September 13, 2022

Putting finance at the service of the agricultural sector

By Dickson Ng’hily

Dar es Salaam. Given the government’s efforts to reorganize the agricultural sector, the demand for agricultural finance is expected to increase. However, as the current flow of funding is insufficient, more private capital is needed to drive the growth of the sector.

For example, although credits worth 20 trillion shillings were injected into the economy last year, only 8.3% (about 1.66 trillion shillings) of said loans were disbursed to the chain. of agricultural value.

The figure depicts local farmers as the most underfunded group, which prevents them from purchasing agricultural inputs, adopting new technologies, and undertaking other investments associated with higher returns.

According to the Bank of Tanzania (BoT) Monthly Economic Review for June this year, the agricultural sector grew by 42.1% compared to 10.7% in June of the previous year.

Data from neighboring Kenya indicates that the total portfolio of loans to the country’s economy, as of December last year, was $27.1 million in December 2021, of which 4% (about $1.1 million – the equivalent of 2.56 trillion shillings) channeled into agriculture.

The country’s agri-finance trend has prompted Mr. Hussein Bashe, the Minister of Agriculture, to call for monetary policy reforms to transform the sector into a commercial one from the current subsistence status.

Advertising

“The country’s monetary policies and regulations, including International Financial Reporting Standards (IFRS-9), are not favorable to agriculture. The reform is essential to align with the government’s initiative to revamp the sector,” Bashe said.

Mr. Bashe was of the view that the demand for agricultural finance remains unmet and the sector needs more than described, thus supporting the government’s efforts to commercialize the sector.

“I want to see more agricultural loans and other related financing given to local farmers on the ground. I understand that CRDB and NMB are doing a great job, I welcome their initiatives, but I would like to see more credit given to farmers,” he noted.

When asked why financial institutions are reluctant to lend to the sector, Dr Nicholaus Mgaya, an independent economist, said: “Lending is a core business in banking, credit risk prevents financial institutions from financing the agricultural sector freely”.

He added; “On the other hand, the monetary policies put forward by the BoT aim to protect deposits and ensure the stability of the economic and financial sector, therefore, there are fears that they may restrict agricultural lending.”

According to him, seasonal production cycles and natural threats such as climate change and others do not align with conventional banking practices and the financial regulatory environment, and therefore agriculture is identified as a risk, hence underserved. by the banks. and other financial institutions.

Dr. Mgaya further appealed; “While maintaining proper risk management in the financial sector, monetary policy and regulations related to agricultural lending need to be reviewed as the sector plays an important role in the economy.”

Commenting on the issue, Ms. Mwajuma Mohamed, an agribusiness practitioner said; “Banks are struggling to finance the agricultural sector due to several risks such as price instability, climate change, regulation, as well as inadequate financial records.”

Acéli Africa; a market platform that facilitates the financial market for an inclusive agricultural sector in Africa, offers some recommendations regarding policies that hinder agricultural finance.

Aceli suggests in a report that since the African Development Bank (AfDB) and other African policymakers released the Kampala Principles for Agricultural Finance in Africa, it is high time to implement them.

The Kampala Principles call on national governments to strengthen agricultural finance policy by creating a high-level coordinating body to promote agricultural credit, because too often responsibility for policies impacting agricultural finance falls into a vacuum.

In addition, Aceli calls for an extension of the expected credit loss model for the IFRS-9 calculation to include expected development impact (EDI) for agriculture and other high-impact sectors. .

IFRS-9 is an international accounting standard that guides central banks in setting policies at the national level.

“To be clear, we recognize the real risks of lending in agriculture and affirm the role of the central bank to ensure appropriate risk-weighted capitalization for lenders. However, we believe that policymakers should take a broader view that balances risk management with economic growth considerations,” reads part of the report.

Accordingly, Aceli proposes that EDI be incorporated into the expected credit loss equation and recommends that governments fund EDI through stimulus incentives for lenders that would offset the limiting effect of applying the ECL. IFRS 9 to their loan portfolios.

On the other hand, the Capital Adequacy Ratios (CAR) policy, which requires banks to set aside a percentage of their capital against their risk-weighted assets, would be higher (ranging from 10 at 15%) than the International Standard under Basel III (8.5%).

Therefore, the financial platform recommends possible adjustments of the CAR downwards, so that they are closer to 8.5%.

Regarding the loan classification and provisioning policy, which requires banks to classify their loans according to loan repayment delays, the report suggests that with the agricultural sector, repayment delays do not indicate necessarily that the loan is not performing.

Therefore, Aceli argues for a sector-differentiated approach that relies on loan performance data, which may be worth considering. According to the working paper, the central bank should also instruct banks to allocate a portion of their loan portfolio (around 10-15%) to agricultural finance and any bank with a lending deficit to the sector would be penalized.

It is also recommended that, in an effort to reduce sector risk, there is a separate entity/fund from the BoT policy, which could pool capital and distribute it to private sector lenders, who in turn would invest in innovations that can reduce the cost and risk of agricultural loans.

In addition, banks should allow other forms of collateral, including stored products, equipment and moveable property, and revise the discount factors applied to such collateral, as the net effect on the economy of these additional loans may outweigh the risks of a more flexible collateral requirement. .

In 2018, the Dalberg and KFW report estimated that there was at least a $100 billion annual gap in access to finance by agriculture in sub-Saharan Africa. The gap has been attributed to various factors including higher risk associated with agriculture, low bankability and lack of conducive legal and regulatory frameworks.

The World Bank highlighted regulatory constraints as a particular challenge, noting that Basel III raised minimum capital ratios and liquidity ratios for banks, which do not favor agricultural lending, especially long-term lending.