The East Africa Exchange has delayed setting up operations in Uganda due to the country’s recent General Election. This delay will lock out smallholder farmers from access to structured agricultural and financial markets.
The regional commodity exchange had planned to extend its operations to Uganda at the same time as Kenya as it seeks to consolidate its operations in the East African Community.
The Ugandan commodity value chain is driven by traders and village agents who are known to reduce farmers’ profit margins to increase their own.
The Kampala middlemen transport maize and sell it at $0.21 per kg, while the same maize is traded at $0.32 per kg.
To reverse this trend, Ugandan authorities and the Rwanda-based EAX officials started negotiations but when Uganda went into elections, the talks were shelved.
“We should resume the negotiations with Ugandan authorities soon because the election period is over,” said Alfah Kadri, EAX manager.
EAX manages warehouses, warehouse receipt systems, grain cleaning and collateral management services and also deploys a Nasdaq electronic trading platform. Ugandan authorities are pushing for a partnership where the two parties would share revenues.
Uganda is the only country of the original Northern Corridor states where EAX has not set up its operations.
Last month, EAX opened four warehouses in Eldoret in Kenya.
The EAX enables farmers to benefit from a financing scheme, based on a collateral management model, where full protection is provided for financial institutions who in turn lend on favourable terms, including accepting the farmer’s grain as the sole collateral for advancing loans.
In Rwanda, where the exchange started operations in 2015, lenders’ appetite for the warehouse receipt system has been growing, boosted by futures contracts — a tool used on the commodity market to offset risk exposure.
As a result, this year, at least $100 million is expected from six lenders to finance 50,000 futures contracts, up from the $72 million in 2015 — a development that has eased funding for the agriculture sector.
The lenders have also expanded their loan books to fund the downstream agricultural value chain — from production to marketing.
For instance, KCB Rwanda has $10 million for agri-lending, according to Maurice Toroitich, its managing director.
Equity Bank Rwanda has also set aside a Rwf30 billion ($39 million) revolving fund to finance the entire value chain and is considering financing farmers in Kenya’s Rift Valley region, said James Mwangi CEO of Equity Bank Group.
Other banks with agri-lending funds are Ecobank, Urwego Opportunity Bank, Banque Populaire du Rwanda, AB Bank Rwanda and Guaranty Trust Bank Rwanda.
Despite this trend analysts say the money allocated to this sector is still low, exposing households to food insecurity and poverty.
Rwanda’s State Minister for Agriculture Tony Nsanganira said lenders are still sceptical about financing the agriculture sector.
He suggested that loans should be structured to meet the demands of the sector.
In Rwanda, only 1.9 per cent of the total loans advanced in the year ending 2015 went to the agriculture sector.
The sector also has the highest loan application rejection rate at 49 per cent, according to the central bank.
When smallholder farmers go to borrow from lenders, especially from microfinance institutions, they are charged 40 per cent interest on loans.
EAX said its interventions will stimulate lending as it mitigates risks.
“We are determined to change this trend by managing the risks of the lender as well as ensuring the farmers are less exposed and more protected,” said Dr Alfah.
The growth of Rwanda’s agriculture sector has stagnated at five per cent.
The EAX is a subsidiary of Africa Exchange Holdings Ltd, which comprises Heirs Holdings, Berggruen Holdings, 50 Ventures, and Ngali Holdings — a local investment company in Rwanda.