Most farmers cite the high interest rates as reason for not taking up the loans.
Despite several interventions in agricultural financing by governments and the private sector, access to credit by smallholder farmers has remained low.
According to Gerald Otim, co-founder of Ensibuko, a financial technology organisation that is modernising infrastructure for microfinance institutions, the biggest constraint is the high interest rates by commercial banks and the long processing period for loans.
This makes savings and credit co-operatives (Saccos) more attractive.
Mr Otim suggests that to improve access to financing, banks should turn Saccos into primary clients to whom they lend at reduced interest rates.
A 2014 report on unlocking the dilemma of financing smallholder farmers in Uganda notes that out of the 359,000 farmers that accessed credit for agricultural purposes in the previous five years, only 37,000 received it from commercial banks.
Most of the loans were either through semi-informal and informal institutions like Saccos.
Most farmers cited the high rates as reason for not taking up the loans from formal institutions.
Risk factor
The executive director of DFCU bank William Sekabembe said most commercial banks in Uganda prefer lending to groups rather than individuals because it becomes easier to monitor the repayment schedule.
“When you see the lending rates high it’s because of the high risk involved in giving out these loans to small holder farmers,” he said.
A number of government projects have been put in place to help small scale farmers.
For example the National Agricultural Advisory Services programme implemented in 2001 with the aim of increasing access to credit and farm inputs has suffered setbacks as most of the funds were misappropriated, prompting government to review the programme in 2013.
The extension and provision of agricultural credit finance services were separated.