Microfinance is very critical in increasing crop production

19Nov 2018
Muharram Macatta
The Guardian
Microfinance is very critical in increasing crop production

Agriculture is the major means of livelihood for the rural people of Tanzania.  It is also the backbone of national economies, the main source of foreign exchange and the most important source of employment.  

Microfinance has increased the bargaining power of women, who are typically more interested in bringing sanitation home (Source: Gramalahya)

It is not surprising that in the 1980’s the paradigm shifted towards agricultural finance in developing countries. Microfinance became the alternative to the fall-out of government intervention to alleviate poverty through credit support to rural farmers.


However, till now, no study has been conducted to ascertain the impact of microfinance on crop production in Tanzania. This analysis therefore investigates the impact of microfinance on crop production in Tanzania with specific reference to the Muheza District in Tanga region of Tanzania.

The analysis employed the quantitative method approach. The sample size that was used in the study was hundred (100) respondents who were drawn from the list of farmers in the district who have somehow accessed microfinance.

The results show that there is a significant relationship between microfinance and crop production. Also, consistent with the perceptive views of the respondents on the impact of microcredit on crop production, the regression result showed that a Tz.1000/- increase in microcredit to the farmers would increase crop production by more than one-third (0.314) of a bag.

This shows that microcredit has significant impact on crop production.  Microfinance is increasingly being used to assist farmers in rural and peri-urban centers in recent times.

Although governments and international aid donors have been subsidizing credit to small farmers in rural areas of many developing countries, microfinance is seen as viable alternative in reaching out to the poor farmers in rural communities who largely depend on subsistence agriculture.

Therefore, microfinance is very critical in increasing crop production. It is further argued that despite the important contribution of agriculture to the GDP of the poorest developing countries, the supply of financial services to farmers is still limited.

It is also further opines that the more rural populations contribute to GDP and the greater the percentage of agricultural workers, the lower the rate of financial inclusion.

 It is a universal affirmation that microfinance can play an important role in agricultural finance and is capable of mitigating the many challenges associated with the sector.

In order to increase farmers’ access to microfinance, several conditions must be met:

1. Organization of the agricultural sector;

2. Professionalization of the various actors, at all levels;

3. A supply of diversified and well-adapted financial services;

4. Access to non-financial services that promote agricultural development;

5. MFI access to medium-and long-term refinancing, at affordable rates;

6. Diversification of regions and types of activities financed, keeping in mind the primary objective of financing rural and agricultural sectors;

7. A regulatory framework adapted to the challenges of agricultural and rural finance.

These various factors underlie the fact that meeting the financial needs of farmers on a sustainable basis requires governments (including the 5th phase Government which is tackling the current cashew nuts crop saga) to support the microfinance sector, as was the case, for example, in the creation of agricultural credit institutions in Europe (France).

According to our wealth of experience, microfinance is the provision of a broad range of financial services such as deposits, loans, savings, payment services, money transfers, and insurance to the poor and low-income households and their micro-enterprises who are excluded from the formal financial systems.

Similarly, some other experts see microfinance as the attempt to get better access to small deposits and small loans for poor households neglected by banks.

Thus, following the strand of the definitions, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector.

By far, agriculture is the major means of livelihood for the rural people in Tanzania. It is also the backbone of national economies, the main source of foreign exchange and the most important source of employment.

Therefore, the argument in the literature has been very consistent in terms of using microfinance to increase crop production. In this backdrop, it is argued that for the adoption of microfinance in crop production since it has the potential of increasing crop production and impacting the lives of farmers.

It is not surprising that in the 1980’s the paradigm shifted towards agricultural finance in developing countries. Microfinance became the alternative to the fall-out of government intervention to alleviate poverty through credit support to rural farmers.

In the Tanzanian context, although the Agricultural Development Bank (ADB) under the late General Manager Mr. Victor Makame provided credit facilities to farmers to increase crop production, microfinance institutions are now at the forefront of advancing credit to farmers.

Despite the recent growth in the microfinance sector, advancing loans and credit to farmers to increase crop production is still a challenge. 

It is reported that in order for microfinance organizations to venture into crop agriculture, it is important to understand the context of crop agriculture and their potential role in it.

 Indeed, agricultural microfinance is not business as usual but requires a different approach from that typically applied in many microfinance organizations.

The agricultural sector is characterized by generally much lower returns on capital, slower velocity of capital, higher uncontrolled risks and less understanding of finance and business.

Also, although it is argued that improved productivity and output levels will be achieved through the introduction of new production technology, credit is a prerequisite to gain access to such technology particularly for the small-scale farmers in the United Republic of Tanzania with little or no capital of their own.

Microfinance initially had a limited definition - the provision of microloans to poor entrepreneurs and small businesses lacking access to bank and related services.

The two main mechanisms for the delivery of financial services to such clients were: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

Over time, microfinance has emerged as a larger movement whose object is "a world in which as everyone, especially the poor and socially marginalized people and households have access to a wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.

 Many of those who promote microfinance generally believe that such access will help poor people out of poverty. For many, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

For others it is a way for poor to manage their finances more effectively and take advantage of economic opportunities while managing the risks.

The terms have evolved - from micro-credit to micro-finance, and now 'financial inclusion'.  Microfinance is a broad category of services, which includes microcredit.

 Microcredit is only about provision of credit services to poor clients; only one of the aspects of microfinance, and the two are often confused.

Critics often point to some of the ills of micro-credit that can create indebtedness. Due to diverse contexts in which microfinance operates, and the broad range of microfinance services, it is neither possible nor wise to have a generalized view of impacts microfinance may create.

Many studies have tried to assess its impacts.  Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is enhance financial inclusion. 

In developing economies and particularly in rural areas, many activities that would be classified in the developed world as financial are not monetized. That is, money is not used to carry them out.

This is often the case when people need the services money can provide but do not have dispensable funds required for those services, forcing them to revert to other means of acquiring them.

We hereby cite several types of needs:

  • Lifecycle Needs: such as weddings, funerals, childbirth, education, home building, widowhood and old age.
  • Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
  • Disasters: such as campfires, floods, cyclones and man-made events like war or bulldozing of dwellings.
  • Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job, etc.

People find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value.

Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry and precious metals. In the 1980s we demonstrated that "micro finance could provide large-scale outreach profitably," and in the 1990s, "micro finance began to develop as an industry".

In the 2000s, the micro finance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty.

While much progress has been made in developing a viable, commercial micro finance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand.

Microfinance is the proper tool to reduce income inequality, allowing citizens from lower socio-economical classes to participate in the economy. Moreover, its involvement has shown to lead to a downward trend in income inequality.

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