By Nathan SundaySunday Nathan.jpg

The role of agriculture in the social-economic transformation of the country cannot be over emphasised. According to Uganda Bureau of Statistics (2018), the sector accounts for 65 percent of the working population and employs 36 percent of the labor force. Despite the declining share, it still contributes a considerable share of the country’s GDP averaging at 24 percent for the ten year period (2008 to 2017). The role of agriculture is further emphasized by the Second National Development Plan which stresses it as one of the three key growth opportunities. As such the sector deserves adequate financing.

According to data from Bank of Uganda, commercial bank credit to agriculture has steadily increased both in total and as a percentage of private sector credit. For instance, in 2008, the sector received Shs.194.2 billion, equivalent to 5.2 Percent of commercial bank credit to private sector. The total has since increased to Shs.1.5 trillion, equivalent to 12.2 percent in 2018. Notwithstanding this increase, agriculture value added as a percentage of GDP has steadily decreased from 26.8 percent in 2009 to 21.8 percent in 2017. In addition, growth in agriculture value added has also stagnantly remained low, averaging at 2.7 between 2009 and 2017 (figure 1).

Figure 1: Agriculture credit and growth in agriculture value added

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Source: Author’s Computation using data from BoU

Such a trend therefore suggests that increase in credit to the sector is not matched with commensurate increase in agriculture value added, thus raising questions as to whether credit is properly aligned in agricultural sector. An analysis of credit distribution indeed reveals sizeable inequality in the distribution of the credit between the two broad areas in agriculture (production, and marketing and processing). Much as commercial bank credit to agriculture has increased, processing and marketing consistently receives the lions share averaging at 57.5 percent between 2009 and 2017. Moreover, the gap between percentage of credit to production, and that to processing and marketing continues to widen as the share allocated to the later continues to increase at the expense of the former (see figure 2).

Figure 2: Distribution of commercial bank credit to agriculture

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Source: Author’s Computation using data from BoU

Figure 2 shows that, much as there was a balance in the credit allocation to the two sub-sectors between 2010 and 2012, it has since been lost which has seen the percentage allocated to production decline to 34.1 percent in 2017 while that of processing and marketing rose to 65.9 This divergence raises a number of uncomfortable questions; is it low absorption of credit from the production side that is responsible for the declining share of credit (demand side) or the reluctance of banks to lend for production (supply side)? Regardless of the answer to the above questions, the key question then is whether the observed trends in the distribution of credit is responsible for the decline in the share of agriculture in GDP and growth in value added.  

Regardless of credit absorption level, agriculture production is perceived to be more risky particularly in Uganda where there is over reliance on natural conditions. As such, risk averse commercial banks are likely to be biased against extending loans to production which leaves farmers with limited access to loans from commercial banks thus pushing them to micro-deposit taking institutions, credit institutions and other informal credit markets. Indeed as data shows, about 75 percent of agriculture credit from micro-deposit taking institutions and credit institutions in 2018 went to production (BoU data, 2019). However, such credit institutions may not be able to provide adequate credit since they are less capitalised.

As a way forward therefore, there is need to realign commercial bank credit to agriculture by putting in place agricultural finance policy that will provide strategies that can improve agricultural lending by commercial banks. This will necessitate government increasing the scope and value of agricultural insurance and other credit guaranteed schemes to mitigate against risk losses to farmers in production activities. This would enhance their loan repayment capacity and thus induce commercial banks to extend more credit to production.

Nathan Sunday is a Research Analyst at the Economic Policy Research Centre (EPRC)