Agriculture remains Uganda’ s backbone sector covering over 22% of its GDP, however financing of this sector remains low due to the high risks involved with the sector.
Over 90% of the Agricultural business in Uganda is rain fed, managed by smallholder farmers and the sector is exposed to the risks of weather vagaries, price volatility, forex fluctuations which increase overall risk.
However, with the help of government and development partners, commercial banks are increasingly getting interested in agricultural financing.
According to Mathias Katamba, Dfcu Bank Chief Executive Officer, although the sector is risky, it still has a lot of potential that can spur growth in the banking sector if financial institutions understand and put measures in place to mitigate the agricultural risks
“It takes a good understanding of the agriculture ecosystem to provide financial solutions that stimulate growth along the agriculture value chain. Our financial solutions are specifically designed to be able to respond to the needs of the different players in the eco system, from the small holder farmer to the commodity trader” katamba stated during a commodity financing dialogue hosted by Dfcu Bank at the Kampala Serena Hotel, in partnership with RaboBank earlier this year.
According to Godfrey Mundua, Dfcu bank’s head of corporate banking, the bank has so far invested over Shs250billion in agriculture and this profile is growing everyday.
“Lending to agriculture sector is generally perceived to be a high risk compared to other sectors like manufacturing, services, trade and commerce, construction where cash flows are more certain. Financial institutions therefore need deep understanding of the sector and must have ability to have structures where the risk can be mitigated or shared with other parties,” Mundua started
He add; “Weather vagaries are one of the key risks that impact yield for rain fed agricultural production. Many commercial farmers need loans to finance inputs like seeds, fertilizers, herbicides before planting but the challenge many lenders face is the loss of yield due to bad weather. Today, this risk can be mitigated by banks taking insurance cover that mitigates the risk. The cost of insurance is paid by the farmer but it is subsidised by the government.”
Mundua further added that the bank had commodity financing which supplements that agricultural loans.
“We have financed several players in different value chains including grains, coffee, oilseeds, cotton, cocoa and others. Up to 20% of our lending book is dedicated to agriculture and credit to the sector forms significant portion of our lending. We will continue to finance interested individuals and supporting them in whichever way. We want to have a success story where the bank is growing with its customers,” he states