Financing mechanisms for rural livestock & dairy sector players

Ariong AbbeyTechnical Advisor, Market Access

Land O’Lakes International Development

Financing Mechanisms for Rural Livestock & Dairy Sector Players

Ariong Abbey Technical Advisor, Market Access

Division of Land O’Lakes Inc. founded in 1981, that leverages corporate experience and expertiseOur Vision: To be a global leader in transforming lives by engaging in agriculture and enterprise partnerships that replace poverty with prosperity and dependency with self-reliance.Our Mission: Help farmers around the world improve incomes and quality of life.

Who We Are

Where We Work

Practice Areas Crops Dairy/Livestock Market Access Food Safety and Quality

Assurance Resilience Enterprise Acceleration

What We Do

Gender Environment Nutrition

Cross-cuttingAreas of Practice

Rural Finance inLivestock Development

For livestock owners, animals are: Food Capital A means of transport Crop inputs such as draft power and

fertilizer

Investments in livestock provide the following:

Crop inputs Cash flow through sales Seasonal security (short & long term) Contribution to export earnings

Increasing production

Asset formation

Poverty alleviation

Enhancing income and food security

Creating sustainable rural development

Improved Access toFinancial Services’ Vital Role

Benefits to livestock owners

Rural development

Risk management

Mitigation strategies

The Importance of Effective,Reliable Financial Services

In Uganda, agriculture …forms the main source of livelihood.

Farmers’ Income fromAgricultural Sectors

Common Activities RequiringFinancial Services

Livestock distribution

Purchase of units

Water supply systems

Transportation of produce

Establishment of livestock related microenterprises

Factors CausingPoor Outreach in Rural Areas

Increased transaction costs

The lack of titled physical collateral

Financial products that are not tailored to local circumstances or to client needs

Poor understanding of the local demand

Financial institutions’ failure to adequately assess overall financial risk

Failure to understand and incorporate the priorities, choices and views of livestock and dairy farmers

Credit Delivery

Smallholder livestock and dairy farmers with crossbred cows have higher needs

Borrowers have different needs in different locations

Must make an accurate assessment of farmers’ liquidity position

Functioning and sustainable credit delivery systems are required

Take into account market participation and savings mobilization

Subsidized credit programs have led to misallocation of resources

Previous and Current Channels of Rural Investments in Uganda

Functioning Markets andMarket Linkages

Products that have unpredictable or volatile markets cannot sustain the demand for financial services. When milk yields are high, milk prices often crash and negatively affect dairy producers’ ability to repay loans.

When producers and traders are restricted from accessing markets for their commodities because of disease outbreaks, it negatively affects their ability to borrow or repay.

Market linkages, when well functioning, can improve demand for financial services in that margins are predictable and recovery of credit is easier.

Types of RegulatedFinancial Service Providers

Commercial banks

Development banks

Agricultural banks

Micro deposit-taking institutions (MDI)

Government

Microfinance institutions (MFIs)

Building societies

Credit cooperatives (SACCOS).

Types of Non-RegulatedFinancial Service Providers

In Uganda, agricultural lending by regulated financial institutions increased by 10% in 2012

Commercial Banks: (94% lending to agriculture) Centenary Rural Development Bank DFCU Stanbic

Microfinance and credit institutions: (6%) SACCO’s Uganda Central Co-operative Financial Services LTD

(UCCFS)

Current Opportunities in Agricultural Lending in Uganda

Development partners: Abi-trust Africa Enterprise Challenge Fund (AECF)

Equity Funds: Africa Agriculture and Trade Investment Fund (AATIF) Agri-Vie Agribusiness Fund Annona Sustainable Investment Fund Voxtra East Africa Agribusiness Fund

Guarantee Funds: Agricultural Credit Facility Agricultural Loan Guarantee Company (ALGC) - Abi

Trust

Current Opportunities in Agricultural Lending in Uganda

Uganda Financial ServicesAccess Strand

Where Ugandans Borrow

Financial Products

Financial products— must have at a minimum design features

Working capital loans—livestock farmers may borrow for feed, labor or transport

Term finance—these loans are longer term, normally repaid over a period of several years

Leasing—the borrower receives a loan as the productive asset itself

Cash Management andInsurance Products

Overdrafts

Factoring

Insurance

Credit in kind

Financial literacy

Key Points to Note

The use of financial services—is more efficient when the structure of the loan term is tailored to meet the needs of livestock producers, processors, traders, etc.

Loan duration and repayment—conditions should be related to the size of the loan, the nature of the activity to be financed, the cash flow pattern it generates, and the risks involved.

Focus should be given on saving mobilization—charging lending interest rates on a market basis and financial sustainability of the lending institutions.

The effectiveness of the delivery—of financial services to livestock producers and their enterprises also depends on the legal and regulatory environment in which the finance providers operate.

Improved integration—in the value chain improves access to finance. Modern value chains require traceability meaning farmers and processors working closer together. An integrated value chain enables banks to develop value chain financing (VCF)

Thank you!