UGANDA COOPERATIVE ALLIANCE UCA LTD The UCA Integrated

UGANDA COOPERATIVE ALLIANCE (UCA) LTD The UCA Integrated Model and Agriculture Finance Prepared by Mr. Leonard Msemakweli General Secretary, Uganda Co-operative Alliance P. O. Box 2215, Kampala; Tel. +257 772 591976 lmsemakweli@uca. co. ug ICA General Assembly – Cape Town, November 2013 1

Background � Uganda Co-operative Alliance (UCA) Ltd is a national umbrella body of all co-operatives in Uganda. It was formed and registered in 1961 and is owned by member co-operatives. Vision: A strong umbrella organization of prosperous Cooperatives with Empowered Members. Mission: To provide high quality support services to cooperators on a sustainable basis. Its mandates include the following: a) To carry out advocacy and representation of the Ugandan cooperatives b) To provide education and training at all levels of the cooperative movement and; c) To mobilise resources for the development of the coperative movement. 2

Background cont’d. . �In Uganda the change in government policy during the late 1980 s resulted in total collapse of the cooperatives and completely forgotten for about 5 years until UCA took initiative re-start them afresh in 1997. Sionce that time, the organisation has been involved in recostruction right from grass root to the national level and making sure that the impact of cooperatives in the economy and society is felt even more than before. �Specifically, UCA is involved in the following activities: i. Advocacy for the Uganda’s Co-operative movement ii. Mobilizing resources for the development of the Cooperative movement. 3

Background… Cont’d iii. Building the capacities of agriculture cooperatives so that they can in turn provide the services demanded by their members such as financial services, extension services, storage, market information, new technologies, processing and value addition and marketing. iv. Mobilizing and guiding communities to form nonagriculture co-operatives such as Financial Cooperatives, Housing, Electricity, Water, Handicrafts, Consumer and Transport. v. Conducting internal audit and supervision of cooperatives to ensure that they comply with the cooperative law, their by laws, operating policies, procedures and guidelines so that they remain safe, sound and sustainable institutions. vi. Integration of women and youth in cooperatives. 4

Background… Cont’d �Through these interventions, UCA has been able to halt and reverse the hitherto co-operative movement decline, rekindled public interest in the co-operative business model and managed to attract many players to support programmes in co-operatives in Uganda. �Among the most notable partners are Weefect, Canadian Cooperative Association, Norwegian Society For Development who have been with us since we embarked on this long journey. Since a few years ago, many others have come on board. �Even the Uganda Government which was initially opposed to the re-emergency of cooperatives has now come on board with a totally changed mind attitude. 5

Background… Cont’d �UCA has been able to carry out wide ranging reforms, design new models which are in tune with the new environment and implement them so that they are effectively used by the members for purposes of accessing services on a sustainable basis. �These have resulted in the creation of many cooperative institutions including community-based savings and credit co-operative societies (SACCOs), Primary Co-operative Societies (PCSs), Area Cooperative Enterprises (ACEs) and six enterprisespecific national unions. The six national unions include Grains, Horticulture, Dairy, Honey, Livestock and Fish Farmers Union. 6

2. 0 UCA’s Integrated Cooperative Model �Since the majority of our members are farmers, from the time UCA actively got involved in cooperative development it has been working to transform smallholder farmers from subsistence to commercial farmers using self-driven and selfdirected cooperatives. �Before embarking on that task, UCA was fully conscious that the farmers needed a minimum package of coordinated services for that transformation to happen. This package includes financial services, extension services, marketing and value addition services. �Over time we have also come to learn that in order to have successful agriculture cooperatives that fully benefit the farmers there has to be a strong link with financing institutions. 7

Int. Coop. Model Cont’d �This is why the strongest agriculture cooperatives to-date are found in South East Asia such as Korea and Japan. That link has been created through the “multipurpose” cooperative model in those countries. �Unfortunately, in Uganda our experience with the multipurpose model had not been successful at all when it was applied. Even during the hay days of our cooperative bank which was wound up in 1998, the financial link with the cooperative movement was not so strong because the bank did not really go down to the grass root. It only dealt with the big unions to provide trade finance to them, leaving the rest of the agriculture chain without financing. �Besides, at that time the Government had withdrawn most of its services following its reforms and obviously private banks were not interested in dealing with smallholder farmers. 8

Int. Coop. Model Cont’d �In spite of this, we at the UCA wanted to realize the country’s agriculture potential which had remained a mere dream for so long mainly because of the haphazard way in which services had been delivered to the smallholder farmers. �This is the kind of environment in which we found ourselves operating when we started. A very difficult environment and we believed we could fill these gaps using the cooperatives themselves which are owned by the members themselves because you decide what to do with them. �As far as the SACCOs are concerned, we did not have such institutions operating in the rural areas until after the 1990 s when the UCA decided to assist its members to establish them there. �The SACCOs we had before were those belonging to employees such as teachers and those employed in parastatal bodies but even these had collapsed. 9

Int. Coop. Model Cont’d �Their portifolio was mainly social loans such as school fees, meeting health fees at the clinic, etc. �These could not support agriculture. Our plan was to use the SACCOs to fill the financing vacuum and be the engine of all types of cooperatives including agriculture. Neither did we have cooperatives intensively involved in provision of extension services. Therefore, the aim of our integrated model was to have a system that was self-financing and a system that offered a good package to the members. Hence, the integrated model includes the following steps: i. Members of a community in a geographical area called a Parish form one cooperative for purposes of improving their farming. 10

Int. Coop. Model Cont’d ii. About 15 -30 such primary cooperatives in a larger geographical area known as a Sub-county form a secondary cooperative known as Area Cooperative Enterprise (ACE). iii. Individual members plus all the Primary Societies plus the ACE then form one SACCO which is shared by all the three categories as their financial institution. �The governance and management of the three different cooperatives is separate although they work very closely together to provide a full package of support services to their members. �The integrated model lies between the multipurpose model and a situation where the cooperatives do not have any link particularly at the grass root level. This is very common in Africa. In the integrated model, we have existence of SACCOs, Primary Societies and Area Cooperative Enterprises delivering services. 11

Int. Coop. Model Cont’d �In multipurpose cooperatives, all services, financial and nonfinancial are combined into one institution which has the same governance and management. This is quite complex and requires highly skilled people to manage which we did not have, at least not in Uganda, but still we wanted to do something. �It is a model which reflects the strong belief at the UCA that we need to integrate the cooperative structures in order to maximize their potential contribution to the development of the members. It is one thing having cooperatives in place and another thing putting those cooperatives to maximum advantage. 12

3. 0 3. 1 Roles of co-operatives involved in the Integrated Co-operative Model. Primary Co-operative Societies Guide their members in: i. Selecting enterprises to undertake (maximum of 3) based on certain factors such as the market, relative profitability etc. ii. Developing members seasonal production plans so that they move in harmony as they target a certain market. iii. Accessing farming inputs and other services such as extension services. iv. Accessing credit services from SACCOs v. First bulking of members’ produce after harvesting and linking with the Area Co-operative Enterprise 13

The Role of Cooperatives… Cont’d 3. 2 Saving and Credit Co-operative Societies (SACCOs) i. Accepting savings from all categories of members ii. Providing credit/loans to individuals and primary and secondary cooperatives iii. Safe depository iv. Financial literacy education 3. 3 Area Co-operative Enterprises (ACEs) i. Collects and disseminates market information ii. Collaborates with the primaries to guides members in the selection of 3 enterprises to focus on during production. iii. Stores members’ produce after it has been bulked and delivered by the primary co-operatives. It can also just keep the records of what is where. iv. Checks on quality of produce delivered by the members 14

The Role of Cooperatives… Cont’d Drying and storage and adding value to members produce where it is desirable and feasible. vi. Bulking of members produce and marketing on behalf of the members vii. Issuing stores receipts to the primary co-operatives members for their produce which they can use for accessing credit from SACCOs viii. Managing the produce stores (in most cases jointly with the SACCOs) �ACEs do their work, on the basis of a commission in terms of percentage of the sales price, which is agreed upon with the members well in advance. This serves as a motivation to the ACEs to get the highest market prices in marketing the members produce. v. 15

The Role of Cooperatives… Cont’d �Furthermore, unlike the traditional unions, ACEs are used by the members to market a whole range of commodities/ products such as grains, fish (from ponds), livestock, milk, horticultural products, apiary, and others in addition to the traditional export commodities i. e. coffee and cotton. However, a single ACE must specialize in 3 commodities/ products. �Below is a simple illustration of the relationship of the model. 16

4. 0 Achievements of the Model in Agriculture Finance a) The farmers now secure loans from SACCOs to improve their farming. For example, they now get loans to hire labor for cultivation of their land, weeding and harvesting, purchase of equipment such as ox-ploughs, hoes, machetes, beehives and many other tools or equipment depending on what the farmers and their cooperatives are involved in. �This is because during the packaging of the new SACCO model, it was deliberately planned that the SACCOs would be much more involved in the provision of credit to farmers and UCA has actively been assisting their managers to design suitable products for agriculture as well as monitoring to ensure that this is being done. Infact as of now about 80 percent of the volume of loans in our SACCOs are for agriculture which is a long way covered because we started from zero. 17

Achievements of the Model… Cont’d b) The ACEs have also borrowed money from the SACCOs to finance purchase of equipment especially for adding value to their members produce so that they can get higher incomes. For example, equipment for primary processing such as rice hulling, maize milling and packaging material such as honey packaging bottless, wine packaging etc. c) With the integrated model, the famers are sure to get not only quality but also cheaper agro-inputs because they purchase jointly using the advances from their SACCOs in collaboration with the primaries and ACEs. They are able to bargain effectively and get the inputs at a lower cost which leads to a lower production cost and hence higher incomes. 18

Achievements of the Model … Cont’d d) The method of bulking which is used by the cooperatives in the model reduces the need for the huge financing volumes which means it is more efficient, cheaper and safer. The traditional unions before their collapse, used to secure loans from banks and government in order to buy the members’ produce. This caused a lot of problems because they would require huge volumes of finance, take the risk as the borrowers and borrow at very high interest rates. Because of this they always felt they were working for the banks and members got very little. This is what caused many of them to sink into debts. With the new system, the funds used to pay for the members’ produce are supplied by the buyers and the cooperatives do not carry any risk or pay so much in interest. This is one of the contributions to agriculture finance. 19

Achievements of the Model … Cont’d e) The banks have been encouraged to come in with the financing to agriculture because of the existence of the SACCO. The SACCO is closer to the members and knows them since they are the same and knows who is credit-worthy and how to recover the loans. The banks however do not know the farmers and do not know how to recover the loans once it has been given. With their presence in the system, the SACCOs have become the bridge between the farmers on one hand the financial institutions on the other. With that kind of relationship the banks feel much more confortable than when they are operating in a vacuum. �This might explain why we are increasingly seeing the attitude of financial institutions towards agriculture changing for the better and the SACCOs in the model will continue to link them to farmers since their needs will exceed what SACCOs can mobilize. Many financial institutions give whole sale loans to SACCOs. 20

Achievements of the Model … Cont’d f) With the integrated model, the payment system which is used by the buyers to pay the farmers has become easier, faster and safer. The dairy cooperatives in Uganda offer a very good example. When the buyers collect the milk from the cooperative, farmers are not paid with cash which would be cumbersome and risky. Instead, farmers’ accounts with the SACCO are credited with the value due to each one of them. In an environment where the banks have been absent in rural areas this is progress in getting the farmers into the banking culture and with improved payments we should expect more buyers and more finance to come in using their money. 21

Achievements of the Model … Cont’d g) Agriculture finance has been facilitated through the Warehouse Receipt System (WRS) which has been implemented in Uganda since about five years ago. Through the system the famers can use the commodity in the store as collateral to secure credit either from the SACCO or some other financing institutions or alternatively get advance from their SACCO to meet immediate requirements which might include purchase of agro-inputs. �Through the warehouse receipt system, it has been possible for the producers to get high prices at a later date instead of selling in a rush immediately after harvesting when the prices are depressed. 22

Achievements of the Model … Cont’d �Yes, while one does not need to have SACCOs in order to operate the WRS, but from our experience on the ground their presence adds a lot of value and makes the system more effective and more reliable. The WRS is increasingly becoming the common way of marketing and financing commodity trade. 5. 0 Future Prospects of the Model. �From what we have seen on the ground during the last 10 years the model has been in operation, the model has good prospects because: �The participants are easily linked to service providers because it creates a critical mass which attracts business partners just as the farmers benefit from discounts. It brings a win-win situation to all the players involved in trade. 23

Future Prospects of the Model… Cont’d �Even the suppliers of agro-inputs are interested in the market opportunities created by the groups under the integrated model because they find them to be more organized and more coherent than stand alone cooperatives. �We see new financing arrangements being made in different countries to fill the existing gap in agriculture finance which arrangements will benefit from the model. For example in Uganda the Government has created a company called The Microfinance Support Centre which is expected to finance farmers and their organizations. These arrangements make a difference because they offer better loan terms both in terms of interest and loan term and they best perform when linked through the SACCOs. 24

Future Prospects of the Model… Cont’d �Similarly, the Government in Uganda has created an Agriculture Modernization Fund jointly with a number of participating banks to provide credit for the modernization of agriculture. Under the fund one can even get medium term loans and at interest of 10 percent which is less than half of the market rates. To take that further, recently, one of the biggest donor agencies by the names of DANIDA has created a Trust where funds for developing value chains can be procured. �Therefore, as far as the future prospects of the model are concerned, we in Uganda see that it is increasingly attracting the attention of major players including the government, major donors and the private sector. 25

Future Prospects of the Model… Cont’d �This is especially so because of the new environment where development actors are interested in the value chain approach in developing smallholder agriculture. Because of this the model is attracting a lot of interest from such actors. 6. 0 Constraints to the smooth operation of the Model. i. Inadequate storage facilities such as silos with drying facilities, cold storage which are connected power for effective handling of the members’ produce. 26

Constraints… Cont’d ii. Inadequate loan funds in SACCOs to enable them extend appropriate loans to farmers. The SACCOs are still operating below the required volume and can only afford short-term credit to the borrowers. The needs to be met are quite many, right from the individuals to Primary Societies and ACEs. This needs a lot of money. iii. Lack of term-loans. iv. We need credit facilities for medium and long-term credit, especially for purposes of investment. 27

7. 0 Conclusion. �The subject of agricultural finance is still a difficult one but definitely there are many positive developments in the pipeline and horizon. We need to recognize these developments and harness them. We are not yet there but the journey has started. �Agriculture finance in the past seems to have been complicated by how the cooperatives transact business. �We now need new approaches to agriculture finance which is possible especially under the rising demand for food. - END 28