A change by Rwandan banks, to support farming though there still remains a big issue

 By Jean Baptiste Ndabananiye

Different Rwandan farmers and Imbaraga Farmers’ Organization- a national nongovernmental organization of Rwandan farmers pointed out banks’ reluctance to lend money to Rwandan farmers around 3 years ago. However, this organization now says that Rwandan banks have performed a change but that there still persists a big issue of high interest rates.

Potien Niyonambaza is a professional farmer in Nyabitare Village, Munyana Cell in Minazi Sector in Gakenke District, Rwanda’s Northern Province. More than two years ago, he said that no farmer still standing at the embryonic stage could then actually obtain a loan from a bank, if s/he said that they were going to invest it in agriculture. “While I am conversing with youth or my peers, they tell me ‘You’re farming because you possess land to cultivate.”

“What the Government ought to do is to change some loan conditions; for instance, let them say ‘farming loans will start being repaid within 6 months when a farmer has begun harvesting, and let the banks not charge interest for these 6 months. You know that the Government provides some young people having completed technical and vocational education with a tool kit [such as sewing machines] meant for helping them to start small businesses relating to knowledge and skills they’ve acquired.”

Niyonambaza said that a similar approach should be introduced in the farming field. “I don’t suggest that they [the Government] should stop this [the support for technical and vocational education graduates], but they should also earmark a certain amount of money to support farmers. For example, they can say ‘Let’s allocate this amount,  for farmers to procure loans with a small interest.’

Though we persevere in working with banks, we work with banks as an intense cross we have to bear on our backs. When you design a farming project and that you submit it to a bank, they tell you ‘Change the project from farming to trade, so that we can grant you the loan. For instance, request for a loan to establish a shop. What profitability does farming produce, how will you explain that this farming project will repay the loan?’”

He added that he eventually got a loan, but with difficulty. However, Niyonambaza said that he never failed to repay different loans for which he asked. He explained a tactic that he employed for him not to find himself in loan arrears especially at the start of his farming business when the latter one had not grown yet. “I reserved a certain portion which I would pay back while my crops had not ripened yet. For example, when I was given a loan of a million Rwandan francs ([RWF] around $740 today), I could set around 300 000 RWF ($222) apart for me to spend them on repaying the loan for the  first 3 months.

I have always repaid my loans without any arrears, but you understand that this practice then actually caused me a certain loss, because this amount which I kept inactive  generated no profit to me while the bank had given it for me to exploit it fully.”

He moved that financial institutions should develop confidence in the farming sphere, since according to him, this sector is vital for every nation. “Banks should trust the farming sector, since all developed countries owe the development to their developed farming because all commodities produced in factories come from agriculture. If you want to raise strong industries, you have to first advance farming.

Almost all things, 99%, which are used including clothes and even that notebook in which you’re writing emanate from farming. Farming represents the start and primary industry on which all others rest, that’s why I suggest that the financial institutions treat it with special consideration.” The fact that agriculture constitutes an unparalleled sector and foundation of all is more elucidated by this article.

Jean de Dieu Mwiseneza is a Burera district resident who is also farmer and told me that he had also attempted to obtain a bank loan but in vain. “In 2017 I approached a bank for a loan to inject into farming. They requested me to fill high conditions most of which were impossible for me to meet;  I realized I realized it was their tactic to wear me down, causing me to eventually abandon the loan request. I consequently relinquished it. There are other people- I know- who have encountered the same issue in some other banks. For example, there is a guy  who has asked for a loan to invest it in a banana plantation here in our locality, but they have refused it to him.”

Mwiseneza thought that at least cooperatives were easily furnished with bank loans. Nevertheless, Charles Uwamungu- the then President of Irish Potato Farmers Union in Musanze district also in the North- explained that getting loans constituted an intensely heavy burden. “It is extremely harsh for a farmer to secure a bank loan, since banks are reluctant, advancing ‘If we give farmers our cash, we will lose it’.

There are certain banks- KCB [Kenyan Commercial Bank], Equity Bank and Urwego Opportunity which -that are the only banks which try, but they also provide loans for farmers in cooperatives or groups, yet still it is little cash they give them. They have a ceiling to which they are confined, they give 500 000 RWF, 600 000RWF, they don’t exceed 700 000RWF per person [ in a cooperative or group]; they can’t lend you [a big loan of] 3 000 000RWF.”

All the farmers suggested special interventions to reinforce this sector.  Jean Paul Munayakazi,  Imbaraga’s Legal Representative, also defended the suggestion of strategies special for the agriculture field. He highlighted that this problem would be solved by a financial institution uniquely designed for farmers. He added that such a bank would give special attention to farmers who are still new in the sector, giving them affordable loans which don’t go beyond the annual interest of 6%. “It could be better, if there were a special fund which provides loans for farmers, like in other countries.

Other countries possess  farmer banks specific for farmers. As the Government has instituted Umwarimu SACCO and other various banks assigned to improve the living conditions of certain categories of people, the government should also think about how the farming sector should have its own bank. A bank currently close to citizens is SACCO, in our recent study we have observed that in some places the interest rates ranges between 24% and 32%. Commercial banks give loans on the interest rates lying between 18% and 24%.”

He further stated that the organization had already discussed this issue with the Ministry of Agriculture and Animal Resources [MINAGRI/French acronym]. He added that the organization had formulated to the ministry the wish to create the farmers a bank and that this ministry had saluted it. The MINAGRI had additionally told Imbaraga that there were reserachers who had recommended this idea too. Munyakazi then trusted that the wish would be implemented, saying that the Government cares considerably about agriculture.

A change introduced by banks, despite the high interest rate

Munyakazi now says that banks have conducted a “positive” change. “For example banks have now hired employees especially in charge of agriculture. Banks like Bank of Kigali, Equity Bank and Banque Populaire have these staff members responsible for this sector.

This happened after you talked to us the last time. It is a positive and great thing that the banks have accomplished. For it to materialize, we performed advocacy with the government through its agencies- the MINAGRI and RAB[Rwanda Agriculture Board] and we commend their intervention.”

He instead reiterated the problem of high interest, emphasizing that the current rate cannot allow farmers to progress significantly. “For example, if you secure a five-year loan of 5 000 000 RWF from a SACCO at 22% interest rate, you will pay the interest worth 6 000 000RWF. What will have a farmer done, which will have generated all this amount? They should have at least obtained the profit of 12, 000, 000 RWF for them to be able to repay the amount.

The interest rate for farmers ought not to exceed one digit. It should at most stand at 9%, it can even attract a lot of investors. But now a person applies for a loan, claiming that they will invest it in farming, only to divert the funds into other ventures like restaurants, shops, and so on. Nevertheless, it is agriculture that feeds every nation, and a country which is self-sufficient in farming enjoys true independence; agricultural self-sufficiency represents the cornerstone of independence.”

Notwithstanding, Munyakazi adds that he also agrees that banks cannot reduce their interest rate to one digit. It is for this reason that he reiterates a special financial institution for the farming sector. “Banks are traders, so they can’t decrease their interest rates to 9%. A fund exclusively for farmers stands as the only solution to the problem. As I said it to you last, we are discussing it with the government and we believe that this fund will also be established though I cannot exactly specify time when it will exist.”

Special financial institutions for the farming field in the region

The International Monetary Fund says that agricultural development banks were created across the world, to extend credit and other financial services to customers not considered creditworthy by commercial banks. Most of countries around Rwanda also have financial establishments that have been  created to exclusively finance their agriculture.

Uganda

The Government of Uganda- in partnership with Commercial Banks, Uganda Development Bank Ltd (UDBL), Micro Deposit Taking Institutions (MDIs) and Credit Institutions all referred to as Participating Financial Institutions- founded the Agricultural Credit Facility (ACF) in 2009.

The ACF aims to solve challenges related to financing in the agricultural sector, like high-interest rates and limited access to credit, particularly for long-term investments. It seeks to promote agricultural modernization by providing financing to farmers and agribusinesses.

A document released by the African Development bank and prepared by the Bank of Uganda reads “Max loan amount ≤ UGX 2.1bn. (can go up to UGX 5bn on a case by case basis. Max loan period – 8 Yrs [years] & [and] minimum 6 months. Grain Trade 2 Yrs & max loan amount up to UGX 10BN per individual or company. Grace period – maximum of 3 years. Interest rate – max of 12% per annum & 15% for working capital for grain trade. Primary security is machinery & equipment.”

“What is Eligible under the ACF? Most activities along the agricultural value chain e.g acquisition of agricultural machinery & equipment ,post-harvest handling equipment, storage facilities ,agricultural inputs, irrigation facilities etc. Agro-procesing [processing] activities. BUT We don’t finance purchase of land , planting of trees & trading (apart from grain) and refinancing existing facilities.”

A March 18, 2024 article by the Uganda Investment Authority confirms some pieces of this information from the document published by the African Development Bank. It reads “The fund is accessed through Bank of Uganda-supervised financial institutions up to 2.1 billion shillings repayable in eight years (maximum), with a grace period of three years (maximum) and an interest rate of 12 percent per annum.” Yet there are sources that say that loan amounts for agricultural value chain can exceed 5 billion Ugandan Shillings.

A grace period in the context of loans means a specific time frame, after the loan is issued, during which the borrower is not required to perform payments or is allowed to delay payments. With this, the borrower doesn’t incur penalties, late fees, or default. This period can apply to both the principal amount and the interest.

 Tanzania

Tanzania Agricultural Development Bank Limited (TADB/Farmers Bank) was established in September 2012. Tanzania Farmers Bank says that it conducts financing of assets, projects, smallholder farmers,  and season financing. These different types of loans serve various purposes.

For instance, this bank clarifies that the purpose of asset financing is to facilitate agriculture mechanization by buying agricultural assets like tractors, planters, harvesters, machinery, post-harvesting technologies and fishing boats. This type of loan targets people who have formed a group like cooperatives, unions and SMEs [small and medium-sized enterprises]. The bank adds that the loan amount does not go beyond 75% of the cost of an asset to be acquired and that the payment duration corresponds to one year.

The purpose of smallholder farmer financing is to encourage other banks to improve access to lending smallholder farmers who face challenges getting finance to adopt modern farming techniques and create employment, promote food security and transform operations from subsistence to commercial farming.

This bank’s interest rates vary, depending of a category of a client. For example, it says that it provides smallholder farmers, livestock keepers and fisheries with loans with interest rate ranging between 8%  and 12% per annum.  Medium and large scale farmers get loans with interest rates lying between 13% and  15%. The loan repayment duration is 1 to 3 years.

 Burundi and the Democratic Republic of Congo/DRC

Burundian investors founded Banque Communautaire et Agricole du Burundi on 21 April 2020, to support Burundi’s farmers, according to this bank’s website. Yet, Life In Humanity has not managed to find other pieces of reliable information on this bank’s relevant details like those pertaining to its interest rates.

Radio Okapi released a story on 29 September 2021 about the DRC’s intention to establish a bank to fund the agriculture sector. This radio reported that the former Prime Minister of the Democratic Republic of Congo declared the imminent creation of a national development bank to finance and make agriculture the top priority in the country. Jean Michel Sama Lukonde  stated it on 27^th September 2021, according to the radio. Nevertheless, Life In Humanity has not been able to find any updates on this point either.

Agriculture banks and funds across the world

Agriculture banks and funds exist in various nations, chiefly in the developed world where they play a crucial role in supporting farmers, agribusinesses, and rural communities by providing financing, investment, and advisory services.

Some notable agriculture financing institutions include Rabobank in the Netherlands, Farm Credit System [FCS] in the United States, AgriBank belonging to FCS,  Agricultural Bank of China also called AgBank, Landwirtschaftliche Rentenbank in Germany, Canadian Agricultural Loans Act (CALA) Program in Canada, AgriBank PLC and AgriFinance in the UK, Australian Government – Regional Investment Corporation (RIC), and the Russian Agricultural Bank.

A few details on these banks

Rabobank says that it started as a movement of cooperative banks founded by Dutch farmers. “More than a century later, food and agriculture (F&A) remains our core international business. We envision a food system that meets rising demand for affordable, nutritious food.”

Investopedia says tha the FCS forms a nationwide lending network specializing in serving the agricultural community. “It is made up of cooperative banks and associations who provide credit to individuals and businesses throughout the United States. The FCS assists the rural community and organizations of all types and sizes, ranging from small family farms to corporations with global operations.”

The Agricultural Bank of China features among the top 4 major banks both in the country and the globe, as stated by Investopedia. “By asset size, the largest four banks in the world are Chinese, according to the 2023 annual rankings by S&P Global Market Intelligence. They include the Industrial & Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China, and the Bank of China, holding more than $19.87 trillion in combined assets.”

Landwirtschaftliche Rentenbank says” During the course of the German ‘peasant liberation’ in the first half of the 19th century, state mortgage banks called ‘Rentenbanks’ were established in the western provinces of Prussia and in many other German states.” This bank adds that  these banks enabled farmers, who had previously not been considered creditworthy, to take out mortgages on the land which they farmed.

The bank further states “In October 1923, Deutsche Rentenbank was founded as a central bank to combat hyperinflation. The bank issued the Rentenmark as a currency which was, by law, covered by mortgages on agricultural, commercial and industrial real estate. This meant that the money supply was limited and therefore the value of the currency remained stable.

In 1925, Deutsche Rentenbank-Kreditanstalt (RKA) emerged from Deutsche Rentenbank. It operated as a key funding institute for agriculture, where a greater demand for funding was the dominant concern. That’s because the agricultural enterprises had often found it difficult to pay back the mortgages they had taken out when the Rentenmark was created. RKA’s revival failed to take effect after World War II and Landwirtschaftliche Rentenbank was established instead.”

The CALA Program constitutes a loan guarantee program meant for raising the availability of loans to farmers and agricultural co-operatives. “Farmers can use these loans to establish, improve, and develop farms, while agricultural co-operatives may also access loans to process, distribute, or market the products of farming,” the CALA says.

Pan Finance says taht the AgriBank chartered in 2012 acquired the necessary passporting rights to render its services specifically designed for the agricultural and the renewable energy industries.“AgriFinance Ltd is a sister company registered in the UK and supervised by the Financial Conduct Authority. It was also established in 2012 and its main aim is to handle the UK lending side of the business within the agricultural and the renewable energy industries.”

Australian Government – Regional Investment Corporation says that it offers loans to farm businesses to strengthen Australian agriculture and build thriving regional communities.

Investopedia in its July 29, 2023 article says “The 5 Biggest Russian Banks. After these two giants [top two banks, Sberbank (SBER) and VTB (VTBR), which together account for more than half of the Russian banking industry’s assets], the next three largest banks by assets are Gazprombank, Promsvyazbank which was nationalized in 2018 and turned into a lender to the Russian defense industry, and the fully state-owned Russian Agricultural Bank established in 2000.”