Embrace priority sector lending to enhance financing of the agric sector

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Agriculture employs over 72% of the Rwandan population, but banks are reluctant to fund the sector.

Lack of funding is one of the main challenges faced by Rwanda’s agriculture sector. Though the sector employs over 72 per cent of the local population, banks have shunned it arguing that it is risky, a situation that has affected its growth and left its huge potential largely unexploited.

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Dr Jaya Shukla

However, this financial challenge could be addressed if government and the financial sector embraced priority sector lending approach. This approach is an effective tool in achieving developmental goals of an economy whereby government gives priority to a particular sector(s) to acquire funding loans at low interest rates. Therefore, under priority sector lending banks give priority to particular sectors when giving loans.

By policy, certain percentage of loans are allocated to priority sectors.

Targets are given to banks in terms of priority sector lending. Performance of banks is also judged based on loan performance for priority sectors.

In developing countries, priority sectors could include agriculture sector, small scale industries, cottage sector, handicrafts, entrepreneurship projects, exports sector, infrastructure projects, low-cost housing, and other areas based on developmental goals of economy.

Rwanda being developing country has to achieve developmental goals, including improving agriculture and related sectors as a part of its inclusive growth strategy.

The country’s agriculture sector has high potential and is one of the top three contributors to Rwanda’s GDP and exports growth, but a lot of this potential is unexplored. The sector has a high percentage of smallholder farmers that has left it largely underdeveloped.

This can also be attributed to challenges like small farm size, low productivity, dependence on seasonal rains, lack of required infrastructure, and unskilled manpower. The smallholder farmers need to access finance to enhance their potential and contribution toward national development.

In addition, within the local agriculture sector, there are some potential unexplored projects that can contribute towards rural development. Initiatives like increased use of greenhouses, drip irrigation, as well as land conservation, watershed projects, and intensification of crop cultivation and animal husbandry are not fully explored. Other areas are building the technical and organisational capacity of farmers, promoting commodity chains and agribusiness.

The major source of finance to agriculture in Rwanda include Saving and Credit Co-operatives (SACCOs), micro-finance banks, co-operatives, commercial and development banks. Of these, SACCOs are the main source of finance for rural agriculture sector, other sources provide only small portion of loans to agriculture, especially smallholder farmers.

Financial services are also unevenly distributed in the country, and rural areas, in particular, are still underserved.

Why priority sector lending

Instituting a priority sector lending policy can help in solving financial need of agricultural sector development in Rwanda.

So, there is need for priority sector lending policy to ensure commercial banks and development banks lend to farmers as a part of inclusive growth strategy.

Major elements of priority sector lending in banks should be provision of certain percentage of their loans to agriculture sector and other priority sectors; opening of rural branches or hard-to-reach and remote areas in the country; while loans to agriculture should be subsidised and at low interest rate.

Loans could be divided into short-term, medium-term and long-term. Under such an arrangement, SACCOs could cater for short-term loans, commercial banks for medium-term and agriculture development banks for long-term loans.

Historical success

This model of priority sector lending was adopted by India as a part of agriculture development and financing strategy in 1970s and has been very successful in helping growth and modernisation of rural economy.

Challenges

Based on India’s experience, priority sector lending was one of the major reasons for growth of non-performing loans among commercial banks in India. So, there is need to ensure proper monitoring and recovery of loans for the priority sector lending strategy to be successfully implemented in Rwanda.

The writer is an Associate Co-chair Department of Agriculture and Resource Economics at Jomo Kenyatta University of Agriculture and Technology Kigali Campus.