Can the Guarantee Instrument Fight Poverty? : A Minor Field Study in the Morogoro Region in Tanzania

Abstract: The role of access to finance for economic development has received extensive attention recently, which has brought the issue to the top of the policy agenda. The growing attention has resulted in several public policy initiatives to encourage access to financial services, especially in low-income countries where credit constraints are severe. The guarantee instrument has the potential of mobilizing finance, lowering borrowing costs and addressing market failures, why PASS with support from Sida has issued a guarantee that targets smallholder farmers in the agricultural sector in Tanzania. The linkages between access to finance, productivity and welfare are supported by abundant evidence in the previous literature, but few studies have examined the productivity and welfare effects of increased access to finance in the context of the guarantee instrument. This study aims to fill the research gap and evaluate the effects of the PASS guarantee by analysing the productivity and welfare effects of increased access to finance for paddy farmers in the Morogoro region in Tanzania. The study is based on 86 structured interviews and the data is analysed by frequency statistics and cross-sectional regressions estimated with OLS. The results show that farmers provided with a formal bank loan have higher productivity than non-borrowers and that those who use the business plan in their operations are more productive. This highlights the importance of running the business according to the suggestions in the business plan. Furthermore, financial access has a positive and significant effect on household welfare, meaning that households provided with a loan attain a higher welfare level. The results confirm that the guarantee has positive effects on both productivity and welfare, why it can be considered as an effective tool for poverty reduction. Given the results of the study, we suggest that effort to promote financial access should be encouraged by both local governments, international development agencies and NGOs. Furthermore, PASS is recommended to encourage the farmers to use the business plan and provide necessary opportunities to facilitate the use. As the most common reason for not using the business plan is the language barrier, we recommend PASS to offer translation services to increase the productivity of the farmers as well as the probability of repayment. In addition, the results indicate low financial literacy among the farmers, why emphasis to reinforce the understanding of the loan conditions should be prioritised. Finally, the results show that formal education has a significant effect on household welfare, but when considering productivity, formal education is not significant on any level. However, knowledge can be assumed to affect productivity positively, why strategies to increase both formal and informal education, such as business training, should be considered.