News Over two-thirds of agriculture credit goes unutilized: report
November 18, 2023
The majority of agriculture financing loans provided by banks goes unutilized, according to a report from the Ethiopian Agricultural Institute.
An analysis of the credit extended to agriculture by all commercial banks, the Development Bank of Ethiopia (DBE), and other financiers, found that close to two-thirds of 35 billion birr in loans disbursed in 2022 were not utilized by farmers.
The DBE allocated 14 billion birr in credit that year, with only 37 percent of the total being put to use. Two percent of the total was credit provided to agro-processing industries.
Over the same period, commercial banks loaned out 21 billion birr to the agricultural sector. It was a mere four percent of the total credit they provided that year. Nonetheless, a very small portion of the credit was utilized by the sector, according to Institute researchers.
The lower financial utilization by farmers is attributed mainly to a lack of capacity.
“For instance, there are many agro-processing factories who require loans but who fail to meet the 50 percent land ownership qualification,” said Semere Mulugeta, head of the team conducting the research at ATI.
Agricultural investors’ inability to provide clean and clear financial statements required by banks, the DBE’s focus on extending credit to large investors, investor reluctance, and prerequisites involving land ownership contribute to the underutilization.
The DBE limits financing for agriculture projects lasting up to 20 years to investors with more than 15 million birr in capital. The Bank can cover a quarter of the project financing in these cases.
For investors with between half a million and 15 million birr in capital, the Bank offers loans for the procurement of machinery. Only agro-processors with at least 50 percent land ownership are granted full project finance loans.
The Bank cites high risk of default, low investor capacity, and regional regulations as reasons for its selectivity in providing credit.
“Over the past four years, defaulting agricultural loans put the Bank’s livelihood at serious risk,” said Berhanu Mamo, director of supplies at DBE. “It’s not a mistake we are willing to repeat.”
The Bank had 26 billion birr in bad loans on its books in 2021. The figure fell to half the following year due to government intervention. DBE’s non-performing loans (NPLs) stood at 11 billion birr in June 2023.
Agricultural loans account for 84pc of the bad credit, according to Berhanu.
The reluctance to provide credit to agriculture is also evident in the portfolios of the commercial banks. Only four percent of the 564 billion birr availed in 2022 was loaned to agriculture.
The reluctance stems from a series of failures in rain-fed commercial agriculture schemes.
In 2017, a study conducted by the Office of the Prime Minister found that two billion birr in DBE loans to close to 200 agricultural investors in Gambella Regional State was largely unutilized or wasted.
The study found instances where up to three investors were granted the same plot of land, and that only two percent of the investors were even included in the rain-fed commercial farming scheme.