AGRI-FINANCE FACILITIES AND SMALLSCALE FARMERS PERFORMANCE IN

OMORO DISTRICT.

Executive summary
Inadequate support in terms of credit facilities from government and financial institution has
been identified as one of the major problem affecting farming operation particularly that of the
small scale farmers in Uganda This study analyzed the impact of credit facilities to the operation
of small scale farms in Uganda using Omoro district Local Government as a case study.
Questionnaires will be used to source the data to be used in carrying out this research.
The research design to be employed for this study is descriptive survey design, in order to
achieve an accurate representation of the entire population. The study makes use of simple
random sampling technique as the method of data analysis. The study will be carried out in 6 sub
counties, in Gulu district, sub counties of Lalogi, Lakwana, Odek, Bobi, and Ongako sub
counties.
1.1.0 Introduction
Background
In Uganda, around 75% of the households are engaged in agriculture and 68% derive their
livelihoods from subsistence agriculture. Agriculture accounted for 24% of GDP in 2009/10.
Crop production in Uganda is dominated by small farmers, working an average plot of 1.7 acres,
and who produce 96% of the food that passes through the market outlets in the country. But
agriculture is greatly underperforming in Uganda. Uganda’s National Development Plan for
2010-15 is the first of six, five-year plans.
Agricultural finance refers to financial services ranging from short-, medium- and long-term
loans, to leasing, to crop and livestock insurance, covering the entire agricultural value chain -
input supply, production and distribution, wholesaling, processing and marketing.

Rural finance comprises the full range of financial services - loans, savings, insurance, and
payment and money transfer services - needed, offered, or used in rural areas by household and
enterprises. This development plan is replacing the Poverty Eradication Action Plan, the
government’s PRSP. The ambitious plan seeks to transform Uganda from a ‘peasant society’ to a
middle-income country within 30 years. But if this is to happen, smallholder farming, above all,
must be transformed. This is not to mention produce that requires attention to details of access to
finance in rural areas and in the agricultural value chains are numerous.

They can be found in the slow and uneven entry of formal financial institutions into rural areas,
which leads to rural clients often remaining beyond the reach of financial outlets, to the
reluctance of financial institutions to provide financial services to agricultural and rural
activities, whose risk profile is frequently not fully understood and which are often informal in
nature. Despite these difficulties, formal rural and agricultural finance has been making advances
in the continent, with innovative financial services and improved risk management on both the
client and institution sides.

The purpose of the study includes ways in which the Ugandan agriculture and financial
institutions have been trying to revamp the agricultural sectors, highlighting some of the
problems which prevent the full realization of objectives of financial institution and finding
solution to some of its problems.

The most promising approaches include flexible credit schemes, value-chain finance, insurance
products, promotion of financial literacy and the use of new technologies. Prominent examples
are the introduction of index-based weather insurance schemes in Malawi, financial literacy
campaigns in Uganda, or the spread of mobile banking in Uganda. Furthermore, rural and
agricultural clients continue to rely on financial institutions, like savings and credit cooperatives
or village banks.

1.2.0 Statement of the Problem

Despite the fact that agriculture still accounts for about 75% of the labour force in all the
Uganda, underscoring the importance of the sector in job creation and poverty reduction across
these countries. To take this issue further, the ‘High Level Panel of Experts’ on food security and
nutrition have effectively argued that indeed the contribution of small-scale farmers is just not
directly attributed. So, in reality, small-scale farmers play a vital role in the aggregate GDP,
gross national levels of employment, energy efficiency, food security, and are also a fundamental
part of the market economy (HLPE, 2012).  
Inadequate support in terms of credit facilities from government and financial institution has
been identified as one of the major problem affecting farming operation particularly those of
Omoro district local government.
Essentially, the role of the small-scale farmers is critical and warrants attention to improve their
productivity, grow economies, eradicate poverty, and drive social and economic progress. Small
scale farmers perform below their potential, and to increase their productivity, this category of
farmers needs access to a full range of financial services. However, since the role of small-scale
farmers is frequently understated, this calls for a lot of advocacy, policy and public investment
that is small-scale farmers directed.
For the small-scale farmers to overcome their challenges, including financial challenges, there is
a need for targeted advocacy at a high level, with the aim of coming up with the kind of public
policy that prioritizes the interests of small-scale farmers.

Rural and agricultural financial services are provided by formal and informal financial
institutions as well as through financial arrangements within the agricultural value chain. While
the majority of Africa's population lives in rural areas and depends on agricultural production,
the supply of financial services to the sector is inadequate, with, on average, a mere 5 percent of
domestic resources being allocated to the agricultural sector.

Factors such as poor infrastructure and widely dispersed populations in rural areas raise
transaction and information costs, thus further hindering the spread of financial services. In
addition, title and property rights can be difficult to verify in rural areas, posing problems in the
use of collateral. Subsidized lending programs for rural recipients have also contributed to
obstructing the development of a sustainable rural banking sector in Uganda.

Farmers and agricultural companies typically face seasonal income and long maturation periods
and are exposed to considerable risks. Seasonality requires specifically tailored financial services
and conditions, such as longer repayment and grace periods, less frequent repayments, or leasing
products. Agricultural risks to be considered include price fluctuations for inputs and products or
crop failure due to pests and diseases, temperature or variable rainfall. The following are some of
the summary of the statement of problem

 The low educational background of some of the farmers makes it difficult for majority of
the farmers to get information about the existing credit facilities and the procedure
involved in getting such loans.
 Farmers in some cases do not get their disbursement from the ministries loan units in
good time for finely operation.
 Inadequate supervision of individual farmers bring about difficulty in recovery loans that
has been given to farmers.
 State agencies do not reach the number of farmers originally targeted.
 Funds to other project that is not originally included in the programme without due
consultation bring about difficult in loan recovery.
 Most, farmers do not have the required collateral to obtain loan.
 There are many loan defaulters and this prevents other farmers from benefiting.
 Too many risks in farming. There is risk of crop failure as a result of disease s and pest,
prices of products may fall after harvest

1.3.0 Justification
Agricultural finance usually falls into time related categories of short, medium and long term
finance. Short term finance is meant for working capital and ensures that the business maintains
some level of liquidity. It is usually repayable in a year, at the end of the production season. It
can be provided as cash where the farmer will make his /her own purchases, or in the form of
inputs as was the case with government schemes. Contract farming is a special form of short
term finance. It is a commercial arrangement between agro processors. There is great need to
support small holder farmers to access agri finance due to their enormous contribution to the
economy which includes but not limited to:

Actual Production
Smallholders are the major providers of food and non-food products around the world, making
them the key purveyor of food security. As an example, China alone is reported to have at least
250 million small-scale units, who hold only 10% of the total amount of agricultural land that is
globally available, but produce 20% of all food in the world.

Scalability and power of small-scale farmers’ aggregate output

Coffee is the second most traded commodity after crude oil. The global coffee industry is
thought to be worth over USD18 billion. Now, what is important about coffee is its production:
70% of the world’s coffee is grown by around 25 million small-scale farmers in developing
countries. Those are usually subsistence farmers who grow a small amount of coffee as a cash
crop (Black Gold Foundation, 2011).

Small-scale farmers grow around 70% of the planet’s food. When it comes to the commodity
cocoa, the contribution of small-scale farmers is as high as 90%. Small-scale producers play a
critical role in livestock production. Small-scale livestock enterprises drive dairy production in
eastern Africa and South Asia, for example. In Uganda, smallholders with average plots of 1.7
acres produce 96% of the food that passes through the market outlets in the country.
Food Security, incomes and employment
In Uganda, the East African Highland Cooking Banana is an important staple food in the
country, and most of it is produced on small plots of up to 0.5 hectares. The importance of this
crop is both food security and incomes; according to the Ministry of Agriculture in Uganda,
bananas occupy 30% of the cropped land and are produced by 24% of the agricultural
households (estimated at 934,558) as their major source of income. Bananas support about 17
million people in rural and urban areas within Central, Eastern and Western regions of the
country. The national rate of cooked banana consumption stands between 220-460kg per capita
per year, which is the highest in the world (MAAIF, 2012).
Employment
Small-scale farming is a source of livelihood to the majority of the population. That is so
especially to women (who form a majority in small-scale agriculture), to the youth with low
levels of education and to elderly people. The opportunity cost of having this form of
employment cannot be underestimated.
Part of the market economy/markets for goods
Small-scale farmers contribute considerably to economic growth, directly through production of
goods for the local market, and indirectly by forming a large part of the internal market. This is
especially so in developing countries (Mazoyer and Roudart, 2006). When the smallholder
farmers’ incomes grow, this boosts the internal aggregate demand for goods produced in the
local industries.

Efficiency in food production

It has recently been established by the FAO that small-scale farmers can have significant
advantages over large-scale farmers in terms of efficiency in producing staple foods. The FAO
notes that ‘there is a rich empirical literature suggesting that output per unit area in small farms is
higher compared to larger farms’. This is due to greater efficiency in the use of inputs, especially
of family labour. Such family labour offers flexibility denied to larger farms that depend on wage
labour. The FAO also highlights that small-scale production is more suitable for labor-intensive
produce, such as vegetables, that require transplanting and multiple harvests by hand.

1.4.0 Study objectives

1. To identify or refer to the laws, rules, regulations orders, schemes etc enacted by
Ugandan Parliament or State Legislatures connected with or related to agriculture sector.
2. To study the productive needs of agricultural finance.
3. To examine the role of government in agricultural development and broadly identify or
refer to laws ,rules, regulations orders schemes enacted by parliament or state connected
with or related to agriculture sector.
4. To study the nature and relevance of the different agri financing models offered by the
financial institutions and SACCOs.
5. To examine the success of the agricultural finance and impact of agricultural finance to
small holder farmers.
6. To study the contribution of the Insurance companies and NGOs in enhancing access to
agricultural finance to small scale farmers.

1.5.0 Organization of the Study

The study researcher recognized that a long-term strategy would be required to develop a
sustainable system for agricultural finance. The researcher also recognized that financial services
are needed for the entire rural economy, and as such it would be inappropriate to analyze finance
for agriculture without considering how the demands for financial services by rural non- farm
households and businesses might evolve along with the agricultural sector.
To guide its thinking and analysis, the researcher approached the task by posing the question
“How to address issues raised under the scope of the study in the next sub section.
The agricultural sector assumes a dominant role in Uganda’s economy in terms of numbers
employed, thus, it accounts for over 75 percent of all employment and supports the livelihoods of
the majority of rural inhabitants who constitute 85 percent of Uganda’s population. Agriculture
also accounts for 85 per cent of Uganda’s export earnings.
More importantly, agriculture has the potential to act as a base for the improvement of the
livelihoods of both rural and urban populations. In rural areas such improvement would be
achieved by enhancing productivity at the primary, i.e. production level.
 In rural towns and urban areas agricultural products constitute the base for the creation and
expansion of value adding processing industries catering to domestic and regional markets, and
for packaging/marketing operations, both for domestic and export markets. As part of its Poverty
Eradication Action Plan, the Government of Uganda’s Plan for the Modernization of Agriculture
includes among its priority areas for action, measures that have direct relevance to this report.

There is much to be accomplished in these areas, however, before these measures will effectively
raise agricultural and pastoral productivity in Uganda.
For the vast bulk of Uganda’s farmers and ranchers, the level of use of improved technology is
very low, with concomitant low levels of investment. Against this demand scenario, a number of
challenges face all those involved in supplying financial services

1.6.0 Scope of the study

The study covers six sub counties within Omoro district in northern Uganda. The study focuses
on investigating different agricultural financing models, with participation of small holder
farmers as a unit of interest. This will be achieved through carrying out specific tasks, including:
i) Profiling of the various agricultural financing products, services and financing approaches;
ii) Identification of different financing products and approaches that have been successful and
the key drivers for their success;
iii) Identification of policy gaps that may inhibit out scaling of successful models; and
iv) Recommendation of strategies that can minimize out scaling and constraints of successful
models.
iv) The limitation to agricultural credit to small holder farmers

1.7.0 Reporting structure

Apart from the Executive Summary, this report is organized into five chapters. The annexes that
accompany the body of the main report provide greater details on key issues in the main report.
Chapter 2 describes the literature review/related studies on financial access and policies and how
this evolution has affected the structure and performance of the financial system and its ability to
serve the agricultural and rural sectors.

Chapter 3 Data and methodology, data collections. Chapter 4 contains an analysis of the data
and findings of the study. This chapter also analyzes the constraints that are likely to impede the
financial system’s ability to meet the demands that are expected to emerge, along with
recommendations for improvements; including the recommendation for the development of a
long-term strategy to develop financial services for the agricultural and rural sectors.
Finally, Chapter 5 knits together the arguments in the preceding chapters into
an annotated list of recommendations
CHAPTER 2
2.0 LITERATURE REVIEW
Financial services for the poor comprise a great range of different types of financial agents and
financial products. Although the poor are usually excluded from formal banking institutions this
does not mean they have no access to financial services. The informal financial sector still
performs an important role in both developed and developing economies. Identifying the relative
strengths and weaknesses of different financial service agents and institutions has been an
integral part of recent research projects. Work on the informal financial sector has included
studies of village moneylenders in Uganda, and the linkages between informal and formal
financial service providers in Uganda.
Limited access to financial services is an impediment to potential investments with good
prospects
Where they are denied finance because of lack of collateral or network. The issues related to
Access to finance are due to transaction costs, agency costs and uncertainty according to Beck
and de la Torre (2007) provided a theoretical framework that uses ‘access possibilities frontier’
to study supply and demand constraints. The financial market and institutions exist to deal with
these costs and uncertainties. Therefore, the nature of the system affects the way institutions are
able to deal with a lack of access.

2.1 Demand factors affecting access to finance to small holder farmers.

Mpuga (2004), categorized demand side factor affecting access to financial services into two:
The individual/household characteristics and the attributes of financial institutions. Individual
characteristics factors include the level of income, sex, age, education and weather one has
obtained credit before on not. Among the attributes of the financial institutions that may affect
individual decision to demand for financial services from that source include interest rate, other
terms of credit and distance from the provider.

Individual household’s characteristics which are of importance in influencing demand for

financial services include age, gender, education and marital status (Mpuga, 2004). The lifecycle
predicts that the young tend to invest in off-farm activities, which require large capital outlays,
while old and retired, will tend to invest in farm activities.
 Therefore, the demand for financial services is expected to vary positively with age (Zeller,
1994). Gender, education level and marital status, depending on the levels of economic activity
are also expected to have a positive influence on demand for financial services.
Like any other service or product, the demand for financial services is likely to be affected by
their own price. In case of financial services, the price for savings/credit is the interest rate
Offered/charged.
Holding other factors constant, the higher the interest rate charged, the lower the demand for
credit. In addition to the high interest rate there are other charges such as
Commitment fee that may be imposed on the loan recipient. Availability of financial institution
may improve demand for financial services. This background analysis tends to suggest that
Household characteristics and financial institution attributes are important in influencing demand
for financial services.
This demand structure affects different activities in the economy, at firm and household level.
Agricultural credit which is the focus of this study is also influenced by this demand structure.
Studies done on Uganda by Okumu and Matovu (2006), Okurut et. al (2004) and Kasirye
(2007),on the factors that influence access and use of credit by rural households, showed that the
main factors constraining access to rural credit were lack of collateral, financial education, lack
of organized farmer groups and location of financial institutions.

These findings are in agreement with the study by Mpuga (2004). They however miss out on
examining the policy and institutional factors that have an influence on the supply of credit along
the credit market channel, which in turn has an influence of demand for credit. Assessing the
access and use credit by small holders in Uganda, this paper focuses on the supply side factors of
policy and institutional structure, conduct and performance that have an influence on the supply
of credit.
This is important because, beyond the household level in the utilization of credit, there are
external factors of policy and institutional in nature that affect the supply of credit along the
market chain, which this paper attempts to document.

2.3 Supply factors affecting Access to Financial services.

Supply side factors to access to financial services take the form of institutional attributes as well
policy and regulatory framework. These include cost of credit, availability of financial
institution, distribution network, and level of capitalization of the financial institution and policy
and regulatory framework for the financial sector as in (Mpuga, 2004) and Frances and Javier
(2006).The low level of access to credit, and to microfinance services in general, is attributable,
first, to the regulation of the prices of microfinance services. Second, the scant reach of financial
distribution networks does not allow mass access to financial services. Third, the use of
inappropriate credit analysis methods prevents inclusion of the informal economy.

Lastly, the inadequate regulatory and policy framework does nothing to solve the problems of
supply. Regulations imposing maximum interest rates (usury rates) are one of the main factors
that seem to be contributing to the lack of access to credit in Tunisia and Morocco. This
apparently could be the situation across most SSA countries, including Uganda where more
research is required to unlock the constraints to access to credit by small holder farmers.

In Morocco regulated financial institutions are subject to central bank-imposed interest rate
caps, while microfinance associations are not (Frances and Javier, 2005). These associations lend
at market rates (averaging 20 to 30 percent), which explains their growth, without this having
diminished the demand for microcredit. In Tunisia, too, regulated financial institutions must
respect interest rate caps imposed by the central bank.

In Morocco, the interest rate at which microcredit associations are permitted to lend is capped at
5percentin Algeria and Egypt, by contrast, interest rates are unregulated.
In Egypt, too, prices are liberalized; the average rate for loans by specialized microfinance
institutions is currently around 30 percent. The second reason for lack of access to financial
services in the countries under study is the scant reach of banking distribution networks. This
deficiency of the banking networks is offset, however, by the density

2.4 Linkage and utilization of credit in Uganda

The large postal network is an inheritance from a shared French colonial past.
A study by AMIFU (2011), focused on supply side factors affecting the access to financial
services by rural households along the key commodity value chains of coffee, apiary (bees),
poultry, dairy, maize, pineapple in all regions of Uganda.

The findings of the study shows that access to financial services by farmers is mainly affected by
weak linkages of financial institutions from farmers up to formal financial institutions, the
availability of the financial institution and the distribution network. The study recommends
strengthening farmers groups to enhance access to financial services and accountability to the
providers of credit.

In summary the literature tends to suggest that in order to increase access and use of agricultural
credit financing, new approaches to identify financially excluded rural poor in Uganda should be
developed. These would largely focus on access constraints such as lack of collateral, weak
farmer groups, financial literacy and improving the regulatory framework of the microfinance.

2.5 Challenges to agricultural finance in developing countries.

A study by Kimenye and Bombom (2009) on improving agricultural productivity in East Africa
Observes that investment in agricultural technologies by smallholders is often limited by
financial Constraints. Banks and other money lending institutions have always considered
agriculture to be risky. Agricultural credit from commercial banks and other formal financial
institutions is generally expensive. Smallholder farmer often lack the acceptable collateral
needed to secure credit from these institutions.

Inadequacies in farmers’ ability to invest in agricultural technologies could be boosted by

empowering them in groups and building their capacity through mobilization to enable them to
own a micro-credit scheme that could cater for their financial needs. Experience from other
developing countries shows that there is evidence that credit provided to small-holder farmer is
often too small to be used for the intended purposes such as buying healthy animals and this
could lead to high default rates among farmers (Birdar and Jayasheela, 2000).

This is further confirmed by, Banerjee, Duflo et al (2009), using a randomized trial, that micro
credit has little impact on the investment practices and business income of those micro
entrepreneurs that do not already possess a functioning business at the time of loan disbursement.
Beck and Demirguk-Kunt (2008) argue that access to finance can directly be used to promote
start-ups and small entrepreneurial skills. However, (Claessens et al., 2009) point to the supply
side of financial services. They indicate that access and use of credit is greatly affected by the
level of efficiency of the existing institutional framework that is in charge of availing financial
services.

CHAPTER 3
3.0 Methodology
The assignment will be carried out in three stages: 1) literature review, 2) data collection through
visits of farmers to the six sub counties and 3 districts local government, financial institutions,
NGOs, Microfinance institutions and farmer groups and individual farmers then finally 3)
compilation of the report on findings. The sample size will comprise of 10 commercial banks, 1
regulatory bank, 4NGOs, and 24groups and 12farmers, 4 insurance companies, 5 Saccos and 5
Microfinance from the six sub counties in 3 districts of Gulu Amuru and Nwoya.
Both qualitative and quantitative data shall be collected from primary and secondary sources.
The following stakeholders shall be interviewed and consulted in the study:
Financial institutions, including commercial banks, insurance companies, SACCOs, micro
finance institutions, among others;

3.1 Research questions

The study seek to answer the following key questions:
i) What available models for financing smallholder farmers have been successful, and what are
their critical unique success factors?
ii) What weaknesses exist that need to be addressed in other financing models to replicate
success?
iii) What institutional environmental factors are critical for success?
iv) What are the specifics in government policy that need to be addressed, from practitioners’
points of view?
Sampling method
Sampling frame

3.2Methods of data collections

The research also includes the procedure methods used in collecting data and other important
information. The primary data method is the first method to be used to collect data. All the
information gathered in this method is through personal interview.
The other method termed participant observation affords the one opportunity to watch the social
settings and attitudes of the people under references
3.3Methods of data Analysis