Optimism as commercial banks’ credit to agriculture posts highest growth rate

In its Monthly Economic Review (MER) for August 2023, the central bank stated that the strong growth of credit to the private sector was largely backed by higher demand for loans that are associated with improving the business and investment environment.

"Agricultural activities continued to record the highest growth of credit at 46.4 percent, followed by building and construction at 26.1 percent," reads part of the report.

The August growth seems part of a trend that was also reflected in the July BoT report, which indicated that credit for agricultural activities also recorded the highest growth rate of 40.6 percent.

The high demand for loans is attributed to decreasing costs, as data shows interest rates charged by banks have significantly dropped.

The overall lending rates slightly decreased to an average of 15.56 percent from 16.02 percent in the preceding month.

After the outbreak of Covid-19 which disrupted most economic activities around the world, the central bank came up with a set of measures aimed at accelerating credit to the private sector and lowering interest rates.

The measures included the reduction of the statutory minimum reserve requirement (SMR), which is the amount a bank deposits at the BoT.

According to the policy, a bank that extends credit to agriculture shall be eligible for a reduction in the SMR amount, equivalent to the loan extended.

In addition, a bank shall be required to submit evidence of lending to agriculture at an interest rate not exceeding 10 percent per year. This measure is intended to increase lending to agriculture, which is the mainstay of most Tanzanians. It also aimed to reduce interest rates on loans to agriculture.

The central bank also introduced a special loan amounting to Sh1 trillion to banks and other financial institutions for on-lending to the private sector.

The central bank said it would provide special loans to banks and other financial institutions at three percent per year for pre-financing or re-financing of new loans to the private sector.

A bank wishing to access the special loan facility should be required to charge an interest rate not exceeding 10 percent per year on loans extended to the private sector.

The measure is intended to increase liquidity for banks and reduce lending rates.

The BoT said the initiatives are paying off with the increase in credit to the private sector, the reduction of interest rates, and, more importantly, the increase in the speed of lending to the agriculture sector.

Agriculture employs more than 60 percent of the Tanzanian working population and accounts for 26 percent of the gross domestic product (GDP).

The economy is dominated by services, followed by industry and construction.

The sector is the fourth recipient of bank loans after personal loans, trade, and manufacturing.

Agriculture financing is done by the government-owned Tanzania Agriculture Development Bank (TADB), which is a specialised development financial institution, and other commercial banks that have a window for agriculture loans.

When tabling the 2023/24 budget in Parliament earlier this year, the minister for Agriculture, Mr Hussein Bashe, said that the government would continue collaborating with financial institutions so as to issue loans with lower interest rates.

"Until March 2023, the TADB had issued a total of Sh169.656 billion for facilitating production in agriculture. In 2021/2022, the CRDB bank issued loans to the agriculture sector worth Sh801 billion," said Mr Bashe in his speech.

Commenting on the financing, an agri-economist from the University of Dodoma (Udom), Dr Mwinuka Lutengano, said if the lending rates were further reduced, the move would attract more borrowers to commercial banks, especially from the agriculture sector.

"If agricultural loans increase, then productivity will also increase on some agricultural products. This is good not only for the borrowers but also for other players in the agricultural value chain," he noted.

Dr Mwinuka added that the trend seems to be positive.

Banking and financing expert from the University of Dar es Salaam (UDSM), Dr Tobias Swai, said; "My take is that agriculture plays an important role in the economy. Loans to agriculture may go to agro-inputs (seeds, machinery, fertilisers), farming activities, or processing by acquiring machinery for processing various industrial products and even for export of agro-products."

Dr Swai added that whatever the case, the increase in loans to the agriculture sector is a good signal to the economy, which might have been boosted by the central bank's initiation of special funds for agriculture as well as the focus on green financing initiatives by some of the banks.

He added that there are still challenges associated with agriculture lending, including known risks that can be mitigated in collaboration with insurance companies.

"There is a need to check where exactly the loans are going, and whether the number of borrowers is increasing. Is it for food crops or cash crops?" he asked.