Lowering interest rates is a laudable decision, more is needed
The bank said it would charge a single figure of nine percent instead of the usual 20 percent charged on agricultural loans as part of its efforts to improve the development of the agricultural sector.
Its efforts follow a stimulus package announced by the Monetary Policy Committee (MPC) of the Bank of Tanzania (BoT) early last year to mitigate the effects of the covid-19 pandemic on the economy.
Last year, the Central Bank conducted a monetary policy that helped maintain adequate liquidity in banks with overnight interbank interest rates ranging from 3 to 5 percent.
According to the BoT, credit to the private sector grew at a rate of 4.1% in July 2021, compared to 3.6% the previous month.
Private sector credit growth improved to 7.8% and 10% in November and December 2021, respectively, from below 5% for most of 2021, and was in line with the target of 10.6 % for 2021/22.
This is explained by an accommodative monetary policy, the measures adopted to increase bank lending and the fall in interest rates, and the rebound in economic activities following the reopening of the world economy. J
Statistics, however, indicate that the agricultural sector accounts for 26.9% of Tanzania’s Gross Domestic Product (GDP) and employs around 75% of the country’s working age population.
Before looking at the fundamental effects of lower interest rates for farmers, we must understand that there are other prerequisites for improving the efficiency of the agricultural sector.
There is no doubt that the timely availability of credit to farmers is essential for the development of agriculture, but the terms and conditions set by banks make it difficult for borrowers to obtain loans without stress. .
In most cases, a borrower is required to produce a fixed asset as security for the acquisition of a loan. Can vulnerable rural farmers meet these conditions? Definitely not (so let’s save that topic for another day).
For systematic growth of the agricultural sector and the rural sector more broadly, insurance is equally important because farming has always been a risky business in many parts of Africa, including Tanzania.
Smallholder farmers face a range of financial shocks and natural forces beyond their control that can dramatically impact their incomes and livelihoods. Agricultural insurance policies would therefore be a better option for farmers to limit these risks and greatly enhance the security of farmers.
Climate change is a key driver of agricultural shocks. More frequent extreme weather events and increased incidence of pests and diseases increase financial losses for farmers in many LDCs.
Surprisingly, insurers have largely overlooked smallholder farmers who put many rural farmers at risk. In this regard, the Tanzania Insurance Regulatory Authority (TIRA) should come up with the National Agricultural Insurance Scheme to cater to the interests of farmers and boost the agricultural sector.
The Farm Scheme will help restore farmers’ confidence as they are guaranteed that they will be compensated if something goes wrong during the farming season.
When banks finally realize that farmers have insurance coverage for their produce, they may be able to offer loans without hesitation.
Without access to formal insurance schemes, smallholder households resort to traditional risk management schemes, such as self-insurance and community funds, which leave them in a cash trap.
Globally, less than 20% of smallholder farmers have some form of agricultural insurance to protect against the impact of unforeseen events, and across sub-Saharan Africa this figure is less than 3%.
The author of this article is a corporate communications consultant based in Dar es Salaam. For comments, please contact him by email: [email protected] or mobile number: +255758897538