Microfinance for agricultural firms: credit access and loan repayment in Tanzania

The commercial microfinance institution (MFI) in Tanzania deserves special attention. This paper investigates whether Tanzanian agricultural firms have a different probability to get a loan and whether their loans are differently volume rationed than loans to non-agricultural firms. Additionally, the paper analyses whether agricultural firms repay their loans with different delinquencies than non-agricultural firms.

The paper finds that:

• agricultural firms face higher obstacles to get credit but as soon as they have access to credit, their loans are not differently volume rationed than those of non-agricultural firms
• furthermore, agricultural firms are less often delinquent when paying back their loans than non-agricultural firms
• indeed, MFI overestimates the credit risk of agricultural clients and, hence, should reconsider its risk assessment practice to be able to increase lending to the agricultural sector
• on the other hand, it seems that farmers qualify less often for a loan as they do not fit into the standard micro credit product

The document concludes that:

• a higher risk exposition of agricultural firms does not necessarily lead to higher credit risk
• loan products have special importance if full exploitation of MFI potential for agricultural firms is intended, particularly in the case of rural areas where agricultural production plays an important role
• yet, loan products for agricultural firms should allow for flexible repayment schedules to avoid that agricultural firms are denied credit because their cash flows do not allow for a continuous loan repayment
• in addition, there is a high relevance for future research to verify these conclsions for further rural areas, different production types and for different countries