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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
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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PREAMBLEPREAMBLE
• 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.
• 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.
PREAMBLE continued…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 bank’s balance sheet and therefore complements the off-balance sheet Agricultural Window.
• Presently agriculture and agro-processing account for more than 40% of TIB’s 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 .
• 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 bank’s balance sheet and therefore complements the off-balance sheet Agricultural Window.
• Presently agriculture and agro-processing account for more than 40% of TIB’s 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
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 TIB’s 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.
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 TIB’s 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 Window’s resources:
a.Companies/corporate farmers……………………………………….….35%b.Microfinance institutions……………………………………………….….30%c.Farmers’ co-operatives, SACCOSs and associations………......30%d.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 criteriaAmong the key eligibility criteria for credit facilities under the Window are:(i)Project involving primary agricultural production.(ii)Good track record in managing agricultural activities commercially.(iii)Acceptable legal status of the borrower such as limited liability company, association, co-operative/SACCOS, etc.(iv)Collaterals acceptable to the bank.(v)Equity stake of the borrower of not less than 30% of the total investment.(vi)Bankable business plan.(vii)Product market information and availability.(viii)Clean borrowing record with TIB or other financial institutions.(ix)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:(i) Increased agricultural productivity and production;(ii) Increased food security;(iii)Improved agricultural mechanization;(iv)Employment creation;(v) 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 FORWARDTo 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:1.Use of financial intermediaries.2.Working with coop unions to create SPVs for value chain activities.3.Engaging value-add service providers to assist with capacity building, follow up, etc.4.Use of third party credit enhancement and technical service providers.5.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 Tanzania’s 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
The End
Thank you for your attention!
Tanzania Investment Bank Ltd
Your Partner for Growth
