Access to Agricultural Finance in Tanzania

Abstract

The degree of access to financial among the Rural Producer Organizations and their individual members is very low in most of the developing countries, partly as a result of the underdeveloped institutional framework. According to a survey by the Bank of Tanzania (BOT) in 1997 the size of the unmet rural financial services demand is huge, especially after the introduction of the financial sector reforms and privatization. The key findings indicated that 82% of the rural households were saving informally, mostly at homes. Of those operating bank accounts, they only saved 12% of their total savings. On the other hand, about 94% of the total households were willing to borrow if there were available resources and appropriate products and methodologies (BOT, 1997). A similar survey conducted by the BOT in 2002 revealed that between 6%-8% of the total rural credit demands were met by the existing formal financial institutions (IFAD, 2002:19). The majority of the rural populations depend primarily on agriculture. However, studies done so far indicate that agricultural production and marketing activities are constrained by lack of access to financial services (Moshi, 2003; Bee, 1997; Kashuliza, 1994; Nyagetera and Kilindo, 1995; Ndanshau, 1995). There is general consensus that access to financial services has multiplier effect on rural development, investment and incomes, in that it facilitates agricultural production and marketing, and increases demand for local products. It further enhances agro-processing that changes the demand structure of agricultural products and creates jobs. According to Moshi (2003) with the introduction of liberalization policies, the commercial bank lending to agriculture has declined from 12% of the total domestic lending volume in 1996 to 6% in 1999. Furthermore, the share of commercial bank loans for agricultural marketing fell from 19.7% of the total in 1995 to 0.8% in 1999. What is of interest is that whereas services as well as efficiency in the financial sector is expanding and improving, the funding of agriculture is decreasing precariously. The number of commercial banks increased from two in 1991 to 23 by 2004. In addition, there is an increase in diversification of financial institutions comprised of non-bank financial institutions; Microfinance Institutions (co-operatives -SACCOS and SACAs; and Financial NGOs) and foreign exchange bureaus. Appendix la & b has details of registered commercial banks and non-banks financial institutions operating in the country by 2004. There is also an emerging capital market, which is still juvenile, with one stock exchange characterized by few brokers/dealers (www.bot-tz-org). The government initiative to promote co-operative financial services has resulted into the growth of co-operative financial services. However, these are not catching up sufficiently with the growing demand for agricultural finance, and like other formal financial institutions, co-operative financial institutions are shying away from the direct funding of agriculture. In 2002 there were 123 registered savings and credit Co-operative Societies (SACCOS) with total shares of Tshs. 11.4 billion. In addition, there were two co-operative banks - the Kilimanjaro Co-operative Bank (KCB) and the Kagera Farmers Co-operative Bank (KFCB) that have started lending their members on favourable terms to support agricultural marketing. In addition, there is one commercial bank - CRDB Bank that has started market linkage practices with few selected co-operative unions, albeit on limited scale, by extending Export Credit Guarantee Scheme to secure credit for agricultural crop exporters (URT, 2003:137-138). Some informed studies, argue that all these efforts combined together only meet a fraction of the financial needs by the agricultural sector, which is estimated at 5% (Moshi, 2003; Nyagetera and Kilindo, 1995). Due to the inadequate access to formal financial services, agricultural traders, processors and producers have been relying on informal financial arrangements. Tlbaijuka and Santorum (1992: 139), for example observed that over 80% of the traders had no access to credit, instead they depended on informal financial arrangements. Informal credit has played an important role in Tanzanian economy, and perhaps it will continue to remain so for years to come until the financial markets are fully developed.