The Financial Sector’s Role in Unlocking Uganda’s Agriculture Finance and Insurance Transformation

The agriculture sector is a critical driver of economic growth and poverty alleviation of the Ugandan economy. It accounts for 22.8% of GDP and occupies 72% of the labor force with an estimated 87% of the working poor being primarily engaged in agricultural activities.  It also represents about 20% of the country’s total foreign exchange earnings. The sector’s potential is constrained with large yield gaps, low investment in improved farming practices and mechanization and high exposure to risks which include weather, biological, price and market risks.  This plethora of risks and constraints suppresses appetite for investment in the sector.

To support the agricultural sector achieve it’s full potential, the Government of Uganda (GoU) embarked on an ambitious agriculture transformation agenda, which requires innovation and investment by farmers, agricultural input suppliers, processors, traders, storage firms, exporters, distributors and other stakeholders along the agricultural value chain. As part of this ambitious agenda, the GoU recognizes the role of agriculture finance as a critical enabler and initiated several reforms and actions to unlock access to credit and insurance in the agriculture sector. For example, to support agricultural credit markets,  the GoU established, in partnership with the private sector, a long-term funding facility (the Agricultural Credit Facility) which provides interest-free loans to participating financial institutions (PFIs) for on lending to farmers and agri-processors at favorable terms. In addition, the Governments of Uganda and Denmark set up a credit lines, a partial credit guarantees scheme and a technical assistance program for financial institutions including MFIs and SACCOs to support investment in the sector. To expand the access to agricultural insurance to small-holder farmers, the GoU in partnership with private insurance companies launched the Ugandan Agriculture Insurance Scheme (UAIS). UAIS has rapidly expanded in its initial 18 months, selling more than 67,000 policies. The insurance scheme is supported by a premium subsidy ranging between 30-80%.

Despite such efforts, the penetration of agriculture finance is still at sub-optimal levels compared to the potential demand, in particular among smallholder farmers and SMEs. Indeed, formal credit for agriculture production accounts only for 2.8% of the agriculture GDP. Just 6.3% of small-scale agribusiness companies have access to a loan or line of credit as opposed to 44.1% in Kenya. In addition, initial data of UAIS suggests that while the scheme is having success in reaching smallholder farmers, most of the premium subsidies are being captured by medium and large producers.

Against this background GoU requested a technical assistance from the World Bank for a technical review of UAIS and an assessment of the agriculture finance landscape with the objective of providing recommendations to enhance the scalability and sustainability of the public schemes and to enlarge the scale of agriculture finance and insurance markets for the benefit of smallholder farmers and herders.  In response, FCI mobilized a cross-GP team of experts drawing on two global teams (Crisis and Disaster Risk Finance and Long Term Finance) and two regional teams (East and Southern Africa) to respond. 

The team was led by Emiko Todoroki (Senior Financial Sector Specialist-FCI East Africa) and Barry Maher (Senior Financial Sector Specialist, FCI Southern Africa) and consisted of Toshiaki Ono (Financial Sector Specialist, Long term finance), Tenin Fatimata Dicko (Financial Sector Specialist, Crisis and Disaster Risk Finance), James Sina (Senior Agricultural Finance Specialist, FCI East Africa), Charles Stutley (Senior Agricultural Insurance Consultant, FCI East Africa)  and Ernest Wasake (Consultant in Uganda). This cross GP team conducted in-country missions, met with key public and private sector stakeholders to review the UIAS and the broader agriculture finance landscape, identify gaps and develop options for GoU to invest in scaling-up. As part of the stakeholder engagement and reconciling the critical input from the ultimate beneficiaries of the GoU support to the agricultural finance sector, the farmers, the team met with Busoga Kitosi Coffee Farmer’s Cooperative in the District of Kalungu to discuss the challenges they face to access financial services.

The team also discussed in particular the challenges facing female farmers when accessing these services. These cooperatives are partnering with the World Bank supported Agriculture Cluster Development Project (ACDP) intervening in more than 40 districts of the country. The challenges raised during the meetings with farmers are: lack of credit products adapted to agriculture production calendar, the interest rate charged (up to 60%), lack of proximity of reliable financial institutions, limited information and knowledge on agriculture insurance and the scheme.  The challenges in particular for female farmers are that while overall levels of financial inclusion by Uganda women (77%) were similar to men (78%) in 2018, Ugandan women use formal financial services 9% less than men. This was evident in the farmer groups where female predominantly preferred VSLAs to formal financial institutions for savings and credit. This higher usage of informal financial services by women results in them having fewer consumer protections, fewer opportunities to build credit histories and fewer opportunities to grow their business and support their families through the provision of properly structured services such as  seasonal loans and more secure savings options.     

From the findings of these meetings and WB international experiences in this topic, the team then developed an in-depth technical report “Towards Scaled up and Sustainable Agriculture Finance and Insurance in Uganda” detailing the results and recommendations and also a policy note that serves to summarize the key policy recommendations from the technical report for the GoU.  The report was presented by the team to the senior management of the Ministry of Finance, Planning and Economic Development (MoFPED) including the Minister. The findings and recommendations of the report were endorsed by the management of MoFPED, and moving forward the team will be working with GoU to design a potential lending engagement.

*Disclaimer: The blog was originally posted on the World Bank Intranet.

*Authors: Tenin Fatimata Dicko, Barry Patrick Maher, Emiko Todoroki, Toshiaki Ono, Ernest Wasake, James Muli Sinah and Charles Stutley.

*Image: Credit to World Bank Group