Dead co-operativesThe main limitation to the success of the planned cooperative bank could be the absence of cooperative unions in the country. In its hay days, the cooperative bank served vibrant organizations that had solid leadership and substantial volumes of produce against which it would lend the farmers money.
Today, while the government has supported the creation Savings and Credit Cooperative Organizations (SACCOs), experts argue that these will not adequately promote agriculture and therefore do not need a specialised bank. A Ministry of Finance official who preferred anonymity said SACCOs’ main objective is to mobilise money for investment into diverse fields.
Indeed, the membership of most SACCOs is hardly homogeneous as the case was in the 1980s. Rather, they bring together people from diverse backgrounds with varied objectives such as boda boda riders, brick makers, shop keepers and students for the sole purpose of pooling funds for borrowing by the members who then invest in diverse areas including weddings. On the other hand, Cooperatives are groups of people who usually deal in similar products or pursue the same goal, usually revolving around the need to boost output or to bargain for better pay and services.
Creating a cooperative bank to finance SACCOs instead of financing real cooperatives would therefore not achieve the objective of transforming the agricultural sector, according to Mafabi, who is also the chairman of Bugisu Cooperative Union.
“The best thing the government can do is to go down to the bases of the original cooperative and mobilize the members in those areas to cooperate again as they did. Teso region had a cotton farmers’ cooperative, Buganda had East and West Mengo, Wamala and Masaka unions. Bugisu had Bugisu cooperative union, Bunyoro had its own and Acholi too had its union.
“The people are the owners of the cooperatives and they must agree to work together but not confuse people with SACCOs,” said Mafabi.
It goes without saying therefore that the continued absence of cooperatives in Uganda constitutes a fundamental gap in accessing funds from financial institutions.
As Jimmy Kiberu, the Head of Corporate Affairs at Uganda Development Bank Limited (UDBL) noted: “It is easier to deal with a group than with hundreds or thousands of individuals.”
Under cooperative groups, farmers would be able to bargain for better prices, access cheaper inputs, and be able to secure guarantees from buyers for credit as well as other providers of goods and services like education.
For example, Mafabi says, currently coffee farmers get about Ushs 2500 per kilo of processed coffee, which he says is a quarter of the global market price of coffee. The rest of the proceeds, he notes, are enjoyed by middlemen.
“If cooperatives were active, they would fill the role now played by middlemen and would be able to get better prices for their members,” he says.
Most other sources of alternative funding for farmers such as concessional loans from development banks as well as foreign banks with special interest in agriculture have requirements that better suit cooperatives. For example, UDBL, under its Small Farmer Groups or Cooperatives initiative, lends money to farmers’ groups to support medium to long term projects in agriculture.
“The model here is that you need to have a tripartite arrangement where you have a farmers’ group, the off-taker – or the buyer and the bank comes in as a third party. Here we secure the market and also produce in wholesale, ” says Johnson Pande, UDBL’s manager for Business Development.
According to Pande, instead of asking for collateral, the bank requires the borrowing cooperative to have in place a well structured leadership structure as well as a guaranteed market for their produce. This is usually done by striking an agreement of purchase by an established buyer such as Mukwano for cotton and sunflower or Uganda Breweries for Epuripuri sorghum.
Whereas UDBL offers relatively lower interest rates for farmers at 10% per annum, Pande says the minimum amount a farmers’ group can get is Ushs100m.
The high minimum threshold is just but one of the apparently more stringent requirements set by UDBL to farmers. As noted by Pande, a group must be guaranteed a market, which may not be feasible with many other crops but also exposes farmers to exploitation by the buyer. The group must also guarantee the price as well as output from its members, as if it were an industrial exercise where one is able to determine input and output.
Lack of insurance
A more realistic solution, according to Mafabi, would be the involvement of the government to insure farmers, up to a certain level, against losses arising from bad weather that tends to be the biggest factor that affects output.
Indeed, as this reporter found out during a tour of farmers in the great farming state of Iowa in the United States, the American government is replacing direct subsidies to farmers with partial insurance cover to guard against losses arising from bad weather and excess production. Still, the insurance programmes would work better under cooperative organisations than through individual small-scale farmers.
Absence of farmer sensitization
There are a few sources of cheaper credit whose beneficiaries remain the few elite who are connected to funding agencies and government officials with information on how to access them.
For example, in 2009, the Ugandan government introduced the Agricultural Credit Facility (ACF) to: “Facilitate the provision of medium and long term loans to projects engaged in agricultural and agro-processing on more favourable terms that are usually available from private financial institutions.”
But as noted by Stanbic Bank’s Managing Director Philip Odera recently, poor sensitization of farmers about the availability of low-interest funds under the ACF has contributed to the low uptake of the funds.
Recent media reports suggest that only about 280 applications have been successful since the government introduced the ACF four years ago, despite its remarkably low interest rates of 10-12% per annum. Other loan facilities over the past year have hovered above 25% per annum.
Managed by the BoU, the scheme started with Ushs 30bn from the government for on-lending to farmers and agribusiness enterprises through commercial banks. Rather than take their applications to the Central Bank, interested borrowers go through any of the 29 accredited Participating Financial Institutions (PFIs) which evaluate the application and if successful, the Commercial Bank disburses the full loan amount to the farmer applicant, after which it seeks a 50% reimbursement from the BoU.
Repeated requests by The Sunrise to the BoU for details on the fund have yielded no responses so far. The problem is made worse by the evident lack of literature or promotional materials in banking halls or in the mass media and bill boards to bring the opportunities to the attention of intended beneficiaries.
Other organisations like aBi-Trust, which is supported by foreigners like the Dutch, have funds which can be accessed by agribusinesses involved in the value chain system.
According to Josephine Mukumbya of aBi-Trust, between 2010 and 2013, aBi-Trust managed to facilitate access such financing to over 90,000 agribusiness value chain actors through Lines of Credit and Guarantees.
“We work with financial institutions across all tiers, to address constraints limiting supply of financial services for farmers and other value chain actors. aBi-Trust also supports banks to identify and train the existing and potential client in financial literacy and make them more attractive and bankable hence increasing the demand for financial services,” said Mukumbya.
The sheer low level of output by majority of farmers in Uganda, often caused by poor inputs and declining soil fertility, means that many farmers can hardly get excess output to take to the market.
As noted by Mukumbya, improving access to credit for farmers in Uganda needs to be complemented by other binding constraints such as addressing the extension system, better inputs and better agronomics practices.
Mukumbya said: “Access to financial services is not the only key ingredient to increasing productivity, but it needs to be coupled with extension systems that enable small holders to improve agricultural practices to generate surpluses that enable them repay the loans.”
She added that increased access to affordable insurance products, as well as increased technical assistance to agribusiness actors, especially at production level, would go a long way in improving productivity, quality and value addition for the benefit of agribusiness actors.