existing disparities and amplifying youth development across all settings. [17]
best-collateralized clients with whom banks have an ongoing relationship. Interest rate determinations are made on a case-by-case basis. Smaller loans (of TSH 1-10 million, equivalent to USD 427 – USD 4,474) attract higher interest rates as they carry higher risks, not to mention high transaction costs in extending such loans and monitoring clients. Loans of this size would go to smallholders, who are typically not organized into groups or associations, operate at lower scales, and who lack collateral. [21] A high degree of exposure in lending to smallholders Banks and agribusiness funds are hesitant to lend to or invest in many SMEs, particularly if they view them as dependent on smallholders. As a result, most agribusiness finance in Tanzania has gone to larger firms that typically limit their exposure to out-growers. The main reasons are the risk of improper or incomplete use of production inputs by smallholders, the tendency to side sell at least some of their produce (and often some inputs), and the aggressive purchasing tactics of “briefcase exporters,” who invest nothing in providing inputs and agronomic advice to farmers but arrive at the farm-gate with cash in hand at harvest time. On the other hand, commercial farms/firms will work with smallholder farmers, but they prefer to build a relationship of trust and loyalty over time. It should be noted that although development partners have [22] prioritized lending to SMEs that work with smallholder farmers as out-growers or suppliers (including farmers grouped in women’s and youth groups), technically, these are SMEs, but in the Tanzanian context, they are considered large firms. [20]
Across the country, most MSMEs (including those youth- led) engaged in the agriculture sector are challenged by limited capital and cannot easily access financial services from financial institutions and other capital venture providers due to the following reasons: Perceptions of financial institutions In general, financial institutions in Tanzania perceive agriculture to be highly risky. This is due to climate and weather risks, which can lead to production shortfalls for farms with no irrigation; and policy and regulatory risks, which can lead to increases in fees, duties and taxes. There is also the perception that Tanzania is not competitive in international markets, with very few exceptions (exports of avocados, e.g.), due to a host of factors related to the business environment. Also, bankers have a limited understanding of the agriculture sector in general (more so of the horticulture sector). This erodes bank appetite to lend to the sector - risk appetite. Furthermore, mobile banking is expensive, with high transaction costs. This renders them unavailable to small-scale farmers. [18] Mismatch of present financial products Most of the financial products available on the market are not specifically tailored to the needs of MSMEs (much less youth MSMEs), and this is especially true for businesses working in the agricultural sector. This includes products that are currently available but also includes the eligibility criteria put in place that are out of reach of MSMEs, especially those led by youth. L ack of information to MSMEs MSMEs lack information on available products and facilities that can be beneficial to them, and also information on why and when to take loans or use financial products to grow their business. Need for collateral Financial institutions normally request collateral, mostly in the form of immovable assets such as land or houses. This is a huge hindrance because most MSMEs do not have this collateral and, therefore, cannot access products from financial institutions. Private finance for agriculture and agribusiness is limited in Tanzania. This affects aspiring youth agri-entrepreneurs as well. Interest rates charged by banks depend on the loan size and duration. There appears to be no difference in rates charged on loans to horticulture farms and non-horticulture farms. Current commercial bank prime rates range between 18% and 23% per annum, which are only granted to the largest, [19]
Challenge 3: Lack of startup policy in Tanzania
Tanzania has no specific laws or policies related to startups, and existing laws do not expressly define the term “startup”. However, several policies have direct or indirect implications on the startup ecosystem and, therefore, impact the development of startups. These include the Small and Medium Enterprises (SMEs) Policy (2003), the National Trade Policy (2003), the National Research and Development Policy (2010), and the National Economic Empowerment Policy (2004). There are ongoing initiatives to develop startup policies both in the Tanzania mainland and in Zanzibar. The Tanzania Startup Association (TSA), National Economic Empowerment Council (NEEC), and Zanzibar Economic Empowerment Agency (ZEEA) are the groups spearheading these efforts. Similar policy formulation in the Tanzania mainland has advanced and is expected to be completed by the end of this year. [23]
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Youth Enterprise Policy Analysis Report
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