Strengthening Tanzanian Agribusinesses and Creating Pathways for Access to Finance
The agricultural sector in Tanzania
As in many sub-Saharan African countries, the Tanzanian agricultural sector plays a significant role in the country’s overall economy. Agriculture accounts for approximately one-third of Tanzania’s gross domestic product (GDP), and the sector employs approximately 75% of the working population. The biggest crop in the country is maize, and other common food crops include wheat, rice and sweet potatoes. In addition, farmers also often grow coffee, cotton and tea as cash crops.
Of the nearly 300 Tanzanian agribusinesses we’ve assessed, almost two-thirds are classified as “maturing.” Maturing agribusinesses are often characterized by rudimentary policies and processes, a lack of technology and low access to finance. As a result, they tend to be vulnerable to external risks and environmentally unsustainable in their practices. In Tanzania, many agribusinesses cannot access formal finance, and the use of modern agricultural practices, such as irrigation, is limited.
Agribusiness professionalism can help strengthen the sector
By assessing an agribusiness’ ability to operate as a business and then using the data to strengthen weaker areas of operation, it can help strengthen the sector.
Agribusinesses that are more professional see many benefits, including increased finance and resilience. They are also more independent and need to rely less on outside forces. This allows the entire agricultural sector to grow stronger.
Professionalism can increase access to finance
Traditional lenders, such as banks, tend to be hesitant to invest in agriculture because of perceived risks. However, banks also must perform extensive and often expensive due diligence before providing a loan. Because many agribusinesses do not meet the banks’ standards, the due diligence process can often be in vain. Thus, agribusinesses must meet these standards and communicate these to the banks in a way they understand. This is a challenge faced by many agribusinesses in Tanzania.
A professional agribusiness is more likely to meet the standards laid out by most banks. Specifically, we have found that of the dimensions and subdimensions that our assessments measure, the key influences on receiving loans are financial management, marketing strategy, governance and record keeping. If an agribusiness’ goal is to become creditworthy, these four areas are the most important to strengthen.
Our research has also found that the average loan size an agribusiness can access increases as the level of professionalism increases. Very immature agribusinesses usually can only access small loans, often from donor projects or informal credit groups. However, professional agribusinesses can sometimes access more significant loans from traditional lenders like banks. These larger loans allow the agribusinesses to make larger investments into their business, which leads to more growth. Therefore, if Tanzanian agribusinesses grow more professionally, they can also access greater loans, which will help them invest in their businesses and grow.
Modern agricultural techniques can increase resilience
Tanzanian agriculture is mostly rainfall dependent. However, precipitation in Tanzania has been growing more erratic due to climate change. Annual rainfall has been decreasing since 1960, and between 1980 and 2010, there were six major droughts. While some crops may benefit from the changing rainfall, others will not. Decreasing the dependency on rainfall will help all these crops to thrive.
Implementing irrigation is an important step the Tanzanian agriculture sector can take to decrease rainfall dependency. A project by the Food and Agriculture Organization of the United Nations (FAO) has already had success with this. It is also a significant focus of the Tanzanian government’s Agricultural Sector Development Programme. The professionalization of Tanzanian agribusinesses would complement these efforts. Professional agribusinesses are more capable of making advancements, such as integrating modern agricultural practices. As they also have greater access to finance, they can afford to make these changes. Increasing professionalism will also make it easier to increase irrigation.
Proof of concept in Tanzania
Our solution has helped multiple clients increase Tanzanian agribusinesses’ access to markets and finance. For example:
The National Cooperative Business Association CLUSA International (NCBA CLUSA), as part of their USAID-funded Creating an Environment for Cooperative Expansion (CECE) project, used SCOPEinsight’s assessments to ascertain the project’s cooperatives strengths and weaknesses. From this, they developed targeted coaching to 25 agricultural cooperatives and savings and credit cooperatives (SACCOs) in six different regions across the country. This has helped these cooperatives build capital and create financial reserves, which in turn helps the cooperatives grow and serve their members and provide them with a safety net, if necessary.
For NewForesight Consulting (NFC) on their project funded by the Bill and Melinda Gates Foundation (BMGF), we provided crucial data on Tanzanian Agri-food Industry Organizations (AFIOs). This data helped NFC develop a framework for BMGF to support AFIOs in creating inclusive agricultural transformation. This change will then lead to improvements beyond Tanzania.
With the Alliance for a Green Revolution in Africa (AGRA), and a member of our Local Expert Network, Sundy Merchants, we are working with financial institutions to institutionalize a procedure that helps banks optimize their due diligence procedure using bankability metrics (and SCOPEinsight data) when lending to agribusinesses. We envision the codification of these metrics into the targeted banks’ lending procedure and will hopefully result in an overall increase in access to finance for Tanzanian agribusinesses.