Why Saccos have potential to finance agribusinesses

By Editor

Editorial Cartoon

Oikocredit, an international co-operative financial institution last year  disbursed 10 billion/- to 12 Savings and Credit Co-operative Societies (Saccos) in Tanzania.

 

The micro-finance institutions would subsequently loan out the money to small entrepreneurs to help them expand, formalise and modernise their businesses.

 

 About 90 per cent of small businesses operate informally. They cannot access capital from formal financing channels such as commercial banks and financial markets due to some limiting factors, including the high cost of lending.

 

Development of agriculture is fundamental to poverty alleviation. One of the key constraints faced by both smallholder farmers and agribusinesses, is lack of finance for production and growth.

 

The survey was initiated, designed, implemented and funded by the Financial Sector Deepening Trust (FSDT) in collaboration with the Gatsby Charitable Foundation with co-funding from the Rockefeller Foundation in 2011. Survey findings show that regulations governing SACCOS are both unclear and poorly administered.

 

According to the Ministry of Agriculture, Food Security  and Co-operatives, there are 5,300 SACCOS or semi-formal providers of finance as of 31 March 2011, of which 3,000 are classified as rural.

 

The total membership is 970,000, of which approximately two-thirds are men. As of 31 March 2011, the total volume of outstanding loans amounted to 220bn/-and savings 238 bn/-. 

 

The survey shows that SACCOS have a number of advantages over banks and other microfinance institutions (MFIs). "SACCOS have an extensive presence in rural areas, with no need to build expensive branches on which banks and MFIs rely.

 

They also have a large volume of existing agriculture clients and therefore more familiarity with small rural credit than banks and MFIs," the study shows. It also shows that compared to banks and MFIs, SACCOS have a semi-formal governance structure, with a membership base that supports the focus on agriculture.

 

Therefore more is needed to improve liquidity and enable SACCOS to expand their operations. However, despite their perceived advantages, SACCOS encounter many challenges that have to be addressed by the entire financial sector.

 

These, according to the survey, include product development as well as specific needs for accessing appropriate technology and risk management instruments, including MIS and insurance. The researchers caution that for the SACCOS to succeed they will need better training to enhance capacity and improved access to appropriate technology and risk management instruments like management information system (MIS) and insurance.

 

According to the survey, major challenges facing SACCOS include inability to reach clients due to constraints of infrastructure (like roads and communications) and security issues, such as transporting cash over long distances.

 

Another challenge is that banks are generally unwilling to lend to SACCOS financing agricultural activities. However, the survey shows "if this hesitation can be eliminated, expansion of financial services to include smaller clients could be achieved by increasing wholesale lending."

 

The survey recommends the need to modernise the financial sector and suggests improvement of access to finance, transformation of agriculture; and the use of modern technology, especially mobile telephone. With regard to modernisation of the financial sector, the survey points out that infrastructure is the key to many issues, including access to finance.