26 August 2008

Uganda: Farmers to Benefit From New Model of Agricultural Finance

Ugandan agricultural entrepreneurs who have for long struggled with the often elusive funding have finally attracted the eyes of venture capitalist willing to inject money for business expansion in return for a stake in their companies.

African Agricultural Capital (AAC) is willing to invest up to one million dollars into an agricultural-oriented business in return for owning a stake big enough to influence the company direction. "Many businesses need equity finance to grow and expand," Mr Tom Adlam, the managing director of AAC, said.

ACC's leap to the stage reveals a unique approach to agricultural financing where the lender is willing to partake in the risk of the business to which he is lending.

"Equity is low risk capital to the business: entrepreneurs don't need to worry about making monthly repayments and can reinvest income in growth," Mr Adlam said. "When we are an equity partner, our interests as financiers are completely aligned with our investees."

AAC's investment philosophy is not to replace capital that is easily available through commercial banking sources, but to be a genuine risk capital investor. "We often recommend to our potential investees that they consider us as an equity partner," Mr Adlam said. ACC has already invested about $4.5 million into nine businesses in Kenya and Uganda.

Some of the enterprises include Biyinzika Enterprises Limited, poultry business located in the Seeta Kampala-Jinja Highway, NASECO, a commodity marketing company based in Hoima, Victoria Seeds Limited, a firm that supplies, and Coetzee Natural Products (U) Ltd, a firm involved in organic agricultural processing and trading.

"By lending over a medium term, or by taking equity positions in our investees, we provide them with the breathing space necessary to implement their plans," Mr Adlam said. "We believe that a vibrant and effective private sector is the most sustainable way to increase rural incomes."

The initiative could prove good news to the government's effort to turn about 75 per cent of the population from peasants into commercial farmers. "We have taken the view that if we can invest in medium sized enterprises which bring services and inputs or markets to smallholders, we are indirectly increasing rural income levels," Mr Adlam said.

Agricultural financing has always been a thorny issue in the government's quest to promote commercial agriculture.

The government, this financial year, provided Shs100 billion as partial risk guarantee to commercial banks willing to lend to agricultural and agro-processing projects over the next five years.

According to Finance Minister, Dr Ezra Suruma the scheme will guarantee 50 per cent of the lending to agricultural projects.

While the government believes a loan guarantee to commercial banks will mitigate loses associated with agricultural financing, Members of Parliament look at it as presenting an opportunity to commercial banks to fleece farmers.

Parliament committee on finance, recently, rejected the Shs20 billion risk guarantee to commercial for this year, saying the move is likely to benefit banks more than it would do to farmers.

Setting up an agricultural bank, according to the MPs, would increase competition and force banks to reduce lending rates.

However, analysts say what MPs are suggesting is simply not feasible in the current free market economy where the government plays a diminished role in the private sector.

Mr Elly Twineyo, a development policy expert and also the executive director of African Centre for Trade and Development, said: "Donors are likely to look at it as if the government is getting involved in business," contrary to the recommendation of a private-sector led economy.

He said the government should instead consider setting up a department in Uganda Development Bank to deal with agricultural lending. "UDB already has a mandate for development funding and there is no need to go back to parliament to seek approval," Mr Twineyo said. "Government will not be establishing a new institution."

However, the government remains opposed to such a move. Dr Suruma recently told MPs that investing in a farmer's bank would demand subsidies. The history of public sector interventions in the agricultural finance sector has not been rosy. Cooperative Bank step from cooperative unions buckled under the heavy yoke of debt from unpaid loans.

While Uganda is struggling to solve the puzzle of agricultural financing, farmers in Kenya are reaping the benefits of government intervention in agricultural lending. Agricultural Finance Corporation of Kenya is a government owned non-bank financial institution that provides financial resources for agricultural production and land purchases, agricultural inputs, agricultural machinery and infrastructure development.

Mr Twineyo believes that cheap financing is crucial for agricultural sector and that the government cannot afford to abdicate its role.

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