BANK OF UGANDA
Remarks
By
Louis Kasekende (PhD.),
Deputy Governor, Bank of Uganda
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At the High-Level Meeting on Agricultural Financing in
Uganda
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Kampala, 30 August 2016
The Rt. Hon. Prime-Minister,
Hon. Ministers (present and past),
Ladies and Gentlemen,
Good morning!
In my remarks, I wish to highlight the numerous policy interventions and
schemes undertaken by the Government of Uganda since the 1960s
particularly those that had the banking industry actively involved; identify
what I think is the most optimal strategy for agricultural modernization, and
third, is to reiterate what I envisage as the appropriate role for the state in
agricultural financing.
Interventions for agricultural development over the past fifty years can be
broadly summarized into the establishment of institutions, the set-up of
lending schemes and the application of tax incentives. Let me start by dealing
with the experience of the public financial institutions. Government used
public sector banks, the Uganda Commercial Bank and the Cooperative Bank
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to provide loans to farmers at subsidized interest rates which were often
highly negative in real terms. Some of these lending schemes were financed
from the Central bank. About 20 percent of all commercial bank lending in
the 1980s was allocated to farming entities such as the Coffee Marketing
Board.
These policies did not work. Farmers and cooperatives were not able to use
cheap credit to modernize their farming and were unable to repay their loans.
By the early 1990s, both UCB and the Cooperative Bank had been rendered
bankrupt by non-performing loans.
Uganda's experience was similar to that of many other countries in Africa.
The continent is littered with many agricultural finance banks that became
unprofitable and required continuous budgetary support, thus necessitating
their restructuring in form of privatization, or complete closure like Lesotho's
Agricultural Bank and Building Society.
Since the mid-1980s several targeted credit schemes have been implemented.
The Government of Uganda through the Development Finance Department
(DFD) of the Bank of Uganda managed several credit programs, (see table 1),
that supported various investment projects in the different sectors of the
economy, including agriculture, agro-industry, manufacturing and the
services sub sectors like education, health, and tourism/hotels.
Table 1: Credit Schemes Managed by BOU/DFD between 1986-2006/07
Credit Program Source of Funding
Rehabilitation of Productive Enterprises (RPE) USAID (GOU)
Development Finance Fund (DFF) BOU & Commercial
banks
Apex I, II, III & IV EIB (GOU)
Investment Term Credit Refinance Fund (ITCRF) World Bank (GOU)
Export Refinance Scheme (ERS) BOU
Cotton Sub-Sector Development Project (CSDP) World Bank/IFAD
Crop Finance Fund (CFF) Libyan Government
Export Promotion Fund (EPF) GOU
Export Credit Guarantee Scheme (ECGS) BOU /USAID (GOU)
Energy for Rural Transformation Refinance Fund World Bank (GOU)
(ERTRF)
Distressed Flower Project Fund (DFPF) GOU
Source: Bank of Uganda
In the period prior to 2006/07, when the Development Finance Department
and all its activities were transferred to the Uganda Development Bank
limited (UDBL), DFD also coordinated a number of credit related programs.
These included the Linkage Banking Program under the Africa Regional
Agricultural Credit Association (AFRACA); the Capacity Building Program
(CBP) for micro finance institutions under the Cotton Sub-sector
Development Project; Research and advocacy on government programs,
policies and processes from a gender perceptive under the Gender and
Economic Reform for Africa (GERA) initiative of the North South Institute
of Canada; Capacity Building for Rural Women Financial Intermediaries
Program financed by a grant sourced from IFAD; and the DANIDA-funded
Rural Financial Services Component (RFSC), which was aimed at widening
financial services outreach to the rural areas.
Although these schemes yielded some individual successes, they have not
transformed agriculture in this country. Agriculture valued added per worker
measured at constant 2005 US dollars, has remained very low, despite
Uganda's
favorable resource endowments, increasing only marginally from
an average of US$ 212 in the 1990s to an average of US$ 219 in the past five
years, according to the World Bank's World Development Indicators.
Public support to the agriculture sector over the decade to 2015 has also
included tax exemptions and subsidies, including the current Agriculture
Credit Facility (ACF) that primarily targets value addition in agriculture and
provides for a maximum interest rate of 12 percent using budgetary
resources. The fiscal incentives have included: i) tax exemption on income
earned by financial institutions lending to agriculture that was introduced in
2006/07; ii) income tax exemptions for new rural agro-processing
investments; and iii) zero rating for VAT on most agricultural inputs and
services. Various studies including those published in our very own
Agriculture Finance Year Book have demonstrated that these tax incentives
did not result in any significant gains to farmers in the form of either reduced
input prices, or an increase in lending to the agriculture sector. Instead they
benefited mostly the banks and importers while denying government
revenues; and as a result, Government embarked on eliminating many of
these tax incentives in the financial year 2014/15.
What lessons can we learn from these experiences? Agriculture in Uganda is
dominated by small holder farmers, of whom two thirds are engaged in
subsistence agriculture, according to the 2014 Uganda National Population
and Housing Census. Therefore the agriculture development strategy must
focus on the small holder farmer. Any risk-sharing model for financing must
be based on a clear understanding of the profile and origins of the risk. In this
case, we must resolve what continually constrains the modernization of
agriculture and what makes small holder farming very risky for financing.
Smallholder farmers face a raft of constraints to modernising their farming,
of which lack of financing is not necessarily the most important. Most
smallholders produce very little surplus, beyond their own needs for
consumption, which can be marketed. Furthermore, the vulnerability of
agriculture to the weather, pests and other hazards means that surpluses
cannot be produced with any degree of reliability. In these circumstances,
agriculture assumes a very high risk premium, and borrowing money to
purchase agricultural inputs is very risky for farmers, and they will
unavoidably struggle to repay loans.
Modernising smallholder agriculture in Uganda requires a holistic set of
interventions. The first priority should be to assist farmers to increase their
output without exposing them to greater risks. There is evidence from
agricultural projects that if smallholder farmers are given advice on the
adoption of good agricultural practices, such as better seeds, optimal crop
spacing, weeding, post-harvest handling etc, substantial increases in yields
per acre can be achieved, even without the application of purchased inputs
such as fertilisers. This would allow farmers to produce more marketable
surplus and thereby generate cash incomes. The next step would then be to
start applying modest amounts of purchased inputs such as fertilisers, to
increase yields further.
Luckily, we are not short of demonstrable projects in the Uganda and
elsewhere that have markedly improved yields per acre and income of the
farmers by providing this sort of comprehensive support. The 2015
Agriculture Finance Year book for Uganda provided an assessment of one
such pilot by the One Acre-Fund in Kamuli district. The main challenge
facing agricultural policy is how to scale up the successes of individual
projects to smallholders throughout the country. The key to delivering the
interventions needed to modernize agriculture are effective, nationwide
agricultural extension services. We also need to strengthen the rural
infrastructure, especially the rural feeder roads, and provide the necessary
support for private sector-led contract farming.
Once the above interventions are effected and farmers are able to earn cash
incomes from selling their produce, the risk profile of agriculture will reduce
and it will become possible to extend credit to them on a sustainable basis,
although it is unlikely that commercial banks, given their cost structures, will
be the most suitable financial institutions to do this. Instead financial
institutions which specialize in small savings and loan facilities, and which
have strong local roots, are better suited to delivering rural finance on a
sustainable basis. Mobile banking and leveraging technology may also be
able to contribute to solving market information deficiencies and delivering
financial services in a more cost effective manner. A key question is whether
rural finance can be provided on a purely commercial basis, or requires some
degree of subsidy to offset the undoubtedly higher risks involved. We don't
yet have a definitive answer to this question.
I am of the view that, in implementing a holistic set of interventions
highlighted above, Government resources should prioritize what it can do
best and what the market cannot provide: the provision of public goods that
benefit the majority of the small holder farmers such as policy, strengthening
land rights, rural feeder road infrastructure, research and extension services,
and supporting the strengthening of the ware house receipt system.
Tax incentives and subsidies as we have evidently seen are the least optimal
way of utilizing public resources. I am aware that in a bid to lower the risk
profile of agriculture and incentivize agricultural financing, government is
introducing an agriculture insurance scheme. My advice is that any such
publically funded insurance scheme should mainly cover systemic risk faced
by the majority of farmers such as a general epidemic or extreme weather
conditions.
Finally, the historical evidence with state-run agriculture financing
mechanisms - risk sharing schemes or development banks on the African
continent, is instructive that if any such financing institution or scheme is to
efficiently support the development process, it must be managed on
commercial principles.
I thank you for listening to me.