CREDIT FOR FISHERMEN ON LAKE TANGANYIKA THE EXPERIENCE OF THE PROJECT FOR INTEGRATED TECHNICAL ASSISTANCE AND CREDIT FOR ARTISANAL FISHERMEN ON LAKE TANGANYIKA

U. Tietze
Fishing Technology Service
Fishery Industries Division
FAO

1. INTRODUCTION

This case study describes the revolving loan fund operated by the Cooperative and Rural Development Bank of Tanzania (CRDB) in the context of the FAO project for Integrated Technical Assistance and Credit for Artisanal Fishermen on Lake Tanganyika. This is one of the few successful projects in Africa with regard to credit recovery from small-scale fisherfolk. It is the only one where loan recoveries in local currency are automatically converted into foreign currency for importation of fishing inputs to be supplied on credit. The study analyses the operation of the revolving loan fund and proposes further improvements.

The project for Integrated Technical Assistance and Credit for Artisanal Fishermen on Lake Tanganyika has been operational since January 1983. It is the continuation of earlier projects, the emphasis having changed gradually from assistance in developing fishing methods and improvement of fish processing techniques to integrated development assistance and provision of credit to artisanal fisherfolk.

The area of operation of the project is the Kigoma Region of Lake Tanganyika, the northern and central part of the Tanzanian shore of Lake Tanganyika, along which about 25 project villages are located. Credit for fishery inputs was initially provided exclusively as group loans to Ujamaa villages, and to individual borrowers later.

2. FISHERY AND ECONOMIC ENVIRONMENT

According to a project evaluation mission carried out in October 1987, the development of artisanal fisheries on the Tanzanian side of Lake Tanganyika reached its maximum in the years 1973/74, when a thorough Catch Assessment Survey indicated that catch levels in twelve consecutive months totalled about 50 000 tonnes. Estimates of the Lake's pelagic fish potential provided by FAO in 1978 are of the order of 10 kg/ha or 135 000 tonnes for Tanzanian waters of Lake Tanganyika. Considerable annual fluctuations in fish stocks occur, but this estimate is thought to represent a safe aim for fisheries development, preventing over-investment in years of temporary fish abundance. Compared to the 1973–74 catch values, there would thus have been scope for a nearly 2.5-fold increase in fish catches. In spite of very high official statistics produced by means other than the Catch Assessment Survey, which had to be discontinued for lack of funds, total fish catches have declined drastically in recent years, the main reason being the lack of imports of fishing gear, equipment, engines and spare parts. The quantity of gear present in the Kigoma region (data from Regional Fisheries Officer) would seem to indicate that a total catch figure of 25 000 tonnes is a likely estimate for this region.

Resources therefore seem to justify further expansion of fishing activities. This situation is likely to continue as population density is low, infrastructures and roads are virtually non-existent and main consumer markets are far from the fishing grounds.

The present shift of emphasis towards private sector development and the liberalization of importation of fishing gear and equipment is considered by all concerned to be a contributing factor to the recovery of the fisheries sector.

In addition, rural credit policy changes are being planned and implemented, resulting in a re-orientation or further development of the credit delivery mechanism of the project towards a higher degree of need orientation, timeliness and flexibility. The Tanzania Cooperative and Rural Development Bank is reviewing its organizational set-up and introducing changes to improve its operational efficiency and extend its branch network to reach a larger number of rural people, particularly the poorer sections. In this context, non-security-based lending could play an important role and more appropriate lending procedures and loan administration could be introduced to ensure the desired socio-economic results and satisfactory loan recovery rates.

Another significant change which occurred in the process of project implementation is the increased participation of women in project activities, both in environmental activities, such as tree planting, in fisheries-related activities, such as smoking, and with regard to credit.

3. IMPLEMENTATION OF THE CREDIT SCHEME - ACHIEVEMENTS AND CONSTRAINTS

Loans are disbursed for fishing equipment such as outboard engines, lamps, lift nets, and accessories used in lift net fishing with light attraction.

While initially credit was channelled to Ugamaa villages as group loans, the group lending approach was discontinued later on in favour of loans to individual fishermen. Fishermen request loans on their own initiative. Requests are forwarded through the village chairmen to the regional CRDB office in Kigoma. The Project Officer (Fisheries) visits the applicant in his village to certify his credit-worthiness and the fisherman is asked to complete a loan application form. Individual borrowers who can provide a high cash equity are selected. For each loan application the Project Officer prepares a technical and financial appraisal report, including calculation of Net Present Value (NPV) and Internal Rate of Return (IRR). The application and the appraisal report are then scrutinized by the Regional CRDB Manager and, if endorsed, forwarded to the Regional Loans Committee for recommendation. This committee is headed by the Director of Planning of the region and composed of the heads of all regional departments, the Secretary being the regional CRDB Manager. If recommended by the committee, the application and appraisal report are forwarded to the head office of CRDB in Dar-es-Salaam for sanctioning.

Borrowers are visited every two months for loan recovery by the Project Officer or Credit Supervisor. Repayment notices are issued in the case of delayed payment.

The mechanism for the conversion of loan repayments in local currency into foreign currency for further importation of fishing equipment introduced during the first phase of the project works reasonably well; US$ 199 243 have been converted since May 1985.

Several of the group loans disbursed to the Ujamaa villages had not been repaid because the equipment had not been properly used, due to organizational weaknesses at village level. Attempts were made to recover instalments and interest on these loans but did not meet with much success.

The two courses of action available were either foreclosure or writing off of the loans. The first alternative was considered more suitable, as it seemed prudent to sell the assets and equipment remaining in custody of the village authorities. The value of this equipment had increased considerably because of devaluation and scarcity of goods, and they fetched high enough prices to cover the arrears, including those towards interest payments.

After foreclosing some of the group loans to Ugamaa villages, the group lending operation was replaced by lending to individual fishermen. As of September 1988, two batches of altogether 42 loan applicants had received credits worth T.Shs¹ 7 340 776.56. The two tables below show loan disbursements and recoveries for both batches of borrowers.
¹ T.shs - Tanzania Shillings

While the earlier group loans to Ujamaa villages had been fully recovered by foreclosing loans which had not been repaid, loans extended to individual fishermen were being recovered at the rate of 133.24% as of September 1988, which means that loans were being repaid in advance of the due date.

In addition to extending credit to fishermen, the project became increasingly involved in cash sales, which is documented by the table 4 below. For the period from September 1987 to 1988, fishing equipment worth T. Shs 6 000 782.55 was sold on cash basis to fishermen while the total value of all credits in kind was only T.Shs 5 772 840.65. Needless to say, cash sales are directed to the more affluent members of the fishing community while credit aims at the poorer sections. As a reason for the large number of cash sales, a strong demand for fishing equipment which could not be fully met by credit disbursements was cited. This was attributed to the limited number of loan applications which can be entertained at a time because of the procedures adopted for the processing of loan applications.

B. Value of cash sales as compared to loans from 1/9/87 - 22/9/88

B1: NETS

Loans:

Cash:

B2: FLOATS, TWINES, POLYROPES

Loans:

Cash:

Nil

B3: SEAGULL OUTBOARD ENGINES

Loans:

Cash:

3.2 Transaction costs of bank, charges and interest rates

Transaction costs incurred by the bank while operating the fisheries credit programme can be subdivided into cost of funds, cost of loan administration, and clearing and handling charges for the imported fishing equipment.

Table 5 below shows that the transaction costs of the bank amount to 17.5% of the volume of lending. The figures include a sizeable component (T.Shs 447 736.40 for the period July 1987 to June 1988) towards clearing and handling charges of the imported goods.

Regarding the cost of credit for borrowers, the handling and clearing charges were passed on to the borrower as a mark-up of the loan amount, while other lending costs were covered by the interest on the loan which was revised monthly and ranged from 12 to 17%. While the repayment towards principal minus the mark-up remained in the revolving loan fund, repayment towards interest plus repayment towards mark-up remained with the bank, to cover their operation costs and to provide for a profit margin.

Transaction costs expressed as a percentage of lending:

3.3 Constraints

While the loan recovery is excellent, a major shortcoming of the credit programme is the small number of loans which have been disbursed so far to individual fishermen. One reason seems to be the elaborate procedures for loan application, appraisal and sanctioning which, while ensuring an excellent repayment rate, prevent the credit programme from meeting the demand for credit by expanding the operations and covering a larger number of fishermen.

A second major constraint of the credit scheme is its emphasis. on borrowers who can provide a high cash equity, thus neglecting poorer sections of the fishing community, particularly women.

The third major constraint is the erosion of the purchasing power of the revolving loan fund due to the fact that only the loan principal is revolving while interest and mark-up remain with the bank. The erosion of the revolving fund is aggravated by the high inflation rate and by devaluation of the Tanzania Shilling.

4. NECESSARY IMPROVEMENTS TO THE CREDIT SCHEME

4.1. Diversification of lending programme

A mission was carried out in September 1988 to recommend changes in the operation of the revolving loan fund in order to increase the timeliness, simplicity and flexibility of credit delivery, particularly to the poorer sections of the fisherfolk population. The recommendations of the mission are summarized below. The implementation of the recommendations was reviewed by a very recent evaluation mission, the findings of which were not available when this case study was prepared.

The mission found that in view of the shortcomings identified above, there was a need for the lending institution involved, CRDB, to re-vamp its lending policy to artisanal fisherfolk and take steps to increase lending in order to reach a larger number of borrowers. A more flexible and streamlined credit delivery and recovery system was needed.

It was further noted that the large number of cash sales was not in accordance with the objectives of Phase II of the project. The purpose of the project is to establish a credit-cum-supply and technical assistance system for artisanal fisherfolk, particularly for the poorer sections, not to supply fishing gear to those who have large amounts of ready cash available. Cash sales are only permitted for engine spare parts and for the purpose of repairing fishing gear.

One measure to extend the credit programme to poorer and disadvantaged sections of the fishing communities is the inclusion of special credit schemes for women. A preliminary enquiry in Mwamgongo and Mtanga villages showed that there was a demand for credit for fish marketing, tailoring, canteens, handicrafts, bakery and goat rearing. It was recommended that groups of women should also be eligible for loans for beach seines. A survey of other villages to identify needs and demands, in order to expand the lending programme for women, was suggested.

In addition to extending the credit programme to women, the inclusion of additional fishing gear, the bottom-set gillnet, was proposed. This net is relatively cheap and available on the local market, manufactured in Tanzania. It was suggested that CRDB should use their own funds as credit for this equipment.

With regard to the demand for credit in fishing villages, it was noted that there are many unemployed young people who could take up productive activities if initial investments could be provided on credit. CRDB should play an active role in the provision of this credit.

4.2 Cost of lending and interest rates, charges and equity

In accordance with the project's plan of operation and the evaluation report of the previous phase of the project, modifications regarding cash contributions of borrowers and charges referred to as mark-up were considered necessary.

The aim of these proposed changes was to ensure that:

• the credit programme is not limited to wealthy borrowers who can afford large cash equity contributions, but is extended to average and poor fisherfolk, including women and young people, who cannot contribute substantial amounts of cash. The achievement of this aim is supported by the introduction of lending procedures appropriate for non-security-based lending.

• the purchasing power of the fund is maintained by passing on cost increases and risks to the ultimate borrower rather than covering these, particularly the latter, by institutional subsidies such as replenishments of the fund. The role of replenishments was anyhow to be limited to provide for the uncertainties which are involved when calculating anticipated bad debts, and foreign exchange rate fluctuations.

In order to safeguard the purchasing power of the revolving fund, it was to be protected against bad debts and against the increase in costs of the assets to be provided on credit due to devaluation of the T.Shs. The transaction costs of credit, consisting of cost of funds, loan administration costs and handling charges, and a margin for the bank, were also to be provided for.

These cost elements were to be covered by the interest and by a mark-up which was to be added to the loan component. The total loan amount thus consisted of the amount covering the cost of the asset (minus the equity contribution of the borrower) plus the mark-up. It was further suggested that the borrower contribute a cash payment of 10 per cent of the cost of the asset.

In quantitative terms, the elements were calculated by the mission as below:

1. Bad debts.. It was assumed that 10 per cent of the loans might not be repaid, which is why 10 per cent of the loan amount towards cost of asset was to be charged to the borrower to safeguard the fund against bad debts. The charge was to be included in the loan amount and annually reviewed.

2. Increase of cost of assets due to devaluation of T. Shs against foreign currencies. A 10 per cent devaluation of the T.Shs against the US$ was assumed during 1989. This charge was to be included in the loan amount and to be annually reviewed. The provisions against bad debts and foreign exchange fluctuations can be considered a fund stabilization component.

3. Bank transaction costs consisting of loan administration costs plus costs of storage and transport of the assets. Ten per cent of the loan amount towards cost of the assets was considered loan administration costs, while another 15 per cent should be considered handling costs (storage and transportation). While the loan administration costs were covered by the interest rate, the handling costs were to be charged to the borrower as part of the loan. As shown above, the present transaction costs are slightly lower (17.5%) so the estimate still includes a safety margin.

4. Margin and interest for bank. It was proposed to charge 15 per cent as interest on the loans, so that 5 per cent of the loan amount can be considered as margin for the bank (15% - 10% since

   In total, the additional loan elements represent 35 per cent of the loan amount towards cost of the asset. While the loan administration costs as well as the bank's margin are covered by the interest rate, the fund stabilization component, composed of the provisions against bad debts and foreign exchange rate fluctuations and the handling charges, were to be included in the loan as a mark-up which amounts to 35 per cent of the loan amount towards the cost of the assets.

   The fund stabilization component is intended to ensure that the demand for credit declines and eventually comes to a halt should the financial viability of the credit programme decline. The decline may be caused by an extraordinary increase in the cost of the assets resulting from extreme foreign exchange rate fluctuations. It may also be caused by non-repayment of loans due to lack of financial viability of the fishing operation as a result of economic resource over-exploitation or willful default.

At the same time, the fund stabilization component should provide an incentive for the borrower to repay the loan, as the better the repayment the smaller the loan amount will be of future loans.

Table 6 below shows the composition of the financial outlay proposed by the mission as well as the sub-division of the loan components.

Whilst it was proposed that 12 per cent of the loan recovery should remain with the bank to provide for a margin and to cover the bank's loan transaction cost, 88 per cent of the repayments of the loan should remain in the revolving fund. The fund stabilization charge and the handling charge were to be annually reviewed.

4.3. Liquidity of revolving fund

With a view to improving the liquidity of the revolving fund, an overdraft facility on the CRDB Project External Account at NBC Foreign Branch, Dar-es-Salaam, was recommended, the facility to be restricted to 50 per cent of the value of each Letter of Credit deposited against the External Account of NBC at Head Office in Dar-es-Salaam. The approval of the Bank of Tanzania was to be obtained.

At present considerable delays are experienced in the transfer of funds from the Collection Account of NBC Kigoma (Suspense Account) to the CRDB project External Account of NBC Foreign Branch. Telegraphic transfer was recommended for the speedy transfer of funds. The figure below shows the proposed modification of credit delivery and recovery and of the transfer of funds.

It was also recommended by the mission that the grace period for the repayment of loans be reduced from six months to three months. Debt servicing should start as soon as the borrower obtains the necessary equipment and inputs to commence fishing operations.

4.4 Lending procedures

With regard to appraisal of loan applications, there appeared to be a duplication of work at Head Office. A loan proposal was appraised by the Regional Manager, recommended to the Regional Loans Committee, and then submitted to Head Office. At Head Office the application was again appraised by the Development Division and registered. It was further examined by the Divisional Manager, the Chief Manager, the Director of the Development Division, and in certain instances even by the General Manager.

With a view to introducing flexibility and speeding up loan approvals, it was recommended that procedures be streamlined and special activity forms for loans be used for loan appraisal by the Project Officer at the Regional Office. Standardized financial reports and loan schemes contained in the lending programme were to form the basis of loan appraisal and loan approval.

The following procedure was suggested for the majority of applications (see the figure below).

1. Fisherfolk express interest in obtaining loan from CRDB.

2. Project Officer scrutinizes the person and, if satisfied, asks her/him to fill in a loan application form plus activity form. The Project Officer fills in or updates a village profile. The loan application should refer to a scheme listed under the lending programme. However, the lending programme should be flexible with regard to the requirements of the borrower; borrowers need not apply for all assets listed under the particular scheme, if they own some assets or propose to share these with others.

3. Based on the activity form/village profile and standard scheme economics given in the lending programme, the application is appraised at CRDB Regional Office. There is no need for detailed financial analysis of individual loan applications. Only diversions from standard scheme economics should be noted in the appraisal report and justified.

4. If appraised affirmatively, the loan application is forwarded to the Regional Loans Committee. After being recommended, the application goes to the Regional Manager for sanctioning. If sanctioned, the Regional Manager signs the loan agreement on behalf of the bank. All documentation is carried out at the Regional Office, with the exception of the case of loans above T.Shs 500 000, which are appraised and sanctioned at Head Office.

5. The loan is disbursed.

6. Statements of loan approvals, together with copies of appraisal reports, should be regularly sent to Head Office for monitoring, but not for appraisal and approval.

7. Lending programmes should be regularly monitored by Head Office, where any changes in lending programmes should be approved and new lending programmes developed.

PROCEDURES FOR LOAN APPROVAL AND DOCUMENTATION