Financial Services and Economic Development

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This chapter describes the study area: its demographic patterns, economic activities and economic infrastructure. It also explains the study methodology: data sources, collection and sampling techniques, organization and conduct of the study, and finally it provide the analytical techniques employed.

Choice of the Area

The choice of Babati district as an area of study was dictated by several considerations, which include: (i) underdevelopment of Babati – hence an ideal representative of most rural districts of Tanzania, (ii) Babati district is among the major food crop producing districts in the country, which have no reliable agricultural finance system, (iii) Babati experienced the problem of commercial financial institutions pulling out from participation in providing financial services in rural areas, especially after the liberalization of the financial sector, and (iv) financial NGOs and co-operatives are not growing fast enough to meet the observed “demand gap” in provision of financial services.

The Profile of the Study Area

The geographical location and Administrative divisions

Babati is one of five districts of Manyara region. The other districts are Kiteto, Simanjiro, Mbulu, and Hanang. Manyara region was established in 2002, when the government split the former Arusha region into two regions – Manyara and Arusha – each with five districts respectively. Geographically, Manyara region lies in the northern part of Tanzania bordering Arusha region to the north, Kilimanjaro and Tanga regions to the east, Morogoro and Dodoma regions to the south, and Singida and Shinyanga regions to the west (for details refer Figure 3.1). Babati district shares borders with Hanang and Mbulu districts to the west, Karatu, Ngorongoro and Monduli districts to the north, Simanjiro district to the east and Kondoa district to the south (RC and Planning Commission, 1998:15; NBS and RC Manyara, 2005:1).
Babati district has a total land area of 6,069 square kilometres covering about 6% of the former Arusha regional total land area. Farming activities take up about 35% of the total district land, while other uses are grazing 30%, game reserves 23%, and forests 5%. The remaining balance of 7% is utilized for buildings, occupied by water bodies, mountains, and roads. Arable land is estimated at 180,000 hectares, of which only 111,840, equivalent to 62% was under cultivation in 1997 (DC, 2001:13; NBS and RC Manyara, 2005:1-2).

Demographic Patterns

According to the Population Census of 2002 (URT, 2003b:171), Babati district has a population of 303,013 (men 156,169 and women 146,844) constituting about 29% of the total Manyara regional population. Comparatively, Babati district is more populated than any other district in the region. The district population is found in 59,970 households with an average size of 5.1 people, as compared to the regional total households of 199,860 with an average households’ sizes of 5.2 persons16 (URT, 2003b:2-9).
In terms of growth and density, the district population is growing at a higher rate of 3.8% and a density of 50 persons per square kilometre as compared to the national figures of 2.9% per annum and a population density of 39 persons per square kilometre17. Table 3.1 below provides summary of some selected population indicators for the region.
Administratively, districts in Tanzania are sub-divided into Divisions that are further sub-divided into Wards that are made up of villages. Villages constitute the lowest unit of local government administration. Babati district is comprised of four divisions made up of twenty-one wards, and eighty-two villages (RC/Planning Commission, 1998: 255, for details see Figure 3.3). Babati division, which has six Wards that are composed of twenty-eight villages, has a population of 102,849. Bashanet division, which comes second, has 90,826 people dispersed into six wards made up of twenty-two villages, followed by Mbugwe (56,408) and Gorowa (52,930). Table 3.2 contains summary of basic indicators for the district.
Babati is a rural district with about 85% of its population living in the rural areas. The district population is comprised of diverse ethnic groups, with the Iraqw tribe being the majority constituting over 40%, followed by the Gorowa/Fiome (35%). The remaining 25% is made up of the Mbugwe, Maasai, Barbaigs, Waasi, and few other tribes.

Description of the Rural Economy of Babati

The economy of Babati district depends mainly on agriculture and livestock keeping. The majority of the rural households practice agro-pastoralism for their living. The district’s agricultural contribution to total regional GDP is estimated at about 40%. In terms of employment, when lumped together, agriculture and livestock keeping employ more than 85% of the rural population. Other economic activities are fishing, mining, tourism, craftsmanship, commerce and employment (NBS and RC Manyara, 2005:32).

 Agricultural Production and Farming Systems

There are two main agricultural crops in the district: cash crops and food crops. Cash crops are those crops produced by farmers solely for the purposes of cash income earnings whereas food crops are for subsistence. In most cases these are crops which have ready markets18. Based on these classifications, cash crops produced include: coffee, maize, pigeon peas, groundnuts, simsim, paddy, sugar cane, cotton, sunflower, wheat, seed beans, pyrethrum, and vegetables and fruits. Although pyrethrum and cotton grow well in some parts of the district, farmers are reluctant to grow them due to lack of market, or at times fetch low prices. Major food crops produced are maize, seed beans, paddy, sorghum and millet, sweet/round potatoes, cassava, bananas, leguminous crops, and vegetables and fruits (DED, 2001:3).
In terms of cropping patterns smallholder farmers are the majority owning between less than one to five hectares growing variety of crops. Majority of households in Babati division, have an average farm sizes of three hectares as opposed to Mbugwe and Gorowa, where average farm sizes are two and five hectares respectively. In land constrained parts of the district such as in Bashanet division, average farm sizes are as low as one hectare while in areas such as Gallapo, Qash, Mamire, and parts of Mbugwe farm sizes are as big as ten hectares due to availability of land (DED, 2001:4).
Apart from smallholder producers, there are few large-scale farmers who own estates, specializing in production of single variety of crops solely for commercial purposes. These are mainly found in the Kiru valley occupying about 32,345 hectares producing sugar cane. There are few others in Gorowa and Bashanet divisions where wheat and barley are cultivated and grown commercially. Maize, pigeon peas and beans are other types of crops grown for commercial purposes in Gallapo, Mamire, Dareda, and Qash. These crops are mostly produced through intercropping system (DED, 2001: 6-7).
Tractor ploughing is the dominant form of land tilling, while weeding is done exclusively by hand hoe. Discussions with interviewed farmers and agricultural extension officers revealed that about 60% of the land is tilled by tractors-disc ploughs, 30% by oxen ploughs, and the remaining 10% worked upon by hand hoe. Weeding is done with a hand hoe, thus making it labour intensive in addition to harvesting.
Babati district has good climatic conditions and fertile soils that are suitable for agriculture. Table 3.3 summarizes five agro-ecological zones (AEZs) of the district with different characteristics in terms of rainfall, landscape, altitude, types of soils and crops grown. The upland agro-ecological zone, which includes parts of Bashanet and Gorowa divisions, such as uplands Bashanet, Dareda, Haraa, and Singu have loamy soils and receive reliable rainfall of over 1,000 mm annually. In these areas, people grow potatoes, maize, beans, pigeon peas, pyrethrum, and wheat19.
The middle belt that covers Gallapo, Babati, Riroda, Dabil, Arri, Duru, Bacho, Kiru, Sigino and Gajal villages gets around 700 mm of rainfall annually. With the exception of Gallapo and Mamire that have black soils, much of the lowland areas are composed of volcanic soils that are rich and fertile for agricultural production. Crops grown in these areas are maize, pigeon peas, seed beans, and sunflower.
The southern parts of the district – the Gorowa division – receives well over 1,000 mm of rainfall annually, with a bimodal distribution pattern that is ideal for coffee and banana production in the highland areas, and maize, beans, sunflower, and pigeon peas in the lower parts (DED, 201:7).
According to Agricultural Extension Officers Babati division, which has extensive plains extending around mount Kwaraa through Gallapo to Mamire in the east, though receives less reliable rainfall, is famous for medium and large scale farming of maize, pigeon peas, and sunflower. The Kiru valley, along Lake Manyara, has alluvial and clay soils, where irrigation is undertaken. Here there are few estate growers, where sugar cane production is the dominant crop.
The lowlands of Mbugwe division that receives low rainfall: around 500 mm annually, are prone to droughts. However, Magugu produces local variety of rice20 through irrigation, while Mwada and Nkaiti areas are good for cotton, groundnuts and simsim. Minjingu, which is another dry area, is predominantly a grazing area that extends to Maghara and Lake Manyara to the north and to Tarangire National Park to the south. Figure 3.2 shows the district’s AEZs.
Table 3.4 summarizes production of various crops grown in the district between 1994/95 and 2003/2004 crop seasons. The table reveals that there are substantial fluctuations in crop production over the period. For instance maize production, which is a dominant food as well as cash crop, dropped from 134,449 tonnes in 1994/95 to 45,004 tonnes in 1997/98. Although there were some improvements in the subsequent years, production did not reach the previous records. Generally speaking all crop yields are potentially below the potential levels, indicating that there are rooms for improvement in productivity.
The fluctuations in crop yields are as a result of combination of factors. A fluctuation in climatic conditions is one of the main reasons for this pattern of output. Much of the agricultural production depends on rainfall, where shortage or excessive rainfall affects the levels of outputs. The district experienced El Nino in 1997/98 and droughts in 2002/2003, and as a result there were decrease in crop outputs.
Inadequate farm credit, especially during farming seasons is another constraint in terms of increased productivity. During planting/farming seasons most farmers are cash constrained and hence can not afford to buy seeds, and other necessary inputs such as fertilizers. Availability of rock phosphate at Minjingu in the district is a big complement, but it is neither widely available nor popularized by the extension staff. On the other hand, a local investor has not been willing to sale the rock phosphate to local farmers except to a fertilizer company in Tanga mainly due to the involved distribution costs (DED, 2001:10).
Agricultural marketing is mainly done through Private Crop Buyers, though few large-scale farmers in Gallapo, Mamire, Bashanet, Dareda, and Magugu sell their crops in distant markets such as Arusha where they fetch relatively higher prices. Wheat and barley have stable markets. Wheat producers sell their produce to Tanganyika Farmers Association in Arusha, whereas barley is produced under contract farming by smallholders and sold to the South African managed Tanzania Breweries Limited. Coffee is mostly auctioned at Tanzania Coffee Board in Moshi by producer associations/co-operatives. There are also few private companies involved in coffee marketing; these are Dorman (T) limited; and Victory Coffee Company limited. The Rift Valley Co-operative Union (RIVACU) is organizing marketing of cereals, especially maize, and legumes such as beans, and pigeon peas on a limited scale. However, RIVACU is constrained by inadequate capital and management capacity. In addition, it is suffocated by stiff competition from private buyers (RC/Planning Commission, 1998:20).
According to Babati District Executive Director (2005) since smallholder producers are not well organized, private buyers dictate prices of agricultural crops. During harvest periods, when farmers are in need for cash and at the same time lack storage facilities and incapable to meet storage costs, they sell their crops at low prices offered by buyers. Cotton and pyrethrum, which are grown in limited amounts, are bought by private traders and/or Tanzania Cotton Board and the Arusha based Pyrethrum Growers and Processors Company respectively.

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Livestock keeping

Livestock keeping is another important economic activity practised by many households in the district. Livestock kept include cattle, goats, sheep, donkeys, and poultry. In addition, there are few improved livestock (goats and cattle for dairy and beef as well) that have been introduced recently, albeit on small scale. According to Kahurananga (1992:23) livestock keeping is an important part of the agro-silvo-pastoral farming systems found in Babati area. As it can be discerned from table 3.5, most of the cattle kept are of traditional species, which have low yield of milk and meat but withstands environmental stress and can survive on rough grazing.
According to the District Livestock Officer, the district’s livestock statistics is based on estimates as no census was carried out since 1984. In 2001 the district had an estimated total livestock population of 567,177 comprised of 221,700 cattle, 142,000 goats, 64,000 sheep, 135,000 donkeys, 11,400 pigs and 3,902 dairy cattle and 575 dairy goats (District Council, 2001:4). Table 3.5 provides some indication in terms of livestock population in the district.
Cattle provide an important source of households’ livelihoods21 especially among the agro-pastoral communities. Cattle are not only source of income, but have social values, as traditionally they are a source of pride and status. Livestock are important for: provision of food: meat (protein), milk, and blood, skin and hides as important raw materials in the manufacturing of leather goods, manure for improvement of soil fertility and plastering of traditional crop storage structures, source of power for ploughing, and transportation; source of income and store of wealth (livestock banking); and finally have high social-cultural value (in terms marriage, rituals, and as symbol of wealth and prestige) (NBS and Manyara region, 2005:69).
According to the District’s Livestock Officer, the livestock system in the district can be categorized into three groups, as related to the agro-ecological zones. These are intensive/zero grazing, semi-intensive, and free range. Under intensive or zero grazing livestock keeping system, animals are mostly confined indoors and feeds and water are made available within their confinement. In many cases these are dairy animals. This system is common in zones characterized by intensive agricultural production without communal grazing areas. Households in such areas are keeping dairy cows and goats with a support from FARM Africa and Heifer Project International. This is a common practise in the semi-humid uplands of Dareda and Haraa areas.
Semi-intensive livestock keeping practises is undertaken where there are communal lands set aside for grazing e.g. around Lake Babati and Gorowa areas, or where agriculture is not a dominant activity. Under this system animals are fed indoors and at times grazed outside during part of the day. This system is practised in the Sub-humid Highlands and Semi-humid, semi-arid Midlands of Babati and Gorowa divisions.
Finally, the extensive or free range system, where animals are grazed freely in natural pastures and sometimes associated with shifting is commonly practised in the semi arid lowlands of Mbugwe. These areas are dry during most of the year, but rivers from other zones pour their waters in this flat land making it an ideal grazing area during raining season and hence appropriate for fattening animals.
Table 3.6 shows average meat and milk production levels for different type of animals. The statistics indicate that productivities are very low, and there is a room for improvement with better husbandry practises. According to the survey carried out in 1996 by the livestock department, it was observed that about 72% of households in the district own livestock.
It was also found out that on average, households de-stock their livestock at an average rate of 15% annually. In 1996 about 36% of total livestock were sold. It is important to note that the rate of de-stocking depends on the availability of alternative sources of income, emergence of drought or other unforeseen emergencies e.g. food shortages, sickness, court cases, school expenses, etc. By nature pastoralist would always wish to increase livestock instead of reducing. Under normal conditions, pastoralist would only sell old and/or sick animals (DED, 2001:29).
Livestock marketing is mostly done through livestock auction markets or minada22 that are held once every month in specified locations within the district. Licensed buyers purchase animals through auctioning system. The auctioning practises do not consider the weight of an animal, but rather on the general appearance of an animal. Thus, under this practise farmers do not get fair prices for their livestock.
These stocks are thereafter trucked23 to secondary markets at Themi, Mbauda and Meserani in Arusha; Weruweru in Kilimanjaro and Pugu in Dar es Salaam. Table 3.7 shows the number of cattle, goats and sheep marketed through the minada system between 1991 and 2002. During the survey it was hinted that, there are few occasions where cattle from outside the district are sold in the district’s minada, when prices are relatively better in comparison with those obtaining in neighbouring districts.
According to the district livestock extension staff, livestock production is constrained by a number of factors. These are: low yields due to poor management and types of species kept, shortage of grazing land/feeds, animal diseases, low prices, and inadequate access to financial services.

Other Sources of Households’ Livelihoods

Other sources of households’ livelihoods are commerce, tourism, use of natural resources (mining, fishing, forest products, bee-keeping, etc), employment, remittances from distant friends and relatives. Commercial activities are mostly prevalent in town centres or its satellites, and not very much pronounced in rural areas. In the rural areas, perhaps the monthly market days, popularly known as minada, are very important as buyers and sellers come to a common place for selling and buying all sorts of goods, including livestock.
According to Babati District Executive Director (2005) Babati is a growing tourism destination. Tarangire National Park is in Babati and the district controls a great portion of Lake Manyara Game Park. The hot and warm springs along and within the Manyara basin are in Babati. Lake Babati is a tourist attraction as well. The Lake Babati apart from fishing is also known for its hippopotamus.
According to the district’s Natural Resources Officer, the district is endowed with a multitude of natural resources: minerals, wild animals, fish, and forestry. The two national parks found in the district – Tarangire and Manyara – provide employment as well as income to small businesses and contribute to the government revenue through taxation. Babati has phosphate deposits mined at Minjingu for fertilizers making, in addition to salt, limestone, and gemstones (alexandreanite and ruby) on the shores of Lake Manyara. Fishing is important at Lake Babati, Lake Manyara, lake Bubu, and several streams and households/community ponds. Recently, with a support from donors such as Heifer Project International (HPI), individual households have started constructing fishponds primarily for improved domestic protein intake (DED, 2001:33).
Forests provide variety of products: timber, building poles and fire wood/charcoal. In addition, beekeeping is an important forest activity in the district especially in the extensive bush-lands where there are trees and flowers to sustain beekeeping (Kahurananga, 1992: 26). However, commercial exploitation of these natural resources is done on a small-scale due to capital constraint, poor economic infrastructure and low technical knowledge.
Employment, both formal and informal, constitutes another important source of households’ livelihoods. In this category we have teachers, hospital workers, local government employees, extension staff, and employees in the national parks of Tarangire and Manyara. There are also several NGOs and member centred organizations such as co-operatives. The private sector is equally another important employment provider, though underdeveloped. In the large scale farms there are estate/farm workers in different capacities (DED, 2001:34).
Manufacturing activities are very limited to few small scale agro-processing ventures. There is a sugar production in Kiru area by the Manyara Sugar Company from sugar cane produced in the area. Others are grain mills, timber mills, seed oil extraction, and other SMEs undertaking (NBS and RC Manyara, 2005:94-95).
Besides, there are illegal economic undertakings that are performed in the districts. Illegal activities or dirty activities may be defined as those activities that are socially and morally unacceptable to the community, which are also officially forbidden by the government, such as sex workers, production and selling of illicit drink (gongo), and smuggling of minerals. Brewing, selling and drinking gongo in Tanzania is regarded as an illegal activity, but it is a widespread phenomenon both in urban and rural areas, which is carried out under cover. Gongo is a type of a locally produced gin, which has not been tested clinically and approved for human consumption. Its ingredients are molasses, sugar, maize flour, and water. There are additional ingredients that are added, which vary from place to place.

1.1 Background to the problem
1.2 Statement of the Research Problem
1.3 Objectives and Significance of the Study
1.4 Research Questions
1.5 The Scope of the Study
1.6 Limitation of the Study
1.7 Organization of the Thesis
2.1 Preamble
2.2 Financial Services and Economic Development
2.3 Rural Financial Markets: The Analytical Framework
2.4 Policies and Regulatory Framework for Rural Finance
2.5 The Current Perspectives on Rural Finance
2.6 Summary and Conclusions
3.1 Preamble
3.2 Choice of the Area
3.3 The Profile of The Study Area
3.4 Research Methodology
3.5 Summary and Conclusions
4.1 Preamble
4.2 The German Colonial Period and the Evolution of Banks: 1891 – 1920
4.3 The British Colonial Rule and Expansion of the Financial Sector: 1920 – 1961
4.4. Co-operative Societies and Agricultural Marketing Boards
4.5 The Developments in Rural Finance after Independence: 1961 – 1966
4.6 The State and the Financial Sector under the Arusha Declaration
4.7 Financial Sector Crisis and the Need for Reforms
4.8 Summary and Conclusions
5.1 Preamble
5.2 Macroeconomic Policies and the Financial Sector Reforms
5.3 Regulation and Supervision of Financial Institutions
5.4 Harmonization of Standards and Compliance with Basel Core Principles
5.5 Regulation and Supervision of Microfinance Institutions
5.6 Limitation of the Regulation and Supervision Framework
5.7 Non-prudential Issues: Capacity Building and Regulatory Instruments
5.8 Summary and Conclusions
6.1 Preamble
6.2 Financial Markets in Tanzania during the Post-Reform era
6.3 Capital Markets
6.4 Access to Rural Financial Services: An Assessment
6.5 Rural Finance and Households’ Livelihoods
6.6 Summary and Conclusions
7.1 Preamble
7.2 The demand for Credit in Babati District
7.3 Demand for other Rural Financial Services
7.4 Supply of Rural Financial Services
7.5 Gender and Rural Financial Markets in Babati
7.6 Constraints in Access to Rural Finance
7.7 Summary and Conclusions
8.1 Preamble
8.2 Summary and Conclusions
8.3 Recommendations and Policy Implications
8.4 Areas for Further Research

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