Dairy sector transformation: Can SACCOs fill the gap left by commercial banks?


The Uganda dairy sector has experienced exponential growth in the last few years. The financial sector is missing in action it seems but Joseph Kiirya also notices a few hopeful developments. 

Joseph Kiirya is is investment advisor in Uganda with SNV's TIDE project's (funded by the Netherlands Embassy in Uganda).

Milk prices that Ugandan farmers receive have significanly increased from UGX600 per litre (15 euro cents) in 2016 to UGX850 per litre in 2018 (20 euro cents). This has encouraged farmers to invest and increase production at an unprecedented level, with many recording a doubling of milk sales within the last two years alone. In addition to conducive prices, a well-functioning input market, access to technical knowledge and availability of subsidies have had a catalytic effect. As a result, some of the top farmers in Uganda now have production systems that rival leading dairy farms in Kenya which were long regarded as a benchmark for the region.

As a result, Ugandan dairy exports have grown exponentially - increasing in value from €26 million in 2014 to €115 million in 2017. This currently puts the sector the third, right after coffee and tea in exports value. But to sustain this growth and make investments also possible for the thousands of dairy farmers on the cusp of commercialisation, the financial sector needs to up its game.

The financial sector is missing in action 

Most of the milk for export is produced in Southwestern Uganda. The sector in the region is characterised by fairly large landholdings and has two dry seasons. Most farms in the region have a source of water (valley dams) to bridge these seasons, but to increase the reliability of production, the water needs to be distributed within the farm - instead of ‘taking cows to the water’ to the ‘water need to be brought to the cows', as every kilometre that a lactating cow needs to walk reduces their milk production. Similarly, farmers need to invest in ensuring the availability of feed in the dry seasons, either by making hay, silage or improved pasture management. Over the last three years, hundreds of farmers in the region have made investments - on average UGX50 – 100 million (12 to 24 thousand euro) per farm!

At the moment, commercial banks are slow to react to this dynamism. The financial products that are available reflect a lack of understanding of farmer's needs and realities in the sector. Dairy farming also is still seen as a high risk sector and banks demand big collatorals for loans, such as land titles, car log books, farm machinery like tractors. In addition, financial decision makers do not understand the dairy sector: Directors tend to far removed from the field and even loan officers in local branches tend have a background in economics with limited knowledge of the agriculture sector.

Local financial institutions, i.e. SACCOs (Savings And Credit Co-Operative) are filling the gap. They are flexible on security arrangements, have a good understanding of the farming challenges and are willing to invest time and resources to increase their local presence. Their loan officers are based at the village level and have a close link with these communities. Loans from SACCOs do present another big hurdle: Their interest rates are very high (often 30 – 48 % per annum). These rates make it impossible for farmers to service loans for long-term investment like water, that have a pay-back period of more than 10 years.

Hope on the horizon

A possible solution is looming: The Agricultural Credit Facility from the Bank of Uganda has been specifically set up to support investments in the agriculture sector. It aim to provide medium and long term loans to agri-businesses and farmers through financial institutions. The interest rate to the borrower is set at a maximum of 10% per annum. The only impediment is that the facility is only open to commercial banks which continue to be hesitant to make use it, due to their risk aversion. SACCOs cannot access the facility directly. By opening the facility up to SACCOs, dairy farming could attract the necessary investments to contribute to the continued  transformation of the Ugandan agricultural sector. Alternatively, commercial banks could be tasked to manage the process of interest buy down, with the SACCOs under an agency arrangement. This would also provide SACCOs with access to additional credit.

Of course SACCO have their challenges, but no one should doubt their contribution to the microfinance movement. Many SACCOs are actually giving commercial banks a run for their money and are taking an increasing share of loans in rural areas. They have a higher risk appetite and could be the next solution to agricultural finance in the near future.

Joseph Kiirya

Investment Advisor