This document discusses agricultural lending in Uganda. It begins by providing background on the importance of agriculture in Uganda, noting that over 57% of the labor force works in agriculture. It then discusses key government agricultural policies and programs in Uganda and the need for agricultural lenders to understand these. The document also outlines several challenges to agricultural lending, such as weather dependency and lack of specialized knowledge. Finally, it discusses strategies for managing risks in agricultural lending, such as borrower appraisals and insurance, as well as taking a value chain approach.

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Understanding the Business Customer
Understanding the Customer’s Business
Assessing Customer Needs
Lending in Foreign Business Transactions
Financing Property Developers and Contractors
Financing Agricultural Projects
MODULE COVERAGE
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Alternative Sources of Business Finance

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Introduction to agricultural lending
• The agricultural sector was in the past assumed to be an issue
only for developing countries, the majority whose populations
depend on primary agricultural production. The sector has of
recent come to the limelight mainly due to the high and
escalating food prices the world over. With food shortage
moving towards crisis levels, agricultural development is likely
to assume more importance in the near future.
• Around the world, Agriculture is and will continue to be a
major building block in the achievement of the Millenunium
Development Goals (MDGs). The issue of Agricultural Finance
is frequently on top of the international development agenda.
Now with the triple shocks of the recent years- food, fuel and
finance, the urgency of food security has increased greatly.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• In Africa, agriculture is the mainstay for the majority of rural
people. In East Africa, agriculture is an important sector in terms of
employment and source of livelihood.
• Although the manufacturing and service sectors are growing fast
and reducing the relative contribution of agriculture to GDP in most
countries, agriculture still remains the mainstay for the majority of
people in rural areas.
• In Uganda, for instance, agriculture employs more than 57% of total
labour force, mainly through self-employment and contributes
more than 15% of the GDP.
• To succeed in agricultural finance, the lender needs to know the
agricultural related policies and programmes in the country. This is
because agricultural finance needs to be very keenly designed in
the context of the state and dynamics of the agricultural sector.
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What are the agricultural policies, strategies and programmes in your country at the
moment? What others are planned and who are the major players?
In Uganda, it is necessary for you as an agricultural financier to know details of;
a. National Development Plan (NDP) and its predecessor, the Poverty Eradication
and Action Plan (PEAP) and how the principles therein affect or embrace the
agricultural sector.
b. Plan for Modernization of Agriculture (PMA), its focus and what it does
c. NAADS and its operations.
d. FSD, USAID and other donors’ works in the area of agricultural finance.
Consider:
• What are your government policies & strategies on agriculture and agricultural
finance?
• What mechanisms are in place to support it and what are the other programs and
players you could link up with to boost your chances of success in Ag finance?
• How do these affect the viability of agricultural finance?
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Challenges of agricultural lending
The common challenges of agricultural lending are;
– Dependence on weather and other unpredictable natural
phenomena
– Effects of regional and/or international market price swings
– Necessity for non-financial support to the borrower
– Scarcity of specialized knowledge and skills for agricultural
financing (from product development to delivery)
– Fragmented land ownership and its implications on agricultural
project viability
– Market access by primary producers of agricultural products
– Perishability of the commodities, making them prone to losses
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Challenges of agricultural lending
– Modestly informed borrowers, especially among small scale farmers
– Informality of the farmers’ operations
– Low returns of most agricultural enterprises
– Difficulty in getting acceptable collateral
– Poor physical infrastructure for market access
– Crop/animal failures due to pests and diseases
– Market barriers for some produce in the external markets
– Unwillingness by lenders to learn new financing paradigms for
agriculture
– “Critical mass” bias of most financial institutions viz sparse
populations in rural areas
– Limited relevance of the Government-initiated Agricultural Credit
Facility (ACF)
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Managing challenges in agricultural lending
Strategies for mitigating risks in agricultural lending are many and varied. The
suitable ones for specific cases depend on the peculiarity of the cases.
Some general strategies are;
a) Good borrower appraisal-concept, technical provisions and
capital outlay, management, market analysis, roll-out and sales
strategies, financial projections, risk and sensitivity analysis –
all in agricultural context
b) Insurance for the borrower/entrepreneur. The type of policy
can vary depending on the type of agri-business enterprise.
c) Insurance for lenders. Insurance and guarantee packages for
the lender are easier to access in some cases than for the
farmers. Governments and donors that support agricultural
development often have schemes for mitigating lending risks
to agricultural lenders.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Targeting product mixes that promote synergies or economies of scale
(lending to blocks or peer teams/groups)
d) Spreading out the agricultural portfolio to a sensible range of
enterprises e.g. poultry 20%; coffee 10%, cereals 50% and pulses
20%
e) Tagging repayment to the enterprise gestation cycles, for example,
a loan to a poultry (layer keeper) may attract repayment from the
sixth month and weekly (if small or monthly if large)
f) Constant and tight monitoring practices (selecting and monitoring
using early warning indicators).
g) Limiting credit approval levels and concentration
h) Information and training borrowers on product opportunities
i) Networking, syndicating and leveraging the bank’s risks through
cooperation with other programs.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
9
Crop/ livestock
insurance (crop
insurance quite rare)
Primary producers of agriculture and livestock. Very few
insurance companies have these kinds of policies unless they are
supported by government or donor money
Goods-in-transit
insurance
Stock in trade policies
Agricultural traders/ stockists. They are ordinarily available
because it is normal trade insurance
Exporters and/ or long distance transporters of agricultural
produce. Like Stock in trade, these policies are also common
Types of Insurance Suitable for

10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Value chain approach to agricultural finance
• A value chain is a series of actors who produce, transform or
move the product from input suppliers and farmers at the
bottom to those who sell the product to the final consumer at
the top. The value chain financing in agriculture emphasizes the
vertical dimension of agricultural finance to and between
different segments of agricultural value chains.
• Value chain analysis is a useful tool to help identify gaps in
agricultural finance and how to address them. It starts by
identifying what is already happening in the field (the actors,
relationships, range of services, and bottlenecks to growth). It
increases the likelihood that interventions and innovations will
help to close the gap between demand and supply of agriculture
finance.
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11. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Value chain approach to agricultural lending involves;
a. Conducting value chain analysis of the agricultural sector
b. Identifying and selecting enterprise or sub sectors for agricultural lending
c. Assessing/appraising value chains from a financial perspective
d. Identifying value chain constraints and potential solutions
e. Assessing the market and competition
f. Structuring strategic alliances or partnerships for the agric lender
g. Developing agricultural financial product delivery model
h. Pilot testing the agricultural loan product and evaluating the results
Using the value chain approach, the following types of agricultural loan
products can be developed:
i. Agricultural production loans
ii. Agro processing loans
iii. Agro trade finance.
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