Tanzania Agricultural Development Bank (TADB), also known as the Farmer’s Bank, is a national development finance institution (DFI) established in 2015 to finance the country’s agricultural sector. Broadly, TADB’s mandate is to facilitate the transformation of the agriculture sector from subsistence level farming activities to more commercialized modern farming practices and agri-businesses, with the goal of contributing to Tanzania’s economic growth, poverty reduction, food security, and self-sufficiency.
At a macro-economic level, agriculture is significant to the economy of Tanzania, it contributes to 29% of the country’s GDP and provides employment to over 65% of the country’s working population. Despite its importance, private sector lending to the agriculture sector has historically been low, with constrained financing, particularly to smallholder farmers and SMEs, an impediment to sector growth.
To increase financing in the agricultural sector, TADB utilizes a variety of blended finance interventions, including co-financing arrangements with partner banks, provision of de-risking instruments, matching grant programs, interest rate grants and buy-backs, and provision of liquidity to financial actors.
We spoke to Japhet Justine, Managing Director of TADB about the agriculture financing gap, capital markets development in Tanzania, their flagship Smallholder Credit Guarantee Scheme (SCGS), and much more.
__UNCTAD recently estimated that there’s an annual financing gap of USD 260 billion when looking at the investment needs for food and agriculture in developing countries. In concrete terms, how is TADB using blended finance approaches to narrow this gap? __
The bank has developed and deployed several blended finance interventions to narrow the agriculture financing gap. I’ll just mention a couple here.
First, we have adopted the Integrated Value Chain Financing (IVCF) model, where solutions are being developed and deployed to ensure impact is created along the full value chain, from production to markets. This IVCF model is used alongside blended financial instruments to deliver interventions that create sustainable socio-economic impact. Our model and instruments have resulted in strong partnerships with private sector financial institutions as opposed to competition and/or the crowding out of these institutions from the agricultural sector.
A good example of this is our Smallholder Credit Guarantee Scheme (SCGS), which catalyzes credit access for smallholder farmers to increase production and livelihoods. The USD 25 million fund is aimed at de-risking and providing liquidity to banks and financial institutions to catalyze financing for smallholder farmers and agri-SMEs. The scheme works by providing commercial banks with a 50% credit risk guarantee to enhance loan collateral, it goes a step further and provides the partner financial institutions with liquidity of up to 50% of the approved loan amount, which they then blend with their own funding and advance as agri-loans to smallholder farmers.
Additionally, through partnerships with private sector financial institutions, TADB engages in co-financing arrangements. With this intervention, TADB plays a catalytic role by mobilizing resources from its own balance sheet and blending these funds with financing from commercial banks and development partners in the form of debt, equity, and/or grants to support agri-sector projects. The approach works as follows; TADB works with clients to design and structure agri-sector projects with developmental impacts. Thereafter, the bank provides long term debt financing to support the capital expenditure of the project, this financing is usually advanced at concessionary rates hence providing the beneficiaries with affordable credit access that would not be available from conventional financial institutions. We then work with commercial banks by crowding in private sector credit to provide short term working capital facilities required to operate the projects. TADB may also bring in other development partners to provide grants and technical assistance to the project. This approach has helped build credit appetite of conventional banks on projects that would ordinarily not have been able to raise commercial debt financing – which is the result of other financiers finding comfort in TADB’s participation and backing.
Another concrete example is the TADBloan product, which is an intervention to reduce drudgery for smallholder farmers through affordable mechanization and equipment loans under the Bank’s . The product blends TADB funding with interest reduction grants from mechanization suppliers. Through this program, TADB has been able to provide mechanization loans at interest rates of between 12-15% p.a compared to industry interest rates of up to of 30%. The success of this product has led to other commercial banks leveraging TADB’s experience and replicating similar products.
Finally, TADB’s investment philosophy has centered on showing other market actors the potential for financing agriculture, particularly when they see the opportunities as having a high degree of risk. For example, TADB supported the revitalization of the country’s coffee andsectors by investing over TZS 114 billion (~USD 49 million) to revive 4 coffee unions and TZS 46 Billion (~USD 19.8 million) to revive 3 cotton unions positively impacting over 157,000 smallholder farmers. TADB’s intervention ultimately lead to more credit appetite at the commercial bank level.
__Where does the most potential for blended finance lie within the value chain financing model adopted by TADB (e.g., in production, processing, aggregation, storage)? __
In our opinion, the greatest opportunity to leverage blended finance lies in the processing component of the IVCF model. Tanzania still exports a large component of its agricultural output in a raw state, hence exporting jobs and incomes. To positively contribute to the economic growth and job creation potential of the agricultural sector, we see agro-processing as one of the areas that require concerted efforts from development partners, the public sector, and the private sector. Beyond creating jobs, agro-processing also expands and provides sustainable local markets for smallholder farmers.
To this end, we see opportunities in increasing support for both SMEs and large corporates in agro-processing through a multitude of instruments along the debt-equity spectrum. On the debt front, we see opportunities for more banks to actively finance agri-SMEs and link agri-SMEs to large corporate off-takers with financial products such as short-term loans, supply chain financing, and factoring and invoice discounting solutions. Smaller enterprises still struggle with collateral, so credit guarantees from DFIs can also be powerful instruments to support this segment.
On the equity front, we note that many SMEs still rely on bootstrapping as a form of funding in the early stages of operations, with debt financing being used once the company has built a sufficient track record and collateral. However, debt financing is limited by regulations and the credit risk appetite of the financial institutions concerned. This presents opportunities for equity funding from venture capital, private equity (particularly permanent capital vehicles (PCVs) that have long investment horizons), and public share issuances to provide patient capital to scale operations. The local private equity and venture capital space is still highly underfunded. Tanzania receives only 2% of private equity and venture capital financing that flows into East Africa, despite being the second largest economy in the region.
Lastly, to achieve the necessary impact and scale to transform and grow agro-processors, development partners have a key role to play by increasing access to concessionary wholesale funding to financial institutions.
Can you tell us more about the Smallholder Credit Guarantee Scheme (SCGS)? To date, how much additional financing was extended by partner financial institutions? Can you share any numbers/data on the development impact?
The SCGS has led to new financing in excess of USD 33 million to support smallholder farmers and small enterprises with strong linkages to smallholder farmers. The socio-economic impact has been extensive. To date the scheme has supported over 11,200 direct beneficiaries and 755,000 indirect beneficiaries through 10 partner financial institutions. Farmers have been able to increase acreage and production, thereby improving their household incomes. Additionally, the scheme has supported the financial inclusion agenda, as all beneficiaries are required to maintain bank accounts to facilitate access to the supported products. Furthermore, because of the scheme, financial institutions that previously shied away from agri-lending have started offering agri-loans to farmers.
An interesting outcome of SCGS has been how it has used its concessionary liquidity component to mandate partner financial institutions to reduce interest rates to smallholder farmers, from prior interest rates of 19-30% to current interest rates ranging between 14%-19%, thereby reducing the debt burden and improving affordability for smallholder farmers.
Finally, the SCGS also supports, with 20% of the directly impacted beneficiaries being women.
Where do you see the opportunities in leveraging blended finance-based approaches to mobilize additional private investment in the sector?
At an instrument level, we see opportunities for greater participation of development partners in providing concessionary financing, more private equity and venture capital financing, and grants aimed at supporting research and development and technical capacity building at farm, agribusiness, and financial institution levels.
However, what I want to focus on, which is specific to Tanzania, is increasing access to equity capital and strengthening and deepening capital markets.
Currently, Tanzania’s capital markets are still at a nascent stage with a total market capitalization of TZS 16.5 trillion (~USD 7.1 billion). The Dar es salaam Stock Exchange (DSE) can be utilized to raise equity and debt financing through public share and bond issuances with raised financing blended with development and commercial bank financing. The DSE has established the Enterprise Growth Market window which has less onerous listing requirements in efforts to attract SMEs (important actors in the agriculture sector). There is potential for agriculture sector actors, particularly emerging corporates, to utilize such windows to raise funds.
To spearhead this, development partners that provide long term concessionary financing can support capital markets fundraising by providing technical assistance support and introducing covenants that require beneficiaries to access a portion of their financing through capital markets to be eligible for additional concessionary financing.
The beauty of capital markets development, especially in the blended financing ecosystem, is their catalytic role in crowding in financing from various investors and in providing investors with exit options at the end of their preferred investment horizon, which is a prerequisite for many private equity and venture capital investors. Furthermore, capital markets can be used to mobilize private savings of Tanzanians in the country and the diaspora to become indirect participants in the country’s agri-industrial transformation.
Additionally, we would like to see the use of more blended financing models to scale financing solutions for women beneficiaries, as they face more hurdles in accessing finance, for many reasons, including inadequate collaterals.