The agricultural sector has been identified as key enabler of economic growth and development in Africa. It is the largest employer in sub-Saharan Africa. Governments, Non-Government Organizations (NGOs), multi-lateral organizations, and companies have made concerted efforts to invest in the sector to drive economic growth, profitability and improved standards of living. Extension of credit to the agricultural sector would contribute towards the growth in the industry.
Financing agriculture is considered riskier than other sectors in the economy, which has resulted in several institutions avoiding the sector or investing reservedly. Agricultural clients are perceived to be at higher risk of default because of the uncertainty inherent in the sector. Studies have been done on general risks affecting agriculture ranging from systemic to idiosyncratic. This study was a qualitative research focused on credit risk because it is a key indicator financial institutions consider before disbursing loans. It explored how credit risk in the agricultural sector is managed and evaluated, the sufficiency of the current tools, processes and systems, and the innovative methods being implemented by financial institutions to resolve the challenge of credit risk.
The survey was carried out of selected banking and non banking financial institutions with major agricultural loan portfolios in Kampala, Uganda. The results show that financial institutions employ conventional risk models and risk management measures in agricultural finance, although a few are innovating with different approaches to managing agricultural risk such as value chain financing and financial literacy training for borrowers. Such innovative solutions were found to be effective in managing risk, thereby enhancing extension of credit to agricultural sector.
The study recommends adoption of a holistic approach to measurement and mitigation of risk in the agricultural sector. Responsibility for managing credit risk cannot be borne solely by the financial institutions. An integrated model of measuring and mitigating risk from the production to the market stage, with financial intermediaries as key enablers of the process, would be successful and eventually lead to expansion of credit to the agricultural sector.