Shifting to commercial farming; the role of credit

Today commercial farming is gradually picking up in most developing countries. Unlike subsistence farming, the expectations to generate enough income and revenue from farm sales is high in commercial farming.

However, this comes at the expense of high investments in the farming business. In farming as a business, there is need for capital: both starting and working capital. This is where most farmers are challenged since it is difficult to acquire enough money given that most farmers are poor. Thank goodness, there are several credit facilities from financial institutions and farmer savings groups that can help boost production.

Why farmers need credit in agriculture

The need for credit facility could be vital when acquiring farming machinery and equipment such as small walking tractors, sprayers, weeders, hoes, rakes, spades, pangas, wheelbarrows etc. Most importantly, credit is needed for the purchase of agricultural inputs such as seeds, fertilizers, and payment of labor. The amount of credit needed depends on the size of the farming operation. These are the most important ones relevant even to subsistence farming.

As it is easier to access agricultural credits, the Bank of Uganda established the Agricultural Credit Fund which is accessed through several financial institutions in Uganda. There are short-term loans to meet operating expenses and these may be for 3 to 12 months depending on the crop cycle. And payments can be made in lump sum or phases. There are also long-term loans where the farmers take a loan and pay within 5 years such as a loan to buy a tractor. The credit facilities are given at low-interest rates affordable to most farmers. In addition, the credit facilities have convenient payment choices such as paying back a loan at the end of the season after a sale of the produce.

Furthermore, the loan can be disbursed in phases which is very convenient for the bank and the farmer. In phase disbursement, the loan amount is not given at once, in full, but given in amounts equivalent to the activity taking place. For instance when a farmer applies for a loan of 5 million UGX (about 1,330 USD), he/she is given 2 million UGX (about 532 USD) for land preparation at some point, then after sometime, the loan officer monitors and checks on the work, and disburses another 2 million UGX (about 532 USD) for weeding, sowing, pests and diseases control, etc. The balance is then disbursed for harvesting and post-harvest activities. This is the best option for most crop farmers and it is recommended to apply for the loans before the beginning of the seasons so that one is ready to perform agricultural activity timely for good yields.

However, to obtain loans from banks, the farmers have to meet some conditions which include;

  • Having security such as land title, farm machinery, stock inventories
  • Having guarantors
  • Having been in farming operations for more than 6 months or even more to demonstrate your farming experience
  • Having good credit payments records
  • Credit analysis and evaluation

Although agricultural credits are very good for farmers, there are dos and don’ts when accessing them and farmers ought to know these to avoid being credit defaulters. Obtaining farming credits from banks or any other financial institutions without paying back in the period stated yields a penalty on the side of the farmers. Unfortunately, most smallholder resource-poor farmers are prone to becoming loan defaulters, especially in crop husbandry.

Several factors make farmers not to pay back these loans. Before a farmer opts for agricultural loans, there are self-checks he/she needs to do. For instance, does the farmer qualify with the 5Cs of credit/lending that includes collateral, character, capital, condition and capacity to pay back? Does the farmer have the land title (proof of ownership) or farm machinery that can be used as security? The most common securities in farming are land, farming machinery and equipment, stock inventories such as feed, animals and the produce. However, once a farmer defaults in the credit payments, often times the security placed for the credit is confiscated and if it is the land, the farming business is prone to total collapse. Therefore before accessing credits, farmers should do a self-evaluation to assess their capacity to pay back arrears to ensure a smooth running of farms. Nevertheless, agricultural credits are vital because it is difficult to obtain finances from individuals through borrowing.

What farmers should do to avoid being credit defaulters?

Smallholder farmers should not divert the credit facilities into misappropriation such as school fees payments. They should ensure that the credit works for its designated purpose.

Credit facilities should not be taken in amounts more than what is required by the farmer. In most cases, farmers tend to exaggerate the credit amount needed so that they can use the extra for other activities and so they are often not honest to the credit officers.

Farm diversification is important so that if credit is taken for a crop and when the crop fails, the animal section of the farm can easily pay back the loan. For instance, growing sesame on one, then also groundnuts on another plot, or maize in another and then sales of all these products. This is to take into account crop failure so that when one fails, the other smoothly pays back the loan.

The farmers should be part of farmers groups which have collective marketing of the products such that immediately after harvest, the products are sold. In addition, identifying a potential market is important so that perishable products are not lost but sold as soon as possible. In doing so, the loan could easily be paid without stress.

Last but not least, it is important to adopt good agricultural practice through access of information from local extension agents, internet, radios and television. Lack of agricultural knowledge is one major problem affecting agricultural production. Therefore in viewing farming as a business, technical skills with modern agricultural practices should be accessed and implemented, coupled with business principles so that farming is a success.