Louis Kasekende: Shaping the future of smallholder financing in Uganda
Keynote address by Dr Louis Kasekende, Deputy Governor of the Bank of Uganda, at the
High-Level Meeting on "Developing approaches for financing smallholder household in
Uganda", Kampala, 20 April 2016.
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Good morning ladies and gentlemen.
I would like to thank the organisers of this high level meeting, the Uganda Agribusiness
Alliance, for inviting me to give a keynote address. The modernisation of agriculture is
probably the most important developmental challenge facing Uganda; without agricultural
modernisation it is very difficult to envisage how Uganda's economy will ever be able to
achieve middle income status.
The vast majority of farmers in Uganda are smallholders and they produce almost all of the
country's agricultural output. Ninety six percent of total farm output in Uganda is produced on
farms of five hectares or less in size. There is no feasible route to agricultural modernisation
which does not place the smallholder at its centre.
Although Ugandans often perceive themselves as "blessed by nature" our agricultural
performance has been poor for several decades. Aggregate output growth has been weak
and the growth that has occurred has largely been the result of increases in land acreage
under cultivation and increases in the agricultural labour force. Both average land and labour
productivity have been stagnant for decades. The 2012/13 Uganda National Household
Survey indicated that two thirds of farmers are classified as subsistence farmers. An earlier
survey found that even the most commercialised quintile of farmers marketed only 50
percent of their output.
Modernising smallholder agriculture in Uganda will require helping farmers to improve their
farm practises, utilise more modern farm inputs, especially high yield variety (HYV) seeds
and produce more output for the market, thereby raising yields per acre and labour
productivity. We know, from the work done on demonstration plots supported by
development agencies that farmers can, in principle, achieve large increases in their crop
yields even with relatively low input technologies combined with the adoption of good
agricultural practises. Ugandan smallholder farming has the potential for transformation but
the constraints to this transformation are both large and multifaceted. A lack of access to
finance by smallholders is one of these constraints, although not necessarily the most
binding constraint for the majority of smallholder farmers at this early stage of agricultural
development.
To tackle the multiple constraints to the modernisation of smallholder agriculture, we need to
adopt, and persevere with, a holistic long term approach. Such an approach should have four
key components.
The first, and probably most important in the early stages of agricultural development, is to
provide agricultural extension services which can reach the majority of smallholders
throughout the countryside and provide advice on the adoption of good agricultural practises
and the optimal crops to be grown, given the characteristics of their farms, as well as
postharvest handling and storage. Agricultural extension services must be supported by good
agricultural research. Both agricultural extension and agricultural research have the
characteristics of public goods, because the dissemination of agricultural knowledge from
one farmer to another means that social benefits exceed private benefits. Hence, they should
be subsidised through the Government budget.
The second component of a holistic agricultural strategy should be to strengthen land rights.
As in many African countries, land tenure systems in Uganda are often complex and the
ownership or usufruct rights of farmers are often unclear and insecure. This deters farmers
from making long term investments in land improvements and it is also an impediment to
access to formal sector credit, because land with unclear ownership is not suitable for loan
collateral.
The third component is better rural infrastructure, especially rural feeder roads. The
commercialisation of farming is impeded by the high costs of transporting farm inputs and
outputs, from farm gate to and from the market, because of poor roads. High transport costs
drive down farm gate prices of farm output and drive up input prices, which undermine the
commercial viability of farming. More public investment in the construction and proper
maintenance of rural feeder roads is essential to support the modernisation of smallholder
agriculture.
The fourth component is improved access to finance. As I noted earlier, this may not be the
binding constraint for many smallholders, especially subsistence farmers. Access to finance
will only benefit those farmers who have the knowledge and capacity to use purchased farm
inputs to raise their productivity in a manner which generates profits and which does not
expose them to a potentially ruinous level of risk. This probably currently applies to only a
minority of smallholders in the country, although the number of smallholders who could
benefit from finance should rise substantially if the other constraints to agricultural
modernisation are effectively tackled.
In formulating policies for the development of agricultural finance best suited to support the
modernisation of smallholder farming it is necessary to address two important questions:
what specific type of financial services do smallholder farmers need? And what types of
financial institutions are most appropriate for delivering these services? A third important
question is whether the provision of finance to smallholders warrants any form of public
subsidy. I will not attempt to provide comprehensive answers to these questions but I will
offer some thoughts on them.
Smallholder farmers will probably need a range of financial services, beyond the provision of
credit, to support their efforts to modernise. These services will include savings and probably
insurance products. The latter are especially important to mitigate the risks that arise from
possible crop failures and the volatility of farm gate prices, which are a deterrent to
commercialisation.
I don't think it is likely that commercial banks will be the main vehicle for providing financial
services to smallholder farmers, because the banks' business models entail transactions
costs, which are too high to make serving customers with micro-savings and micro-loans
commercially viable. Instead other types of financial institutions which can access customers
at lower cost and develop lending models which can mitigate the risks of lending to
customers with little formal collateral are more suited to providing financial services to the
smallholder sector. These institutions include microfinance institutions, including those which
take deposits, and savings and credit cooperatives (SACCOs).
There may be a case in principle for subsidising the provision of financial services for
smallholders, because rural financial markets are undoubtedly afflicted with market
imperfections, but I don't think it is a very compelling one in practise. Clearly, the public
resources available for supporting agricultural modernisation are highly constrained and it
would be a more efficient use of these scarce resources to focus them on providing public
goods such as agricultural extension services rather than in reducing the cost of credit.
Furthermore, the availability of subsidised credit creates incentives for its misallocation; it is
very difficult to target subsidised credit effectively at those borrowers who need it the most
and prevent it being diverted to richer farmers instead.
Finally, I want to stress the importance of more research into all aspects of agricultural
finance and its efficacy for agricultural modernisation. The characteristics of smallholder
farming in Uganda are very heterogeneous. What types of agricultural finance work best in
different circumstances (different crops, different land tenure systems, etc) is mainly an
empirical question for which economic principles can only take us so far. There is no
substitute for detailed empirical research, for example research involving randomised
controlled trails. I hope that Ugandan researchers will take up this challenge and help to
guide us in charting the way forward for agricultural modernisation in Uganda.
I thank you.