The term “Agriculture” is derived from the Latin words “ager” meaning field and “cultura” meaning cultivation. Agriculture is concerned with the cultivation of land to produce crops and the rearing of animals of direct value to man. It is also concerned with the processing, distribution and marketing of agricultural products. According to the Food and Agriculture Organization’s (FAO) recent data, agriculture is undoubtedly the largest and most important sector of the Tanzanian economy, providing 31%t of GDP and contributing 24.9% of annual export earnings, in particular through the main export of crops such as cashew, tobacco, sugar, coffee and cotton. 68% of Tanzania’s workforce engages in some type of agricultural activity (both in rural and urban areas). Out of the 68% of Tanzania’s workforce that are engaging in some type of agricultural activity, 83% of them are small farmers who dominate the agricultural sector by contributing around 75% of the total agricultural output. As an important sector, the agriculture sector needs support from all stakeholders in the economic landscape, especially the banks.

For a sector that has 68% of the workforce in the country and contributes 31% of GDP, you would expect the financial institutions, especially the banks, would support the agriculture sector aggressively but the credit flow by banks to the agricultural sector remains dismal. According to the latest Bank of Tanzania (BOT) Monthly Economic Review Report of April 2022, the annual growth of credit from banks to Agriculture activities was 6.2%.

The banking sector in Tanzania has witnessed huge growth in recent years but currently does not play an effective role in supporting the agriculture sector. The main role of commercial banks is to serve as intermediaries between depositors and borrowers. The second role is to remove financial waste from the economy thus helping to channel all available resources towards productive activities. This means the banks do not only protect depositors’ money but also channel the funds in the form of loans/credits to those who need the funds for investment purposes. For that reason, banks are referred to as the wheel of economic progress of a country as they help in the economic development process. One of the sectors that are in desperate need of funds is the agriculture sector. Nonetheless, banks have been extremely reluctant to engage in agricultural finance for several reasons. In this article, I will share a few reasons why banks are reluctant to lend to the agriculture sector.

1. High Degree of Informality – One of the main challenges for banks in lending to the agriculture sector is the high degree of informality. Most small farmers and MSEs (Micro and Small Enterprises) are normally not registered and are characterized by a low level of education and financial literacy. Also, small farmers have rarely kept accounting books and very few can produce cash flow/ financial statements. Additionally, most of them do not have any assets that could be pledged as collateral (fallback option) for financial assistance from banks. With that being said, banks are reluctant to lend to most small farmers as it exposes the banks to significant principal credit, information, and monitoring risks. Also, the high degree of informality creates poor legal frameworks and systems which possess enormous enforcement problems for the banks. It is these risks/problems that have prevented banks from providing adequate financial services to the majority of farmers and have resulted in the financial exclusion of large parts of the society.

2. Political Risks – For most governments, agriculture is a strategic sector as it provides employment and income to the majority of members of society. In addition, agricultural commodities and products are major export earners and contribute significantly to GDP (in Tanzania it contributes about 31% of GDP). This explains why the agricultural sector is influenced by politics and has a considerable degree of government interventions and interference. Most countries have experienced some type of political intervention in the agriculture sector and Tanzania is no different. The political interference constitutes a major political risk for financial institutions engaged in agricultural lending. Some governments have directly engaged in the marketing of certain crops, primarily cash crops for export, by establishing state-run marketing boards and warehouses with direct price control. These political interventions create unstable pricing of the crops thereby affecting the revenues/cash flow of the farmers. Cash-flow inconsistency resulting from political risks affects farmers’ ability to get financial assistance from banks as they are deemed too risky.

3. Price Risks - Prices of agricultural commodities are typically volatile and farmers face considerable price uncertainty. The price of the harvested output is typically not known at the time of planting when the production decisions are taken. Also, prices of agricultural commodities vary with levels of production and demand at the time of sale. Hence, this elastic demand for many agricultural products is often cited as the main explanation for agricultural price variability where small increases in production can result in large price swings. The uncertainty of prices (which causes unpredictable sales proceeds) due to the nature of agriculture activities makes farmers high-risk borrowers in the eyes of the banks.

In summary, I have shared that agriculture is undoubtedly the largest and most important sector of the Tanzanian economy providing 31% of GDP and contributing 24.9% of annual export earnings. Because of that, banks should be supporting the sector actively but that is not the case. In this article, I have shared a few reasons why banks are reluctant to lend to the agricultural sector: high degree of informality, political risks, and price risks. The need to reinvent the entire agriculture ecosystem and the support of its stakeholders will be a good start to arguing for financial support from the banks.

Written by Kelvin Mkwawa, MBA

Seasoned Banker

Email address: Kelvin.e.mkwawa@gmail.com