In this modern and fast paced world of economic development and financial inclusion where twitter feeds and latest global trends of the day are shared multiple times in a single day, it is sometimes tempting to overlook the basics that drive growth. With time we can even fall guilty of neglecting these basics on which we remain dependent on for true success that is worthy of our potential.
One such basic is the agriculture sector and its relationship to the growth and success of the financial sector in Tanzania. Upon a quick observation of the two sectors the contrasts could not be more apparent. The financial sector, with its banks, insurance companies, pension companies, stock and exchange markets, is perceived as the realm for success and where money is abundant. The agriculture sector on the other hand with its smallholder farmers who live in remote rural areas with limited facilities and infrastructure and their income is prone to weather, pests, and market related risks, is the perceived as realm for limited opportunities. Surely it would seem that the two sectors have nothing in common and that would explain why credit to agriculture is only 6.7% of commercial bank credit (BOT June 2018) behind sectors like trade 22% , personal 18.8% and manufacturing at 11.4%.
But within these statistics and perceptions therein lies the fallacy that the agriculture sector is non-relevant for the growth of the financial sector. In fact the agriculture sector is not only important for economic development in Tanzania, it is also the single most important sector for the growth and success of the financial sector.
For starters the agriculture sector is by far the largest sector of our economy. At 30% of GDP (BOT June 2018), the economic size of the agricultural sector is three times the size of trade at 11%, mining at 4.8%, and manufacturing at 5.5%. By contrast, the financial sector is only 3.3% of GDP, or roughly one tenth of the size of the agriculture sector. The sector accounts 38% of the value of exports in Tanzania, this goes up to 92% of value when not accounting for gold exports (NBS 2016). These earnings from just the main export crops (cashew, cotton, sisal, coffee, cloves, tobacco, and tea) are paid to over one million farmers and households each year. When accounting for total employment in agriculture, of which NBS in its 2016/17 Annual Agriculture Sample Survey, notes that there are 8.8 million operators (farmers mostly) that are engaged in agriculture activities in Tanzania. The numbers alone suggest that the sector is potentially the largest savings and financial services base for Tanzania if it can be effectively tapped into.
Agriculture sector is also important to the financial sector in other, less visible but still very critical way – it is a sector that has great influence on price stability, or the value of savings, for Tanzania. The Consumer Price Index (CPI) is measure that examines the weighted average of prices of a basket of consumer goods and services and is a very valuable indicator to measure inflation. In the CPI for Tanzania, Food and non alcoholic beverages account for 38% of the basket of prices of goods and services consumed (this is with weights revised in 2015). Therefore price increases in food related items have a very significant impact on the rate of inflation in Tanzania, and hence the value of savings. The food and beverage index has however been the fastest growing component of the CPI, having cumulatively increased by 78% in 2015 (2010 Base) and already having grown by 17% in 2017 (2015 Base). It is therefore in the interest of the financial sector and macroeconomic policy at large that the agriculture sector is productive and stable so that the value of savings, and the viability of the financial sector, maintained.
It is thus clear that the agriculture sector is important for the development of the financial sector and to its stability. The reasons as to why the two sectors, or farmers and the financial sector, do not enjoy more close relationships are several. The cost of transactions, particularly for rural households and farmers, given their low incomes, can be cited as a major constraint. The transaction costs for the farmer includes the time and hassle spent to transact with a financial institution given the limited value proposition of the services. Likewise for the financial services providers the transaction costs involve the costs of resources required to service a single transaction of farmers, given the profitability or revenues generated from the transactions.
So what needs to happen to reduce the transaction costs between the agriculture sector and the financial sector so that the two sectors can be symbiotic with each other and to be able to effectively catalyze each other’s growth?
1. Creating effective farmer organizations: This is the important first step to bring some structure to the financial transactions of the millions of smallholder farmers in Tanzania. With 8.8 million active farmers, this is a major undertaking. The Agriculture Sector Development Plan, Phase II (ASDP II), notes that effective farmer organizations are critical to enabling commercialization and value addition in agriculture (component 3 of ASDP II). This task, and the major responsibility of achieving component 3 of ASDP II, has been given to the Tanzania Cooperative Development Commission. Thus far we have seen cooperatives revived across a variety of value chains, including the six priority value chains (coffee, tea, cashews, cotton, tobacco, and palm oil).
2. Enabling structured market systems: Structured agriculture trading markets is a significant driver to bring smallholder farmers into the formal financial systems and potentially be a driver for savings in the formal financial sector. Though it is clear that the agriculture sector and the food and beverage industry at large, account for the bulk of financial transactions in Tanzania, it is only in a few value chains where these transactions are visible. The establishment of the commodity exchange, Tanzania Mercantile Exchange (TMX), was an important milestone to enable more structured trading of agriculture commodities. The development of warehouse receipt system (WRS) and the commodity exchange are noted in the ASDP II as among key activities in market enhancement in Tanzania. Development of other agricultural market systems that are non-commodity related such as nucleus and outgrower models are also needed. The financial sector can play a role in enabling structured markets for agriculture.
3. Creating cost-effective rural financial services linkages: This is where financial sector can play the most significant role to engage more closely with agriculture and rural markets. Linkages are collaborative approaches for financial and non-financial institutions to work together to service otherwise difficult target markets, particularly rural people. Delivering financial services to rural people remains a global challenge even despite the progress made in technology and microfinance. An estimated 2 billion adults in the world, mostly smallholder farmers, have no access to the types of financial services delivered by regulated financial institutions (IFADand World Bank 2015). Innovation beyond technology will be needed to enable models that can effectively enable services to be delivered. Models are more relevant than products as they leverage multiple institutions and thus are able to bundle more value more efficiently. In Tanzania models that can leverage infrastructure available in rural areas as well as public and private services will be most effective.
4. Leveraging capital effectively to enhance productivity and savings from agriculture sector: It will also be necessary for the financial sector to be more creative on how to leverage and create and deploy capital for the agriculture sector. The relationship is beneficial in both ways; whereas the agriculture sector has savings to offer the financial sector, it also has financial needs in consumption smoothing, asset growth, production and productivity, etc. The agriculture sector thus needs long term, equity, investment opportunities, long term savings, insurance, and working capital. The financial sector will need to offer a mix of products and services so that confidence in the relationship between financial and agriculture sector can grow and more participation and savings from the agriculture sector can be realized. Confidence will be best built by offering financial products that catalyze increased productivity, value addition, and incomes to the agriculture sector. The Tanzania Agricultural Development Bank (TADB) has a vital role to enable and to build confidence by offering and enabling financial products and solutions that catalyze agriculture productivity and value addition to the mix of financial products available. The particular position of TADB, as an apex development bank with access to long term capital, is truly unique in Tanzania and one that should be leveraged wisely. The capital of TADB can never be enough to address the capital deficits in the agriculture sector. TADB will thus need to facilitate mobilization of rural savings and to facilitate channels and opportunities for which the savings can be deployed.
The ASDP II envisions that by 2025 share of credit to agriculture will be 50% of all credit from financial sector. This will be a significant increase from the current 6.7% (June 2018). This will only be possible if the savings mobilized from the agriculture sector, farmers and rural households more specifically, increases significantly and that the value of the agriculture sector, including related industries, grows significantly. It will also require that the agriculture sector significantly mobilizes external savings in the form of portfolio investments and foreign direct investments. This will be possible, among other means, by market exchanges that have good participation of agriculture sector companies and industries, and market intermediaries and brokerages that can represent the agriculture sector well.
It will surely take time and multiple interventions to effectively integrate the agriculture sector into the financial sector and vice versa. It is however a very important journey to take as neither the agriculture sector nor the financial sector can truly reach the heights of their true potential without the other.