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Financing sustainable business in Tanzania
Mango register member Chris Oliver recently began his placement as Business and Finance Training Programme Director at Equity for Tanzania (EFTA). A social enterprise run on strict commercial lines, EFTA aims to increase employment and household incomes in Tanzania by providing equipment loans to start-up and growing businesses. In this blog entry, Chris tells us more about their incredible work.
Tanzania is a fascinating country and economy. It has fertile land and a favourable climate across many parts of the country which enables people to grow many different crops. Northern Tanzania (where I am based) is lush and verdant and supports a large variety of cash crops including coffee, fruit (mangos, bananas, avocados), vegetables (tomatoes, onions, peas, beans, peppers) and cereals (wheat, barley, sorghum, millet and sunflowers). Further South, there is tea, rice, tobacco, cashews, teak etc. There are large commercial farms and agricultural processors in the country, but most of the land is in the hands of small holders with a typical farm size of less than 5 acres. It is not uncommon for a family to try to exist on 2 acres for maize, millet etc for food and 1 or 2 acres for cash crops (to prove income for school fees etc.).
The role of small farmers in international commerce
There is an interesting dependency between large agricultural processors and small farmers. Many large processors have supply contracts into overseas markets (for example, fruit and vegetables sales to European supermarkets) and can take advantage of the Tanzanian harvest cycles to fill gaps when, for example, avocados are not available from South America or peas, beans and sweetcorn are not available in Europe. The processors may have farms of their own which provide some of the input to their processing and packing plants, but still rely on small farmers to fill their production capacity. This means that the large companies want and need the small growers to do well; to grow the right variety of their crop and to employ good practices to achieve the quality and yields that are needed. Many have outgrower support teams, who provide advice on seed selection, irrigation techniques, the use of chemicals, control of diseases, etc. They do not, however, provide funding for equipment which the farmers need to perform to their optimum – and this is where EFTA plays it role.
EFTA was founded in 2006 by a group of UK businessmen with links to Tanzania and with loans and donations from a group of hedge fund managers. It has grown steadily after proving the viability of its model in its first few years and now receives funding from development banks which has boosted its lending capacity. It currently has USD 2 million invested in loans and this will rise to USD 5 million in the next 2 years and with a target to reach USD 20 million thereafter.
Offering an easy alternative to commercial banks
The need for finance for businesses in Tanzania is very clear. Commercial banks are conservative, expensive, slow to make decisions and require security (such a title deeds) for most loans and advances. This makes it very hard for small businesses to get the money that they need to grow and so most are constrained by the amount of money that they can generate from profits or otherwise can borrow from family and friends. EFTA’s business model is designed to offer an easy alternative to the banks. It focuses solely on giving loans for business equipment and requires no security from the borrower, other than the collateral in the equipment itself.
Finding innovative ways to promote growth
EFTA supports growth in the agriculture, construction and service sectors. It provides loans for income-generating equipment that increases farm production yields, quality and consistency or to produce other goods and services . For example, irrigation systems can extend growing seasons, greenhouses can reduce the need for pesticides and fertilisers and improve quality, tractors and ploughs enable timely and precise planting of seeds, on-farm storage reduces harvest losses and milling machines, mixers, grinders etc. to enable processing and greater value added. The equipment leasing model is designed so that EFTA has a relatively low-risk loan book. If loans do go bad, there is always some residual value in the equipment itself, which EFTA can repossess and sell or re-lease to recover some or all of its losses.
Many of the businesses it lends to are small and informal and may not even have a business bank account. Very few have audited financial statements or business plans, but all have an owner who knows his business, his costs and his market and who has people who can provide a character reference for her/him. In this respect EFTA is lending on the quality of the individual, not on the value of her/his personnel assets, and prepares a cashflow forecast from information provided to show that the business is viable and can generate enough money to meet its loan obligations.
This approach has been successful in enabling individuals to grow successful and scaleable businesses, such as the farmer who took a loan for a tractor to grow barley on his 15 acre farm for a national brewery. He has since expanded his farm to more than 200 acres by renting land and investing in more machinery. This individual was not educated beyond primary school and is still illiterate but has a gift for business which he has been able to leverage through EFTA.
It has another customer who raised chickens from hatchlings, but was unhappy with the quality of feed available locally and starting mixing his own (with fishmeal, dried blood, barley, rice etc). He saw his own chickens thrive and approached EFTA about purchasing an industrial mixer and launching his own brand of chicken feed. Three loans and three mixers later, he is clear of debt and is one of big names in the local animal feed industry.
Want to know more about EFTA? Visit them online.