Land laws block private equity flow into region’s agribusiness

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The East African | 14 december 2013
A farmer uses tractor to prepare land ahead of a planting season.

Land laws block private equity flow into region’s agribusiness

By DICTA ASIIMWE, Special Correspondent

Differing land ownership laws in East Africa are hurting the growth of agribusiness as the sector is unable to attract needed private equity funds.

This is the general assessment that entrepreneurs, farmers and private equity firm executives made about the state of region’s agribusiness during the East African Investment Summit in Kampala last week.

Duncan Onyango, East Africa director of the Nairobi-based equity fund Acumen, cited the law governing in Kenya as one of the challenges hindering equity funding to agribusiness.

Kenya’s new Constitution bars foreigners from owning land, which forces equity firms with funds sourced from outside Kenya to offer the money as loans instead of equity.

In Uganda, the problems range from multiple ownership of the same land because of subdivision into pieces among smallholder farmers.

Svend Kaare Jensen, chief executive officer at Agribusiness Initiative, said such groups lack land titles and business practices that can attract equity into the sector.

Agriculture needs equity investments since loans offered by financial institutions are often too expensive for the average farmer, while the different government initiatives have often failed to reduce the huge financing gap.

Uganda’s former minister for agriculture Victoria Sekitoleko said the cheapest agriculture loan one can get from a financial institution is at an interest rate of 10 per cent per annum, when the highest yield from this sector is 9 per cent.

Furthermore, the 10 per cent interest can only be accessed from the Uganda Development Bank, with private commercial banks offering loans at higher rates. DFCU bank, for instance, offers agribusiness loans at between 12 and 16 per cent.

The cost of loans has over the past 50 years forced Uganda to launch different agriculture financing schemes in the hope that farmers can get affordable capital.

But most of these government financing schemes have largely been ineffective as over the years. The schemes include the co-operative credit scheme of 1961, the farmers’ loan scheme of 1964, the rural farmers’ scheme of 1988, which was distributed through Uganda Commercial Bank and the 1995 [start-up capital] Entandikwa scheme.

Recent schemes include the National Agricultural Advisory Services where farmers got funding to buy inputs, the $35.3 million Agricultural Credit Facility (ACF), which the government launched in 2009 and financed until the end of the past financial year.

The ACF attracted criticism from different quarters including the Agriculture Finance Yearbook, which established that banks had continued to lend this money at interest rates of 20 per cent, way above the yield of the sector.

Agribusinesses in Uganda are also too small and informal to absorb the available equity funds. For example, Acumen has over the past six years had a budget of $5 million per year, which it has not been able to invest.

This year, Acumen will only invest $1.2 million of its $5 million budget. Mr Onyango blames this low absorption capacity on informality of businesses in Uganda, Rwanda and Tanzania — most operate without documentation, and have no proper management structure.

In Rwanda, Acumen has spent 18 months trying to close a deal that should have been done in six months, because documents were not readily available.

Additional reporting by Isaac Khisa
Original source: East African
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