In a significant move to boost agricultural commercialization and support smallholder farmers, the Bank of Uganda’s Agricultural Credit Facility has successfully provided low-cost loans to over 2,113 non-collateralized farmers in the five years leading up to June 2023. This initiative, operating under the Block Allocation arrangement, aims to facilitate easier access to credit for farmers, contributing to the government’s broader agenda of promoting agricultural commercialization.
During this period, these farmers borrowed a total of Shs13.5 billion from the fund, signifying a proactive approach by the government in advancing the agricultural sector. This allocation is part of a larger fund totaling Shs818.29 billion, established in 2009 with the aim of enhancing access to credit for areas characterized by communal land tenure systems.
The Shs13.5 billion was disbursed through the Block Allocation arrangement, designed to primarily benefit micro and smallholder farmers who often find themselves excluded from traditional credit systems due to the absence of collateral. The annual report from the Agricultural Credit Facility reveals that out of a total of 3,455 funded projects over 14 years up to June 2023, 61 percent were non-collateralized.
The Block Allocation arrangement, introduced in 2018, has been instrumental in expanding credit access by reducing collateral requirements for participating financial institutions, including PostBank, dfcu, Centenary, Equity, Housing Finance Bank, and Pride Microfinance. This innovative approach allows these institutions to consolidate small loans (Shs20 million and below) into a block of Shs1.5 billion, simplifying the application process to the Bank of Uganda for refinancing.
Under this arrangement, registered collateral is not always necessary, and alternative forms, such as cash flows, chattel mortgages, borrower’s credit history, banking records, and unregistered land, may be considered. Financial institutions assess eligibility and disburse loans before submitting applications for reimbursement to the Bank of Uganda. This streamlined process, with loans capped at Shs20 million per borrower, minimizes the risk of default, as these loans are essentially unsecured.
The report highlights that the western and northern regions of Uganda have been the most significant beneficiaries of this initiative, accounting for 44.8 percent and 31.9 percent of funded projects, respectively.
The Agricultural Credit Facility, established in 2009, is a collaborative credit source funded by the government and participating financial institutions. It has evolved over time to cater to smallholder farmers, the majority of whom lack collateral.
In the year ending June, the facility disbursed Shs123.38 billion, marking an 18 percent increase from the previous year. Furthermore, there was a substantial rise in new loans, with a 48 percent increase in the cumulative number of loans disbursed. Outstanding loans with participating financial institutions amounted to Shs128.78 billion as of June, with distressed loans at Shs4.04 billion, and a non-performing asset ratio of 0.98 percent, significantly lower than the aggregate non-performing asset ratio of 5.93 percent for commercial banks.
The Bank of Uganda’s Agricultural Credit Facility is therefore making remarkable strides in providing non-collateralized farmers with access to affordable loans, thereby contributing to the growth and commercialization of agriculture in Uganda. This initiative represents a significant step towards empowering smallholder farmers and ensuring the sustainability of the agricultural sector.