The Ugandan agricultural sector is experiencing a paradox. On one hand, financial technology firms are pouring investments into the sector, promising easier access to credit and higher production levels. On the other, traditional financial institutions remain wary due to a myriad of challenges, including unstable weather patterns, fluctuating commodity prices, and inadequate documentation among local farmers.
The agricultural sector has historically grappled with high loan default rates, averaging over five percent per year since 2018. This has made banks cautious about lending, despite the sector’s potential. However, the tide seems to be turning, albeit slowly. The share of agricultural loans has risen from less than 10 percent to around 10-13 percent of private sector loans provided by commercial banks, credit institutions, and microfinance lenders.
Government initiatives like the Agricultural Credit Facility (ACF) and the Parish Development Model (PDM) have been instrumental in this shift. The ACF has disbursed over Ush800 billion ($221 million) in loans since 2012, with interest rates below 15 percent per year. The PDM, an interest-free loan facility, has seen around Ush3.3 trillion ($911.9 million) disbursed to households engaged in agricultural production.
Yet, questions persist about the real impact of these initiatives. How does improved farmer documentation affect credit scores? Does reducing information gaps in the farming community expedite loan processing? What is the tangible effect of increased documentation on loan amounts disbursed to farmers?
David Kalyango, Bank of Uganda’s Executive Director for bank supervision, acknowledges the potential benefits of better borrower information. “It will certainly improve credit underwriting processes carried out by commercial banks,” he said. This means faster credit application processing and quicker loan disbursement. Moreover, it becomes harder for farmers to overstate their assets when satellite mapping systems provide accurate data.
However, Kalyango also highlights the need for more data on the partnerships between commercial banks, fintechs, and their impact on access to credit within the agricultural sector. This underscores the complexity of the issue and the need for a nuanced understanding of the dynamics at play.
The implications of these developments are significant. For farmers, better access to credit could mean increased productivity and improved livelihoods. For financial institutions, it could translate into a more robust and resilient agricultural loan portfolio. For the Ugandan economy, it could mean a more vibrant and productive agricultural sector, a critical component of the country’s GDP.
Yet, the journey is far from over. As the sector grapples with these questions, the need for more data, better policies, and stronger partnerships becomes increasingly evident. The story of Uganda’s agricultural sector is one of promise and challenge, a narrative that will continue to unfold in the coming years.