently. "I had expected to sell a kilo of maize at more than Shs 350, but I sold at Shs 80.Unfortunately, the larger part of the loan (over Shs 2 million) was spent on this section," he said.
Lumu said he was only saved by a small but trusty matooke market in Mubende. "In Mubende I sold a bunch of matooke between Shs 8,000 and Shs 20,000, depending on size. I raised almost half of the loan out of this."

His largest market, however, was with Kampala traders, who paid as low as Shs 2,000 a bunch. "I am told they make huge profits from us," said Lumu, a father of seven.
Group power
It's different story in Kapchorwa. Bank financing through Kapachorwa Commercial Farmers' Association (KACOFA) - particularly from Stanbic and Centenary Banks - has transformed lives and revolutionalised farming practices.
"Stanbic has been of great help to us," he said. "Last year we got a loan of Shs 2.54 billion under the Crop Finance Warehouse Receipt System, and harvested 900 metric tonnes of maize, which we sold and paid off the loan," said the group's Chief Executive Officer, David Kissa.
"We recently secured another loan worth US$ 284,000 million under the Agricultural Credit Facility from Stanbic Bank to buy tractors. Our output has increased, so has our revenue," Kissa said.
The group also borrowed Shs 3.5 billion from Centenary Bank.
KACOFA made it possible for otherwise small farmers to gain access to loans and support services that would be out of their reach as individuals.
Being in the group has also guaranteed access to training, markets and better prices through bulk-selling to World Food Program (WFP), Uganda Breweries Ltd and the growing Kenyan market across the border. It also provided access to equipment like tractors, fertilisers and irrigation systems - major draws for new members.
Kissa says it also helped that the people of Kapchorwa are traditionally hard workers. "If you are a grown up person here and don't have a good-sized maize crib standing in your home, you are considered a failure and cannot even be elected to the LC1," Kissa told The Independent.
"Most farmers can now pay school fees and feed their children well," Kissa said. "We are still semi-commercial but in the near future we will go to full commercial farming," Kissa told The Independent. "Our dream is to develop a one-stop-centre where farmers can access extension services, equipment, market information, and support for value addition."
Started in 1992 with 27 members, today KACOFA has 6,328 farmers - men and women - organised in 270 producer organisations.
KACOFA members cultivate maize, wheat, barley and sorghum on 18,000 acres of land with an average of 3 acres of land per farmer.
Bankers' views
Hoping to replicate this success, Stanbic has adopted the group model to implement the Agricultural Credit Facility, a Shs 6 billion fund from which it lends to farmers on behalf of government since 2010.
"It is easier, cheaper and more effective to deal with a group than with individuals," Stanbic Bank Managing Director Philip Odera told The Independent. "[Especially] in case of need for agricultural extension workers, inputs such as fertilizers and equipment, marketing, processing, value addition and export."
Odera said Stanbic had assembled and trained professionals in agriculture and veterinary services to support the programme.
"It has worked fantastically well for us," Odera said.
More money
Agriculture has always been an important investment, since it constitutes 50 percent of Ugandan exports and the livelihood of up to 80 percent of Ugandans. With growing demand for food in the region, demand for investments in the sector has grown to fever-pitch, and more players are committing.
Centenary Bank and World Bank on July 12 launched a US$ 2.1 million grant to support small-holder commercial farmers. Acting World Bank Country Manager Kapil Kapoor said more was needed from government, donors and commercial banks.
Deputy Bank of Uganda Governor Loius Kasekende echoed the sentiment at a June conference headlined Zipping Finance and Farming in Africa, co-sponsored with the German International Corporation (GIZ).
"Our farmers lack information about credit finance, credit institutions and their ability to give loans. This has hindered agricultural financing," Kasekende said. "SACCOs have not improved the agriculture loan portfolio."
This year the German Development Bank (KFW) will sign a credit line of Shs 50 billion for rural farmers, Ambassador, H.E. Klaus Dieter Duexmann said
Number 1
Centenary Bank managing director Fabian Kasi Kasi told The Independent that right now agriculture financing should be first priority for funds from any financial institution. "Centenary Bank has supported over 15,000 farmers in terms of loans and we hope to double that in the next two or three years," Kasi said. "We want to see many farmers accessing loans and growing."
Centenary is one of the main lenders to agriculture in Uganda, with 17 percent of its loan portfolio going to farmers. However Kasi also noted that without roads, warehouses, markets, stable exchange rates and protection from exploitation by middle men, more money will not achieve the expected benefits. "Our role as banks is to offer loans to farmers. Government bears responsibility for the other part," he said.
Interest rates, farmers' bank
"Our interest rate depends on the risk profiles of the project," Kasi said of the factor that scares most farmers out of banks.
As Lumu shows, borrowing has occasionally been a first step to eternal debt or bankruptcy for farmers. Mostly, this is due to the inherent risks of agricultural enterprise - crop failure sue to climate changes or diseases, price volatility, market unpredictability, low profit margins, etc. These drive up the risk profile of agricultural enterprises - hence interest rates.
Kissa said their loans currently range between 23 - 38 percent a year. "Some are affordable like on the warehouse receipt system at 18% per year and the Agriculture Credit Facility's lease loan for tractors at 12%," he said. "Banks are sensitive about loans because of changing weather patterns. Even agriculture insurance is nervous," Kissa said.
Prof. Augustus Nuwagaba said the best solution is an agricultural credit bank. "If farmers can access loans at a subsidized cost, they would invest more and increase output, hence more exports, higher revenue and eventually stable foreign exchange," Nuwagaba said. "With 80 percent of our people in horticulture, fruits, grains and other food and cash crops, cheaper loans could see the sector take off," he said.
Insuring farmers
Groups like KACOFA are providing fertile ground for an emerging financing solution -insurance. "Lending to groups, community organisations and cooperatives dramatically reduces the risks," said Centenary Bank's Manager of Agricultural Lending, Abdul Kyanika Nsibambi. He said the bank was working with Chartis Insurance to cover risks like drought, floods. "The farmer stakes a 0.85% premium of the total loan against any risk to our insurer," he said.
Nsibambi said insured farms saw dramatically increased yields because they were closely monitored and extension services provided whenever needed. "We focus on helping the farmer find comfortable measures to pay off the loan. It would be of no use to wait until default to grab their security," Nsibambi said. Other insurance companies are incorporating agriculture.
UAP Insurance is developing an agriculture product with the COMESA Secretariat, Ministry of Agriculture and local banks, according to the Assistant Manager, Ronnie Musoke. National Insurance Corporation's Manager Corporate Communications, Josephine Aguma, said the firm is also developing a product to cover small and big farmers alike.

Aguma said NIC was encouraged by successful results in its other markets - Rwanda and Nigeria. The Rockefeller Foundation has also reported success of its Index-Based Weather Insurance in Kenya and Ethiopia, which it is seeking to replicate in Uganda with a Shs 130 million investment.
The subsistence nature of most Ugandan agriculture and low insurance penetration at 0.6% are major shortcomings. But lessons from Ethiopia suggest this is surmountable. Rockefeller Foundation Africa Managing Director, James Nyoro, said in Ethiopia, small-holder famers paid their premiums in kind.
"Results show the [Ethiopia] model can effectively reach very vulnerable families, most of whom had previously been viewed as uninsurable," Nyoro said.