Catalysing Private Sector Financial Support for Moving Small and Medium-Scale Farmers into Commercial Agriculture

        African Agriculture Risk Management Services[pic 1]

        Steve Hodges, Managing Director/Consultant

        stevehodges2011@gmail.com

        +211-955-593085 (South Sudan)  +256-788-461348 (Uganda)

        Office: UMCOR Compound, Aba Road, Yei, South Sudan

1. Catalysing private sector financial support for moving small- and medium-scale farmers into commercial agriculture

Lessons from Uganda and South Sudan

The multitude and complexity of the risks in the agricultural sector make it unattractive for commercial lenders and private sector investors. Steve Hodges suggests three ways to mitigate these risks: conducting comprehensive risk assessments, encouraging banks to engage with multi-stakeholder committees and promoting model farmers.

In countries like Uganda and South Sudan, catalysing private-sector financial support as the main driver for agricultural development that includes small- and medium-scale farmers, is likely to be more complicated than subsidised loan guarantees and warehouse receipt programmes. As a result, agricultural development efforts, especially programmes to help smallholder farming to grow beyond providing food security into market and commercial farming, have been dominated by NGO and government subsidies. Such subsidies are focused on increasing farmer success in a few selected areas, that is to say, reducing the farmers' risks of failure in one or another targeted area of production, or storage, or marketing.

In one project in Yei River County, South Sudan, conservation farming methods were taught to several hundred farmers so that they could conserve more water in the soil to help them withstand the greater frequency of extended drought periods; though when that same season heavier than expected rains came during a short period of time, many farmers lost crops until they learned to adapt the conservation farming methods to allow the fields to drain. Most such agricultural development programmes have focused on production risks, but have neglected to help farmers understand the market and price risks they face. In another case, also in Yei, an agronomist working for a local NGO took a truckload of Irish potatoes to the capital city of Juba, only to find that potatoes from Uganda and several other areas of South Sudan had glutted the Juba market and he could not get a price that even would cover his costs of transportation. His NGO subsequently checked and compared market prices from the village, the payam (sub-county), the county seat, and the state capital – and found that farmers could get the best prices for many commodities at the sub-county level. This information was then shared with 90 key farmers in workshops on understanding market and price risks. Yet other risks to the agricultural enterprise go unexamined: broiler chicken farmers in Koboko, Uganda purchased poults they were assured had been medicated, yet discovered once many began dying it was not true. But they had no written guarantee or recourse with the supplier to protect them from this legal risk to their farming operation. Often the risks are simply lack of communication or coordination amongst actors in the value chain, as in Lainya County South Sudan where farmers wanting to sell honey did not realize there were traders in their own county wanting to buy honey to sell in Juba.

The very multitude and complexity of the risks in agriculture are a major barrier to private sector finance providers like banks being willing to lend to small- and medium-scale farmers who are striving to move into commercial farming. The availability to the lender of loan funds is one problem to increasing agricultural loans: bank staff in two major banks in Uganda have told me they are trying to get more funds available for agricultural lending, but that their colleagues are reluctant because lending to farmers usually means much slower repayment and much greater and more complex risks than lending to other small and medium enterprises. Though the Ugandan government is trying increase loan monies by agreeing to provide half of the loan funds for qualifying agricultural loans, they are requiring the entire loan – both their half and the bank's half – to be lent at 12% interest; bank staff say their banks are losing money by having to lend their half of the agricultural loan at a much lower interest than even the rate at which they break even.

A second problem in increasing agricultural loans is securing the loan, since few small- and even medium-scale farmers have clear title to land in Uganda or South Sudan, and little usable collateral. Several major banks in Uganda have used a programme providing loan guarantees of 50% of qualifying agricultural loans, with funds provided by large international donors and channeled through local nonprofits in Uganda (this programme is not unique to Uganda.) However, in at least one case, bank staff at a rural branch of one major bank in Uganda told me that the programme floundered when farmers found out the loans were guaranteed, and they stopped repaying. Warehouse receipt systems providing documented security for agricultural loans have been successful in some countries. But according to Maria Kiwanuka, the Ugandan Minister of Finance speaking at a conference in Kampala in July 2012, though USAID worked with the Ugandan government to build 6 warehouses around the country, the warehouses are only at 20% capacity. Staff of one NGO in Uganda promoting the warehouse receipt system say farmers don't trust the government warehouses.

So if targeted government loan programmes, loan guarantees subsidised by NGOs, and government-NGO warehouse receipt programmes are not enough, what else can be done to increase agricultural lending in Uganda and South Sudan in ways that don't rely on subsidies? A key shift in approach would be to focus more seriously on the whole range of agricultural risks which are, in actuality, reducing the success of agricultural enterprises seeking to expand into commercial agriculture. This is a much slower approach than most international development actors want to consider, as it takes an ongoing effort to build the capacity of small- and medium-scale agriculture related enterprises, but it has the potential to have more impact in the long run.