Practical Aspects of Agricultural Financing in Tanzania

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• Practical Aspects of Agricultural Financing in
  Tanzania
• The Case of Tanzania Investment Bank
• Presentation for the AFRACA Eastern Africa
  Sub-Regional Workshop, Dar es Salaam 16th May
  2012
• By Thomas M. F. Samkyi Director of Development
  Financing, TIB

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PREAMBLE

• Tanzania Investment Bank Limited (TIB) is a
  development finance institution (DFI) owned by
  the Government of Tanzania, and mandated to
  catalyse economic growth through development
  financing.
• During 2008/2009 the Government resolved to
  establish a new DFI dedicated to financing
  agriculture, the Tanzania Agricultural
  Development Bank (TADB).
• Agricultural Window was set up to cater for
  agriculture financing needs. In 2010 the
  Agricultural Window was opened at TIB as an
  interim measure pending the establishment of
  TADB.

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PREAMBLE continued

• Agricultural Window, funded by the Government
  (TZS 42 billion at present), is managed off the
  balance sheet of TIB, and operates under a
  Framework prepared jointly by the Ministry of
  Finance (MOF), Bank of Tanzania (BOT) and TIB.
  Based on the Framework, an Agency Agreement was
  signed between MOF and TIB.
• Besides the Agricultural Window, TIB has a
  financing strategy that focuses on
  agro-processing and value chain lending. This
  strategy is funded from the banks balance sheet
  and therefore complements the off-balance sheet
  Agricultural Window.
• Presently agriculture and agro-processing account
  for more than 40 of TIBs on-balance sheet loan
  portfolio, which stands at around TZS 215
  billion. The bank also administers on agency
  basis other Government funds earmarked for the
  agricultural sector .

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK

• Product
• The product entails financing production,
  processing and marketing of agriculture and
  agriculture-related projects for short, medium
  and long terms. Emphasis is on primary
  production.
• Target Market
• Recognising TIBs limited branch network
  vis-à-vis the need to reach medium and small
  scale farmers in many areas of Tanzania, while at
  the same time understanding the farmer and his
  operating environment, the bank utilizes
  financial intermediaries besides lending
  directly.

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK continued

• In view thereof, the Framework provides for the
  following allocation of the Windows resources
• Companies/corporate farmers..35
• Microfinance institutions..30
• Farmers co-operatives, SACCOSs and
  associations......30
• Technical Assistance..5

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK continued

• Borrowing limits
• Minimum loan size is TZS 50 million and maximum
  limit to a single borrower is TZS 1,000 million.
• Pricing
• Interest rate is fixed at 5 per annum for direct
  lending, while for wholesale/onward lending the
  interest rate is 4 per annum. For wholesale
  borrowers (onward lenders), the rate charged to
  the final borrower/farmer should not exceed 8
  per annum.
• The bank charges 1 upfront fees for all borrower
  categories (no other fees or penalties), while
  the on-lenders are required to observe a total
  limit of 2 for all types of fees.

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK continued

• Lending Tenure
• Repayment period may range from six months to 15
  years depending on the nature of the agricultural
  activity being financed and related financial
  projections.
• The maximum grace period is 3 years, during which
  the borrower is required to pay interest. Loan
  repayment is usually structured to be in line
  with seasonality of earnings.

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK continud

• Security
• Debenture over assets of the companies, mortgage
  over landed properties, pledges of agricultural
  machinery, equipment and implements, produce held
  in warehouses, processing equipment and
  machinery, motor vehicles, and collateral
  management agreements.
• Credit Guarantees such as by the Private
  Agriculture Sector Support (PASS). The guarantee
  covers range between 50 and 60 of the loan
  principal.
• Note The required security cover is a
  minimum of 1.25 times (regulatory
  requirement).

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KEY FEATURES OF THE AGRICULTURAL WINDOW LENDING
FRAMEWORK continued

• Borrowers eligibility criteria
• Among the key eligibility criteria for credit
  facilities under the Window are
• Project involving primary agricultural
  production.
• Good track record in managing agricultural
  activities commercially.
• Acceptable legal status of the borrower such as
  limited liability company, association,
  co-operative/SACCOS, etc.
• Collaterals acceptable to the bank.
• Equity stake of the borrower of not less than 30
  of the total investment.
• Bankable business plan.
• Product market information and availability.
• Clean borrowing record with TIB or other
  financial institutions.
• No refinancing of commercial credit.

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EXPERIENCE OF THE AGRICULTURE WINDOW

• As at 31st March 2012, loan applications amounted
  to TZS 192 billion
• Loans that were approved add up to TZS 27.785
  billion, and were extended to eighty one (81)
  applicants located in 18 Regions (43 Districts).
  
• Out of the 81 approved applications, 32 are
  corporate borrowers, 42 SACCOS / cooperatives/
  associations and 7 microfinance institutions.
• Items procured include tractors, power tillers,
  irrigation equipment such as center pivots,
  livestock, motor vehicles for farm business
  purposes (commercial vehicles) and other farm
  implements (trailers, storage equipment, etc.).
• 131 tractors and 112 power tillers have been
  purchased and are in use by various beneficiaries
  of the Window funds.

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EXPERIENCE OF THE AGRICULTURE WINDOW continued

• Farm produce supported include maize and maize
  seeds, paddy, coffee, flower seeds, onions,
  sesame, cashew nuts, sunflower, sugarcane, sisal,
  beans, tomatoes, various export vegetables, etc.
  Animal products include milk, meat (beef, pork,
  chicken), eggs, sausages (pork and beef), hides,
  etc.
• Social and economic benefits of the Agricultural
  Window
• Increased agricultural productivity and
  production
• Increased food security
• Improved agricultural mechanization
• Employment creation
• Increased number of small and medium processing
  plants value addition.

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CHALLENGES OF AGRICULTURAL FINANCING

• Challenges and lessons learnt by TIB in provision
  of agricultural credit
• Most of the credit applications lacking
  eligibility. Examples lack of legal
  titles/ownerships or other forms of acceptable
  collateral, lack of managerial and/or technical
  skills to run the projects successfully, lack of
  experience in commercial farming, inability to
  raise the required amount of equity.
• Promoters lack of ownership/understanding of
  their own business plans.
• Limited number of eligible MFIs that on-lend to
  agriculture.
• Reluctance of on-lenders to abide by the
  requirement of charging interest at a maximum
  rate of 8 p.a.

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CHALLENGES OF AGRICULTURAL FINANCING continued...

• Weak management of the on-lending organizations
  (especially SACCOSs) in managing resources,
  mobilizing loan collections and making repayments
  to TIB.
• Some loan beneficiaries, e.g. SACCOS members,
  relocating to other places where they cannot be
  easily traced.
• Tendency not to comply with agreed terms and
  conditions of the loans, e.g. reluctance to
  provide regular reports on the performance of the
  projects, willful default in servicing of loans,
  diversion of loan funds away from the agreed
  activities, etc.
• Low quality of farming equipment supplied to
  farmers.
• Delays by suppliers to deliver farm equipment in
  time for farming season.
• Reluctance by beneficiaries to pay their credit
  obligations believing that the loans provided
  were mere grants from the Government.

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• CHALLENGES OF AGRICULTURAL FINANCING continued..
• Unreliable rains or long periods of drought or
  other severe weather conditions or pests.
• Unreliable markets and prices of agricultural
  products
• Lack of irrigation infrastructure.
• Poor transport and warehousing infrastructure.
• PASS fees are regarded as too high to most
  borrowers.
• Likelihood of conflict of interest when PASS
  prepares business plans for credit applicants, at
  a fee rate that is based on the loan amount
  requested.

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• WAY FORWARD
• To improve agricultural financing and hence
  agricultural output and productivity, the
  following could be done
• Fast tracking process of land surveys and
  issuance of Title Deeds in respect of farms and
  other landed properties to be mortgaged as
  collateral for loans.
• Facilitating creation of irrigation
  infrastructure and irrigation schemes in areas
  that support agricultural practices.
• Making arrangements for establishment and use of
  crop/livestock insurance schemes.
• Improving market information dissemination and
  marketing systems so as to enable farmers realize
  remunerative sales prices.

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• WAY FORWARD continued..
• Improving agricultural extension services.
• Providing/publishing list of tested and approved
  agricultural equipment suitable for farmers in
  various areas of Tanzania.
• Providing technical assistance and business
  advisory services to prospective and actual
  borrowers.
• Devising better ways of financing agriculture,
  monitoring evaluating performance and impact.

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• Examples
• Use of financial intermediaries.
• Working with coop unions to create SPVs for value
  chain activities.
• Engaging value-add service providers to assist
  with capacity building, follow up, etc.
• Use of third party credit enhancement and
  technical service providers.
• Arranging with farmer suppliers to pay upon
  delivery (and acceptance of the supplies).

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CONCLUSION Agriculture remains the backbone of
the economy and the basis for Tanzanias economic
transformation. Challenges arising in the course
of financing agriculture should serve as learning
points. It is imperative that stakeholders
should collaborate and innovate ways to overcome
such challenges. TIB shall within its means
keep on devising ways of overcoming the
challenges, as the bank continues to play a major
role in the provision of credit to the
agricultural sector in order to contribute to the
development of the nation.
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The End Thank you for your attention! Tanzania
Investment Bank Ltd Your Partner for Growth