Business banking unit5

THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

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Understanding the Business Customer

Understanding the Customer’s Business

Assessing Customer Needs

Lending in Foreign Business Transactions

Financing Property Developers and Contractors

Financing Agricultural Projects

MODULE COVERAGE

Alternative Sources of Business Finance


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Introduction to agricultural lending • The agricultural sector was in the past assumed to be an issue only

for developing countries, the majority whose populations depend on primary agricultural production. The sector has of recent come to the limelight mainly due to the high and escalating food prices the world over. With food shortage moving towards crisis levels, agricultural development is likely to assume more importance in the near future.

• Around the world, Agriculture is and will continue to be a major building block in the achievement of the Millenunium Development Goals (MDGs). The issue of Agricultural Finance is frequently on top of the international development agenda. Now with the triple shocks of the recent years- food, fuel and finance, the urgency of food security has increased greatly.


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• In Africa, agriculture is the mainstay for the majority of rural people. In East Africa, agriculture is an important sector in terms of employment and source of livelihood.

• Although the manufacturing and service sectors are growing fast and reducing the relative contribution of agriculture to GDP in most countries, agriculture still remains the mainstay for the majority of people in rural areas.

• In Uganda, for instance, agriculture employs more than 57% of total labour force, mainly through self-employment and contributes more than 15% of the GDP.

• To succeed in agricultural finance, the lender needs to know the agricultural related policies and programmes in the country. This is because agricultural finance needs to be very keenly designed in the context of the state and dynamics of the agricultural sector.


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What are the agricultural policies, strategies and programmes in your country at the moment? What others are planned and who are the major players?

In Uganda, it is necessary for you as an agricultural financier to know details of;a. National Development Plan (NDP) and its predecessor, the Poverty Eradication and

Action Plan (PEAP) and how the principles therein affect or embrace the agricultural sector.

b. Plan for Modernization of Agriculture (PMA), its focus and what it doesc. NAADS and its operations.d. FSD, USAID and other donors’ works in the area of agricultural finance.

Consider: • What are your government policies & strategies on agriculture and agricultural

finance?• What mechanisms are in place to support it and what are the other programs and

players you could link up with to boost your chances of success in Ag finance? • How do these affect the viability of agricultural finance?


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Challenges of agricultural lendingThe common challenges of agricultural lending are;

– Dependence on weather and other unpredictable natural phenomena

– Effects of regional and/or international market price swings– Necessity for non-financial support to the borrower– Scarcity of specialized knowledge and skills for agricultural

financing (from product development to delivery)– Fragmented land ownership and its implications on agricultural

project viability– Market access by primary producers of agricultural products– Perishability of the commodities, making them prone to losses


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Challenges of agricultural lending– Modestly informed borrowers, especially among small scale farmers– Informality of the farmers’ operations– Low returns of most agricultural enterprises– Difficulty in getting acceptable collateral– Poor physical infrastructure for market access– Crop/animal failures due to pests and diseases – Market barriers for some produce in the external markets– Unwillingness by lenders to learn new financing paradigms for agriculture– “Critical mass” bias of most financial institutions viz sparse populations in

rural areas– Limited relevance of the Government-initiated Agricultural Credit Facility

(ACF)


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Managing challenges in agricultural lendingStrategies for mitigating risks in agricultural lending are many and varied. The suitable

ones for specific cases depend on the peculiarity of the cases. Some general strategies are;

a) Good borrower appraisal-concept, technical provisions and capital outlay, management, market analysis, roll-out and sales strategies, financial projections, risk and sensitivity analysis – all in agricultural context

b) Insurance for the borrower/entrepreneur. The type of policy can vary depending on the type of agri-business enterprise.

c) Insurance for lenders. Insurance and guarantee packages for the lender are easier to access in some cases than for the farmers. Governments and donors that support agricultural development often have schemes for mitigating lending risks to agricultural lenders.


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Targeting product mixes that promote synergies or economies of scale (lending to blocks or peer teams/groups)

d) Spreading out the agricultural portfolio to a sensible range of enterprises e.g. poultry 20%; coffee 10%, cereals 50% and pulses 20%

e) Tagging repayment to the enterprise gestation cycles, for example, a loan to a poultry (layer keeper) may attract repayment from the sixth month and weekly (if small or monthly if large)

f) Constant and tight monitoring practices (selecting and monitoring using early warning indicators).

g) Limiting credit approval levels and concentrationh) Information and training borrowers on product opportunitiesi) Networking, syndicating and leveraging the bank’s risks through

cooperation with other programs.


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Crop/ livestock insurance (crop insurance quite rare)

Primary producers of agriculture and livestock. Very few insurance companies have these kinds of policies unless they are supported by government or donor money

Goods-in-transit insurance

Stock in trade policies Agricultural traders/ stockists. They are ordinarily available because it is normal trade insurance

Exporters and/ or long distance transporters of agricultural produce. Like Stock in trade, these policies are also common

Types of Insurance Suitable for


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Value chain approach to agricultural finance• A value chain is a series of actors who produce, transform or move

the product from input suppliers and farmers at the bottom to those who sell the product to the final consumer at the top. The value chain financing in agriculture emphasizes the vertical dimension of agricultural finance to and between different segments of agricultural value chains.

• Value chain analysis is a useful tool to help identify gaps in agricultural finance and how to address them. It starts by identifying what is already happening in the field (the actors, relationships, range of services, and bottlenecks to growth). It increases the likelihood that interventions and innovations will help to close the gap between demand and supply of agriculture finance.


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Value chain approach to agricultural lending involves;a. Conducting value chain analysis of the agricultural sector b. Identifying and selecting enterprise or sub sectors for agricultural lendingc. Assessing/appraising value chains from a financial perspectived. Identifying value chain constraints and potential solutionse. Assessing the market and competitionf. Structuring strategic alliances or partnerships for the agric lenderg. Developing agricultural financial product delivery modelh. Pilot testing the agricultural loan product and evaluating the results

Using the value chain approach, the following types of agricultural loan products can be developed:

i. Agricultural production loansii. Agro processing loansiii. Agro trade finance.