Posted on August, 23, 2022 at 08:26 am
Agriculture minister Hussein Bashe has voiced his optimism that agriculture and related activities will attract more bank loans in the near future.
He told The Citizen in an exclusive interview that although agriculture directly and indirectly employs the majority of Tanzanians, it accounted for only 8.3 percent of the Sh20 trillion in loans issued last year, thus the need to unlock more private capital for the sector’s growth.
The Bank of Tanzania’s Monthly Economic Review (MER) for June 2022 indicated that the agriculture sector grew by 42.1 percent, from -10.7 percent recorded in June 2021.
Mr Bashe said demand for agricultural finance outstripped supply by far, which explains government efforts to commercialise the sector.
“In fact, not all of the credit extended last year went directly into farming, and most was disbursed to actors in the value chain.”
In Kenya, the total loan portfolio to the economy increased by 1.7 percent from $26.7 million in September 2021 to $27.1 million in December 2021, with four percent (about $1.1 million) channelled to agriculture.
Data indicated that in Rwanda, at least 989 bankable business plans with total grants amounting to $1.48 million were approved, out of which 607 business plans with agricultural grants totalling to $1.2 million were implemented.
The financing has made Rwanda’s agriculture credits to stand at 5.2 percent against 10.4 percent planned for 2024, and the Rwandan government is undertaking an initiative that will de-risk the sector.
Mr Bashe admitted that Tanzania’s monetary policies and regulations, including the International Financial Reporting Standards (IFRS), are not agriculture-friendly.
“Reform is vital in order to align with the government’s initiative of revamping the agriculture sector,” he said.
Aceli Africa, a market platform that facilitates the finance market for an inclusive agriculture sector in Africa, has identified policies that impede agriculture finance as including the IFRS 9 under which banks are structurally disincentivized from lending to risky sectors like agriculture.
Other policies include Capital adequacy ratios (CAR) which require banks to set aside a percentage of their capital in relation to their risk-weighted assets.
CAR requirements imposed by central banks in East Africa are said to be significantly higher (ranging from 10-15 percent) than the International Standards of 8.5 percent.
Aceli said that although banks are required to classify their loans based on delays in meeting loan repayments, but in agriculture delays may not necessarily indicate that the loan is non-performing.
“For example, seasonal harvest fluctuations may cause repayment delays but do not necessarily indicate an underlying weakness of the borrower,” it says in a report.
“Banks are required by the central banks to discount the level of collateral held at loan write-off and in many cases, an agribusiness may be required to provide collateral valued at 200 percent.”
Aceli adds that when it comes to treatment of credit guarantees, central banks do not treat credit guarantees as de-risking instruments, but rather as insurance against credit loss. Most credit guarantees, including those that are cash backed, are not zero-rated by the central banks which makes it difficult for banks to use guarantees to stimulate lending through third-party assumption of risk.
Dr Nicholaus Mgaya, an independent economist, seconded an appeal to make agriculture available to farmers saying: “since lending is the core business in the banking sector, credit risk affects financial institutions to freely finance the agriculture sector.
“Moreover, monetary policies emphasised by the BoT are aimed at protecting deposits, and ensuring economic and financial sector’s stability, as a result, there are some concerns that restrict agricultural lending.
“For instance, seasonal production cycles, and natural threats such as climate change and the likes, don’t align with conventional banking practices and the regulatory environment, these make the sector at risk, hence being underserved by banks,” Dr Mgaya said.
“While maintaining appropriate risk management in the financial sector, monetary policy and regulations related to agricultural lending, need to be revisited as the sector plays an important role to the economy.”
Source: The Citizen