ESRF POLICY BRIEF - Economic and Social Research Foundation

NO. 2/2014
ESRF POLICY BRIEF
ECONOMIC AND SOCIAL RESEARCH FOUNDATION
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Formal Agricultural Financing in the Rural
Economy of Tanzania
By Hossana Mpango
ABSTRACT
The Tanzania financial sector reforms that commenced in early 1990s have encouraged private
players to enter the financial sector, increasing competition in banking, as well as the number
and types of formal and informal financial institutions. However, these financial institutions rarely
serve the agricultural sector which is the backbone of Tanzania’s economy and the livelihood of
majority of the rural population. As a result, traps have been created which reproduce poverty
over time and depress the rate of rural growth.
Many African countries, Tanzania included
have been implementing macroeconomic,
sectoral and institutional reforms aimed at ensuring sustainable economic growth and poverty reduction. Having 70.4 per cent of the
population residing in rural areas (URT, 2011)
and being highly dependent on the agriculture
sector which absorbs 75 percent of the entire
workforce (TIC Investment guide 2013-2014);
the Tanzania government acknowledged the
necessity of pursuing different approaches to
improve the agricultural sector. One such approach has been to increase agricultural credit
so as to enable farmers to afford new production technologies such as improved seed varieties, fertilizers, farming implements and
chemicals. The expected results being higher
levels of investments in the sector, increasing
agricultural output, raising agricultural income
for the farmers, reducing food expenditure
and eventually improving the farmers’ livelihood and reduce poverty.
Over the years the Tanzania government in
collaboration with its development partners
have initiated schemes, programmes and institutions to increase access to financial services
for farmers- most of which reside in rural areas. Examples are the First and Second Generation Financial Sector Reforms, Rural Development Strategy (2001) and the Agriculture
Sector Development Program and Strategy I
(2001). However, the interventions have not
been able to fully achieve their objectives because of uncertainties associated with the sector– including poor farming systems and unpredictable factors as drought which discourage most of the banks and other financial institutions to extend substantial credit to finance agrarian projects. Over the years, the
share of commercial banks’ loans to
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agriculture has remained low compared to
manufacturing, trade, and other services sectors. The presented government statistics are
supported by the 2013 FinScope Tanzania survey results which revealed that it is only 6.8%
of the rural population that use bank products. This has negative implications to the
overall performance of the agricultural sector.
Access to financial services has an imperative
role to play in upgrading production, processing, storage and marketing activities in order
to improve smallholder farmers’ revenues and
bring socio-economic development in the rural areas.
Agricultural Finance in Tanzania: Challenges
Agricultural production in Tanzania is dominated by small holder famers most of which
reside in rural areas. These rural farmers are
critical to the attainment of food security and
as they produce the bulk of food items for
consumption in the cities and for export. Despite the contributions of the small-holders
and their potentials for overall national development, they struggle with a number of chal-
lenges. Low access to finance has been the
most pronounced of these challenges. Rural
economy of Tanzania is characterized by a
paucity of viable financial institutions, lack of
variety, breadth and range of financial services. There is also very limited access to longterm financing needed for agriculture, land
and other rural enterprises.
Dearth of financial services to the rural economy of Tanzania is attributable the vulnerability of the agriculture sector which constrains
the capacity and effectiveness of rural borrowers and lending institutions respectively.
Farming activities in Tanzania are highly susceptible to vagaries of weather resulting in
crop failure. This is due to inadequate irrigation systems put in place in the rural areas. As
a result, harvests depend on availability of
rains. A year when there is little or no rainfall,
farms and loan assets of lending institutions
are at risk. The same is true for fluctuation in
prices of farm produce. In most cases farmers
and agribusinesses are vulnerable to unfavourable price fluctuations which constrain
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the capacity of funded projects to meet repayment obligations as they fall due. A drop
in the price of main agricultural produce in local and international markets heightens credit
risk for the lending institution.
Many small holder farmers in African face
similar challenges to those observed in Tanzania. In Uganda for instance, the financial institutions have terms and conditions for accessing loans which are not conducive for smallscale farmers. There are collateral-related
challenges, high interest rates and there is
mistrust between banks and farmers resulting
from risks associated with the agricultural sector (Ogang C., 2013).The situation is no different in other parts of the continent whereby
banks share a general perception of high risk
in the sector which keeps them from providing medium/long-term agricultural loans to
the farmers.
Innovations to address the challenges:
Several banks within Tanzania provide financial services to a majority of the low-income
population either directly or indirectly
through linkages with NGOs or savings and
credit institutions as a viable poverty reduction tool. Examples are CRDB and NMB which
finance irrigation schemes and warehouse systems. Other banks for instance Exim Bank and
Opportunity Tanzania finance procurement,
processing and packing of various export
crops, such as coffee, cashews, cotton etc., as
well as non-traditional crops such as cereals
and pulses.
ricultural sector in the country through loan
financing. Accordingly, the banks give the
loans to farmers through their primary Associations, SACCOs, and also to individual farmers.
Formulation
of member-based organizations
in Tanzania i.e. Savings and Credit Cooperative Societies (SACCOs) and Village
Community Banks (VICOBA). Farmers under
this scheme open a group share account with
a convenient bank or mobile money account
from which they are allowed to borrow
amounts related to the size of their savings.
These organizations are willing to offer even
small sized loans to members contrary to the
formal financial institutions.
Use
of Warehouse Receipt System (WRS)
whereby commodities are deposited in a
designated warehouse and enables the access of credit (collateral) to primary cooperatives and farmers business groups). Finance
providers in WRS include CRDB PLC, Exim
Bank Ltd, Federal Bank of Middle East Ltd,
National Microfinance Bank, Kilimanjaro Cooperative Bank Ltd, and Uchumi Commercial
Bank Ltd, Mbinga Community Bank and numerous Savings and Credit Cooperatives Societies.
Credit
products from mobile money operators: The service allows registered customers
to save and access loans through their mobile money accounts. This has been identiIntroduction of the Agricultural Inputs Fund fied as one of the most effective way of exby the government as an effort to develop ag- tending financial services to the rural
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population by least cost. It is a direct intervention following failure of the Input Trust Fund
to reach all farmers in the rural areas. The innovation was first introduced as ‘M-Pawa’ by
Vodacom Tanzania in collaboration with the
Commercial Bank of Africa. A similar service
known as ‘Timiza’ has also been introduced by
Airtel Tanzania.
Policy Lessons:
 A clear set of policies is needed for servicing rural financial markets to get rid of high
incidences of poverty in rural areas and
growing income inequality between urban
and rural markets. The financial policies
should ensure that long-term loans are
made available to the farmers to cover the
whole value chain.
 Local Banks should network with international financial institutions and multinational corporations that support the agriculture sector.
 In order to improve performance of loan
repayment in rural areas, complementary
technical assistance such as extension services must be provided to the farmers in
rural area.
 For the Agricultural Inputs Fund to benefit
more farmers, it needs to be linked with
SACCOs and Community Development



Funds. It is better to deal with groups of
farmers rather than individual farms.
Finance providers need to understand economic activities of target groups since
these activities need to be financed so that
members can continue to save.
There is a need to build capacity of the rural farmers on financial literacy.
Transport and communication infrastructure which are important areas for publicsector investments must be improved in
the rural areas so as to reduce transaction
costs and enhance the profitability of both
agricultural activities and financial services
provision in rural areas.
References
BOT (2013): Economic Bulletin for the Quarter
Ending December 2013, Vol XLV No. 4, Bank of
Tanzania, Dar es Salaam
Ogang C. (2013): Challenges of Agricultural
Financing: The Case of Uganda, Uganda National Farmers Federation, WFO, Italy
TIC (2013): Tanzania Investment Guide 201314; Tanzania Investment Centre, Dar es Salaam
URT (United Republic of Tanzania) (2011): Tanzania in Figures 2010; National Bureau of Statistics, Dar es Salaam
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