aBi seeks to cut interest rates down to 5 percent

Mr. Andre Dellevoet, Group Chief Executive Officer, aBi

Mr. Andre Dellevoet, Group Chief Executive Officer, aBi

Q: During the recent US Agricultural Trade Mission meeting in Kampala, you hinted something on repayable, concessional financing, a financing which you plan to offer in the medium term. You also said you will work out deals with finance institutions, to bring down the 12% interest that the Agricultural Credit Facility at BOU (ACF) offered to some banks like Stanbic, to actually 5%. Could you elaborate on that?

A:What we are trying to do is basically to supplement concessional facilities like the ACF, which may be brought down to 5% if all risks are covered and likelihood of profitability is increased.

The aim of supplementing the facilities is to bring the interest rates further down so that it is affordable as far as possible. The logic is that there is no agricultural facility in the world that can succeed with interest rates between 22-24% which is more of the prevailing rate.

It is not automatic that the banking sector can come down in their rates, since that depends on their costs, risk assessments etc. We have seen this problem and we thought that if there are facilities like the repayable, concessional financing, we can supplement to bring interest rates further down. Abi is willing to take most of the risk. Abi is also willing to lower the risk further by providing guarantees. This will be medium term financing, between 1 and 4 years.

Q: Why are you doing this?

A:The reason why we have done this is because the current cost of financing is too high. But we also felt that the agriculture business needs to move away from donor funding and look at it as a business. It requires a certain discipline of managing the limited resources. We have to move away from free credits and free inputs. For agriculture to succeed it has to work along the lines of a market system where everything comes at a cost and the client is King.

We are going to not base this facility on guesswork; we are going to develop it in the coming months. We want commercial banks to be more involved in the financial facility, for example by co-financing business proposals. We should set up a process on how it will work and we hope that the banks will be more comfortable in the future to blend resources and provide appropriate and affordable finance to agribusinesses.

The business model that we promote is what we call inclusive business model where the project has to meet two objectives, the social objective of poverty reduction and the commercial objective of making profits, or at least continuity of business operations.

In this case the companies that will benefit from this facility are medium to large enterprises that will become market leaders and will be able to repay the money.

The direct link between the farmer and this facility is not there. The way it works is medium and large enterprises who may want to invest in their supply chain of primary products by working with smallholder farmers, can get various financial and non-financial support from aBi and the banks anywhere between US$ 100,000 and US$ 2,5m.

This is the kind of game Abi is in, and we want to see if the payment concessional can make agri businesses work.

Let us make sure that agri finance is appropriate for the business model at hand. This is what we are saying to the banking sector that they need to be more knowledgeable about agri-business funding. We want to constantly teach these financial institutions that you can make money in financing agribusiness but that you have to understand agribusiness and adapt your product accordingly.

Q: Will the banks fight the AGF?

A: Will the banks fight the repayable, concessional financing facility? I don’t think so. aBi is actually covering their risks and allowing them to penetrate the agribusiness market a lot more than they would do with their own finance. aBi and the banks have to be very good at their joint due diligence and appraisal of the project. It is typical limited thinking that is hampering the sector as a whole, where you fight over the crumbs rather than growing the pie together. That is why the banks are not growing; it is because they fearful and prefer going for the low hanging fruits. But if banks are serious about financing the productive sectors in the country, they have to be smart. We are offering it to them on a silver plate.

Q: How did Abi take off?

A: Abi took off wonderfully in the sense that it made a number of good choices. One of it was to manage this as an organisation aiming at the long term reform of the agricultural sector.

When you look at the challenges, it needs a concerted effort to transform agriculture to a modern sector. That was visionary. The second thing they did was that the resources would be more than any donor would provide. So they created a pool of donor funding. This organization has aligned its work with the government policy. What Abi does is what the Government of Uganda policy is asking. It is an independent entity focused on results. It doesn’t follow politics at all. It built up a portfolio of investment rapidly, which makes Abi certainly the biggest agricultural business development organization in the country with a committed capital of US$130 million. We are discussing with the Government of Denmark for another US$35 million.

Q: In 2016, Abi Trust suspended most of its operations. What happened?

A: Like any young institution, aBi ran into some challenges. Quality in terms of reliability, accountability and capacity to actually deliver, was a problem. That is why Abi in 2016 stopped most of its operations to reform itself. We had to acknowledge that we ran into problems.

We suspended funding of existing projects until an independent audit was done on each of them and we did very few new grants. aBi did not do its due diligence well. There were no reports, and if they were there, then they were not based on authenticity. Most systems including the feedback mechanisms collapsed There was old management but now we have new management. The quality of our implementing partners was missing in terms of accountability, reliability and capacity. Abi was not doing its work very carefully, and this led to more than 60% of our portfolio being compromised. However, we have managed to turn the institution around and we are ready for take-off.

Q: What did you do to avert a repeat of similar problems?

A: In the past, transparency was very poor. Applicants would submit proposals to Abi for support and it happened so often that they would not hear anything even after a year has passed. Apparently it became like a cultural thing that you don’t communicate to people. So when I came in, I restored the client friendly communication. We are now holding our staff accountable for not communicating to our clients.

We are soon launching a grant management system, which is automated. When you are an applicant, you submit your application on line and get informed on the process and processing of the application.

Internally, we now have red flags online, so that within 14 days we are able to know the status of an application. You can follow and know the stage of technical due diligence and appraisal. At any time, you should be able to determine the status of your application. This is the kind of transparency that very few development organizations provide in Uganda.

We further undertook internal reforms to ensure smooth operation of the trust. We are trying to benefit from the second chance to maximize. I would like to make sure that Abi has excellent and very smart way of agricultural support. We are happy that we have retained the donor support.

Q: What would you want to see in the medium term?

A: We are all in a critical time where Abi has reformed itself and we really have a very strong team now. We have invested a lot in the systems, which have reinforced our status as a leading Agricultural business organization, and we are in the coming months ready to take off. I truly believe that Abi has a big potential and needs room to grow. If Abi is allowed to grow, one of the things I would support is to have small offices in the main agricultural areas, like our sister program PASS in Tanzania. The regional offices will enable Abi to be closer to the farmers and SME’s, monitor their activities and identify new opportunities for supporting them. This will let Abi grow, and I think it can. We have laid a foundation for it.

Q: Lessons learnt?

A: What we learn from the painful thing in the past is that you have to know who you are doing business with. You have to interact with them extensively. You should really know your partners well.  You can easily drown in debt and accountability issues.

Q: The aBi Trust provides both financing and technical support in selected agricultural value chains. Why are those selected value chains so special to Abi?

 A: aBi has already made enormous contribution towards the agri-business sector in Uganda. We have funded over 250 large agri-business projects which have benefited over 1,000,000 beneficiaries through both direct grants and line of credit. What we want to do now is to cover the most critical sectors that are both consumed domestically and exported. We are looking at coffee, horticulture, dairy, the cereals, pulses and oil seeds that are all critical to Uganda’s economy. So we try to be very relevant as much as we can for the agricultural sector.

Q: Is Abi doing anything to help Ugandan investors access the African Growth and Opportunity Act (AGOA)

A: I think as a trade regime it has been successful in many countries like, as you can see from the example of the textile factories in Lesotho and Swaziland. This is a good mechanism to allow least developed and developing African countries enter the advanced developed country market like the US. The tragedy is that the quota under AGOA has never been fulfilled and it has been all about not being able to meet food safety and quality standards. And this is where Abi Trust comes in by supporting farmer organizations in meeting strict sanitary/phytosanitary and quality standards. An example is the red chilly market that was lost a year ago. It was the pesticides and poor quality that led to the EU ban. One of the challenges of working with large numbers of smallholder farmers is that it is very difficult to control their practices. However, aBi is committed to supporting the development of Uganda’s agricultural sector through various interventions.

Interview with Mr. Andre Dellevoet, Group Chief Executive Officer aBi, that run in The Observer Friday 16th June 2017: http://www.observer.ug/business/53392-abi-seeks-to-cut-interest-rates-down-to-5-per-cent.html