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Is Climate Change Uganda’s Most Urgent Agricultural Problem?

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Recently at a climate/green financing for agricultural small and medium enterprises (SMEs) meeting held in Kampala, it was highlighted that there is a need to foresee the medium and long-term dangers of climate change, drum up awareness and need to change course, and finally, thrash out financing solutions to the challenges.

The meeting was attended by bankers, development partners, impact investors, SACCOS, cooperatives and agribusiness companies.

Philosophically speaking, the discussion and worry about climate change and adaptation is a good one but very premature for Uganda’s agricultural sector.

It is not feasible or strategically useful to worry about next year, or a decade, when you are literally not sure of your financial security next week and even physical existence in a few months’ time! I would like to use the analogy of one worrying about Alzheimer’s disease in 50 years to come, for a 5-year-old malnourished child, whose probability to live to old age is compromised by stuntedness, low immunity and high vulnerability to all manner of diseases.

Looking at the current agricultural statistics in Uganda where 89% of all agricultural production is by smallholders, a 75% financing deficit in the basic aspects of Agro inputs, working capital and capex, 73% of the population is employed in agriculture, Agriculture makes up only 24% GDP contribution.

Henceforth my analogy, before we worry about Alzheimer’s disease in our agricultural sector and smallholder farmers, we should first worry about;

  1. Agriculture at the primary production level where the majority of smallholders participate has an inherent challenge of a huge timing mismatch between revenues and expenses, where producers receive all their revenues in only 3 to 5 months of the year during the harvest, and nothing for the rest of the 7 to 9 months. This forces them to sell their crop flowers during the off-harvest season to local loan sharks for anywhere between 20% and 50% of the harvest value. This practice I first encountered it in Tanzania and Kenya has driven and continues to drive poverty levels very high in farming communities. It is not just a practice that impoverishes the farmers who sell their gardens as flowers, but also one that undignifies them in their families, farmer groups and communities because they are obliged to become the day and night security guards of their gardens now owned by the loan sharks from the day of the sale to the day of harvest, and they are even too embarrassed to tell anyone that they sold their gardens as flowers!
  2. Most farmers, estimated at 75%, are currently unable to fully translate their agricultural incomes to improved livelihoods for various reasons that include lack of/limited formal education, limited geographical exposure, limited ability to use IT tools to get the info they need, etc, and so they remain in a situation of inability to liberate themselves from the shackles of economic backwardness. The analogy here is that the effort to provide an income or an improved income to farmers is akin to moving masses of people from one station to another by train, but we need more specifically tailored efforts to move them from the arrival station to their final homes.
  3. Considering that the average rural farming household size is 6, 89% of our agricultural production is done by smallholder farmers on 5 acres or less, and that our inheritance practices are such that land is divided amongst the children upon the passing on of their parents, we will in the near future have a transition from smallholder farmers to what I call micro holder farmers of 1 acre and less!

Business succession in primary agriculture will be severely compromised and made worse by the fact that the children of the current farmers, are better educated and better exposed than their parents and will not be willing to take up Agriculture on much smaller plots than their parents, given that, that will only ensure that they will earn much less than their parents did!

We, therefore, need to find practical, affordable and scalable solutions to these challenges, but before we do so, I would like to give my thoughts on the suggestion in my two-day workshop that commercial banks were a key part of the solution.

My opinion on this suggestion is that this presumed solution is feasible, for the following reasons;

  1. Commercial banks by design, anywhere on the globe, are an embodiment of the extreme capitalist philosophy of profit and value maximisation for shareholders, for which lending to the agricultural sector is not aligned! Agriculture is more risky, unpredictable, and has many important variables (production quantity, quality, price, at the mercy of external factors and parties, etc.
  2. Commercial banks are inherently distracted by other less risky higher margin financing options like government bonds, trade finance, real estate, invoice discounting, etc. They, therefore, have no incentive to waste their time, efforts and resources in channelling more loans to a sector that is less attractive.
  3. The credit teams of commercial banks are largely technically challenged in properly and fairly assessing and reviewing agricultural loan applications because they are not very conversant with key agronomic aspects of the sector (e.g. plant population per acre, yield per acre, season cycles, etc.) which are key in understanding and assessing credit risk.

Financing agribusinesses using the scale and reach of institutions fully or largely dedicated to agricultural finance, like Impact Investment funds, which because they have a focus on social impact, in addition to the economic viability of their borrowers, agricultural financing is given top priority at best possible interest rates and other lending terms and they have no distraction from other loan products like government bonds, import finance, invoice discounting, etc, because they, by mandate, are not supposed to have them. These kinds of lenders take the time to invest in their staff to develop a deep and broad understanding of agriculture to enable them to properly assess the loan applications they receive and even appropriately advise their clients on how to improve their business models, post-investment, something a commercial would never be able to do.

Yunus Social Business Foundation is currently in the process of further improving its agricultural financing by setting up a thematic food and Agri-fund that will focus specifically on addressing the 3 key current challenges (revenues vs expenses mismatch, business succession, and last-mile impact), being faced by smallholder farmers in Uganda as earlier highlighted, through well-designed loan products exclusive to the fund.

It is when we have sorted out these challenges in the sector and are more certain of living to the ripe old age of 60 and beyond, that we can then have the luxury of worrying about Alzheimer’s disease and all its debilitating effects!

By Richard Tugume, the Country Lead for YUNUS Social Business in Uganda

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