Experts call for a review of the monetary policy and regulations related to agricultural lending as the sector plays an important role to the economy. PHOTO | FILE
Dar es Salaam. Given government’s efforts to revamp the agriculture sector, the demand for agri-finance is expected to increase. However, since the current financing flow is inadequate, more private capital is needed to boost the sector’s growth.
For instance, although credits worth Sh20 trillion were injected into the economy last year, only 8.3 percent (about Sh1.66 trillion) of the said loans were disbursed to the agriculture value chain.
The figure portrays local farmers as the most underfinanced group, which makes them fail to purchase agricultural inputs, adopt new technologies, and undertake other investments associated with higher yields.
According to the Bank of Tanzania (BoT)’s - Monthly Economic Review for June this year, the agriculture sector has grown by 42.1 percent, from 10.7 percent recorded in June the previous year.
Data from neighbouring Kenya indicate that the total loan portfolio to the country’s economy, by December last year was $27.1 million in December 2021, with 4 percent (about $1.1 million – equivalent to Sh2.56 trillion) channelled to agriculture.
The country’s agri-finance trend prompted Mr Hussein Bashe, the agriculture minister, to call for monetary policy reforms in order to turn the sector into a commercial one against the current subsistence status
“The country’s monetary policies and regulations including the International Financial Reporting Standards (IFRS-9), are not agriculture-friendly. Reform is vital in order to align with government’s initiative of revamping the sector,” said Mr Bashe.
Mr Bashe was of the view that the demand for agricultural finance remains unmet, and that the sector is in need of more than what is depicted thus supporting government’s efforts to commercialise the sector.
“I want to see more agricultural lending and other related funding being extended to local farmers in the field. I understand that CRDB and NMB are doing a tremendous job, I do commend their initiatives, but I would like to see more credits disbursed to farmers,” he noted.
When asked why financial institutions shy-away from lending the sector, Dr Nicholaus Mgaya, an independent economist said: “Lending is a core business in the banking sector, credit risk falters financial institutions to freely finance the agriculture sector.”
He added; “On the other hand, monetary policies emphasised by the BoT are aimed at protecting deposits, and ensuring the economic and financial sector’s stability, as a result, there are some concerns that they restrict agricultural lending.”
According to him, seasonal production cycles, and natural threats such as climate change and the likes, don’t align with conventional banking practices and the financial regulatory environment, and as a result, agriculture is identified as a risk, hence being underserved by banks and other financial institutions.
Dr Mgaya further appealed; “While maintaining appropriate risk management in the financial sector, the monetary policy and regulations related to agricultural lending need to be revisited as the sector plays an important role to the economy.”
Commenting on the issue, Ms Mwajuma Mohamed, an agribusiness practitioner said; “Banks find it difficult to finance the agriculture sector due to several risks such as price instability, climate change, regulations, as well as inadequate financial records.”
Aceli Africa; a market platform that facilitates the finance market for an inclusive agriculture sector in Africa, offers some recommendations towards policies that impede agriculture finance.
Aceli suggests in a report that since the African Development Bank (AfDB) and other African policymakers issued the Kampala Principles Agricultural Finance in Africa, it is high time for its implementation.
The Kampala principles call on national governments to strengthen agricultural finance policy by establishing a high-level coordination body to promote agri-credit as too often, responsibility for policies impacting agricultural finance falls into a void.
Besides, Aceli calls for an expansion of the Expected Credit Loss model for calculating the IFRS-9 to include Expected Development Impact (EDI) for agriculture and other high-impact sectors.
IFRS-9 is an international accounting standard, which guides central banks in setting national-level policies.
“To be clear, we recognise the real risks of lending in agriculture and affirm the central bank’s role in ensuring appropriate risk-weighted capitalisation for lenders. However, we believe that policymakers should take a broader view that balances risk management with economic growth considerations,” part of the report reads.
Accordingly, Aceli proposes that the EDI should be incorporated into the Expected Credit Loss equation and recommends that governments should fund EDI through stimulus incentives to lenders that would offset the limiting effect of applying 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 in relation to their risk-weighted assets, is said to be higher (ranging from 10-15 percent) than the International Standard under Basel III (8.5 percent).
Therefore, the financial platform advocates possible adjustments of CAR downward, so they are closer to 8.5 percent.
When it comes to the Loan Classifications and Provisions policy, which demand banks to classify their loans based on delays in meeting loan repayments, the report suggests that with the agriculture sector, repayment delays may not necessarily indicate that the loan is non-performing.
Therefore, Aceli appeals for a differentiated approach by sector that is informed by data on loan performance, which may be worth considering. According to the working paper, the central bank should also task banks to allocate a portion of their loan portfolio (about 10-15 percent) to agricultural financing and that any bank having a shortfall in lending to the sector would be penalised.
It is also recommended that in a move to de-risk the sector, there should be an entity/fund detached from the BoT policy, which could pool capital and distribute it to private sector lenders, which in turn would invest in innovations that can reduce the cost and risk of agricultural lending.
Furthermore, banks should allow for alternative forms of collateral, including stored produce, equipment, and chattels, and revise the discount factors applied to these collaterals as the net effect on the economy from this incremental lending may outweigh the risks of a more flexible collateral requirement.
In 2018, Dalberg and KFW report estimated that there was at least $100 billion annual gap in access to finance by agriculture across sub-Saharan Africa. The gap was attributed to various factors, including higher risk associated with agriculture, poor bankability and the lack of conducive legal and regulatory frameworks.
The World Bank highlighted regulatory constraints as a particular challenge, noting that Basel III raised the minimum capital ratios and liquidity ratios of banks, which do not favour agriculture lending, especially long term lending
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