Status of the evolving Microfinance in Tanzania

By James Mathew Mgaya – Art in Tanzania internship

Marketing and Management

Introduction

The movement of microfinance started in the 19th century, during the time of the European Union, and the creation of modern microfinance by Bangladeshi social entrepreneur Muhammad Yunus in 1983. Microfinance was simultaneously created. In 1983, Yunus established Grameen Bank in Bangladesh. The initial goal of Grameen Bank was to provide small loans to entrepreneurs. Microfinance involves financing low-income earners like food vendors (mama Lishe), farmers, poor communities, and micro enterprises.

We call them low-income earners to financial service providers, but the nature of this industry is too slow and small. They misunderstand it with banking services, but they are so different aspects. Moreover, Microfinance is likely to be called micro-credit or micro-loan, with most users being low-income earners while women in Tanzania are. In rural areas, there are usually small farmers and others engaged in small income-generating activities such as an anti-poverty tool for the people living in rural areas. It claims to assist communities of the economically excluded to achieve a greater level of asset creation and income security to eradicate poverty in Tanzania at the household and community level, which has not been completed as it initially aimed.

Many microfinance institutions currently operate in urban areas rather than rural areas. Microfinance is known for Its reputation of helping low-income households stabilize their income flows and save for future needs; observing facts are too slow, building up the existence of Microfinance institutions in rural areas are yet to focus on rural areas while remaining with poverty, and these kinds of financial services remain unknown to other rural and remote areas. Furthermore, microfinance may help families, farms, and small businesses prosper, and it can help them cope and rebuild rural communities if introduced and operated in these remote areas.

The central bank in Tanzania must regulate it and have a mandate for any financial services provider, especially Microfinance, which is well controlled under BoT, its National Microfinance policy, and another supervisory framework. The emphasis on them is too low, as commercial banks’ presence with their innovative product interfered with Microfinance financial services.  It’s not a lousy notion since it is a competitive and commercial era, but it seeks to suppress these micro-capital institutions to its existence. In good formality, it must learn to co-exist as alpha be alpha (BoT) and beta doing the beta thing (commercial banks) and let omega enjoy the fruits of being omega (Microfinance institution); this interruption redirects the primary purpose of microfinance and its main objective in Tanzania.

Microfinance industry

Regulation 

According to “mondaq.com ” The Bank of Tanzania (the BoT) exercising its powers under section 60(1) and (2) of the Microfinance Act of 2018 (the Act) has published the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations of 2019 (the Regulations) among other regulations.”        

According to Finandlaw.co.tz, the Central Bank of Tanzania (Bank of Tanzania) has finally issued the regulations governing microfinance business in Tanzania. The regulations come in a trio containing Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations 2019 (GN No. 679 of 2019), Microfinance (Savings and Credit Cooperative Societies) Regulations 2019 (GN No. 675 of 2019), The Microfinance (Community Microfinance Groups) Regulations 2019 GN No. 678 of 2019. The government view microfinance as a powerful ally to combat poverty in Tanzania, so they established it, regulated it , supervised it and governed it through the Bank of Tanzania, some supervisory frameworks and policies.

Microfinance institutions

Microfinance institutions in Tanzania appeared to have three faces: first, non-governmental organisations (NGOs), which include PRIDE, FINCA, Vision Fund, SEDA, PTF, etc. Other banking services which offer a similar range of micro-credit are large banks like NMB, CRDB, ACB, and most regional banks and community banks are also providing these kinds of services like Kilimanjaro Cooperative Bank, Dar es Salaam Community Bank, Mfindi Community Bank, etc. Finally, we will discuss cooperative-based institutions, such as SACCOS, SACCAS, AMCOS, VIKOBA, etc. Not only do they provide financial services that are predominantly savings, but they are also not regulated by BoT. These don’t work directly as financial institutions or agencies for poverty eradication, including SIDO, YOSEFO, SELFINA, Poverty Africa, and Zanzibar-based Women Development Trust Fund.

In recent years, there have been e-banking or mobile banking institutions that provide micro-credit to borrowers with internet access and some without. In fact, some are not real financial institutions but provide micro-credit and micro-savings like M-pawa through M-pesa, Tigopesa, Halopesa, etc. Those include online microfinance institutions like TALA, Branch, Timiza, TMF, easy loan, mkopo chap chap loan finder, etc.

Source of funds and Operation

The source of financing microfinance, so they say, is from donors, SACCOS, Government, community-based and bank loans. International donors play a big part in funding institutions and NGOs and provide substantial financial resources and even technical assistance to them. SACCOS and community-based programs mostly use internal sources of funds. Collective fund measures toward membership that provide equal contribution and distribution and sometimes get help from donors, the government through subsidies and noninterest loans, and the use of bank loans which can be accessed.

Many microfinance companies operate through microborrowing, but the market is widespread nowadays. When involved with big guns like banks, they tend to have savings. However, many borrowers’ ideology is not saving; it is about getting microcredit, which is the primary purpose. Since then, microfinance has drifted to commercialisation more than serving low-income earners and eradicating poverty, as the government intended. Microfinance is supposed to deal with poor and rural areas, but many operations are urban-centred, making reaching them more straightforward than in rural areas. The interest pricing can be high because most local microfinance providers borrow from banks for 10% to 20%. This may lead Microfinance to charge more than the bank rate. This makes borrowers use commercial banks despite many procedures, but some still enjoy microfinance, though they are affected by it.

Challenges

Microcredit providers in Tanzania face many developmental challenges because it is substantial to the backbone of encouraging low-income and unemployed people to enter economic activities. These are some challenges.

Criticisms: their propaganda involves charging low rates and oversimplifying procedures than those of those commercial banks. Most of them charge low interest of 1% up to 10%, mainly with no transaction cost or restriction of having savings. Banks cannot use these approaches and techniques because they can not take loan risks. Still, microcredit providers can offer loans for 24 hours, with national identity cards only, which makes accessing loans easier than using banks.

Beneficiaries of the benefits: the aim of microfinance institutions by Dr Muhammad Yunnus and other idealists like US President Bill Clinton once said, “the poor are creditworthy and that microfinancing effort can be self-sustainable, create growth and widespread peace.” But do poor benefit microcredit? These institutions focus on commercialising services and drift away from their primary purpose. These institutions target civil servants and government officials by using Lawson’s verdict. In large per cent, poor and rural areas are outreached and incapable of getting these services, but other groups benefit from these services.

Insolvent of financial services ingredients: financial literacy, trust issues, repayment measures and access to credit. Borrowers of microcredits are client of banks which have bank accounts in consumer perspective to have MFI’s account is not easy due to misunderstanding of financial services to offer savings as product so, also some low-income earners do not have that knowledge of saving. Trust issues faced by microfinance institutions about borrowers do trust this institution because the repayment measures are not comfortable to the consumer as its recovery is not smooth transaction the fact that the collateral they use is home furniture and sometimes employers’ concerns bring fear among borrowers and institution, targeted poorest people are not able to access credit for claims of geographical and socio-economic factor for MFI’s not able to reach them at large; remoteness is fact but also repayment capacity of these projected clients like in rural areas. The inaccessibility of credits in areas and the nature of competition and profit-oriented business ideology have made them centred mind to the point of loss of clients who use bank services.

Contribution

The developmental outreach of microfinance institutions is reasonable nowadays. It can be accessed through e-banking, known as sim banking/ mobile banking, google apps, telecommunication company services, and even phones, increasing the number of borrowers with easy access to credit. Increase of digital services to borrowers reduce time consuming to loan procedures, it establishes more easily accessible micro loans and other services. Many entrepreneurs who have achieved women’s empowerment are women nowadays. Microfinance institutions boost the economy as a financial tool to eradicate poverty in urban and rural areas; low-income earners are motivated to borrow and start micro-enterprises to build their individual/household provisions. This is a baby step in development.  The competitive market uses technology, which creates unemployment problems, easy access to services, and availability of products because of the increase in microfinance institutions and financial services providers. Reasonable and competitive pricing of interest for some MFIs who use donors and subsidies. They offer low interest that benefits customers and encourages other clients to apply for credit. Innovative products have different packages like mortgages, leasing of buildings, machines, vehicles, furniture and many other uses for loans.

What should be done?

Most MFIs must mobilize savings for the clients to reduce their dependence on international donors, which leads to good savings management and use in the loan portfolio. They must also build stable sources of funds that expand operations based on microfinance institutions. There is financial inclusion towards Microfinance institutions and borrowers or low-income earners to overlook individuals and micro enterprises to access financial services according to income level that may be useful and affordable financial products and services that meet their needs to smooth transactions, suitable payment methods and approaches, potential savings, available and accessible credit, and insurance to be delivered in a responsible and sustainable technique like online.

Return to the basics of microfinance’s purpose. The idea of microfinance is to provide financial services to poor households, microenterprises, women, and youth so that the government can reach its goals. Their notion says, “Poor people need not just loans but also savings, insurance, and money transfer services.”

Coping with economic and political environment; economic policies like millennium development goals and sustainable development goals these change in time with political interest of the country. Monetary policy has been accommodative to support credit and economic growth, as it endorsed poverty eradication as goal number one and decent work and economic development. Microfinance institutions need to consider the political environment when creating business strategies. The entire political environment includes reviewing government policies and the risk and instability of current political factors and the current political party in power, the degree of politicization effectiveness and efficiency of the current government, government policies, current legal framework, and the public attitude towards the economy.

Professionalism: Expertise in Microfinance institutions is very important and can make the industry move very fast. India’s microfinance sector is fragmented, with more than 3000 microfinance institutions in India estimated to account for almost 74 percent of the total loans outstanding. Expertise means putting the right person for the right job with standards, awareness, and practises in the microfinance sector.

The verdict

Upon the creation of microcredit by Bangladeshi social entrepreneur Muhammad Yunus in 1983, microfinance was simultaneously created. In 1983, Yunus established Grameen Bank in Bangladesh. The initial goal of Grameen Bank was to provide small loans to entrepreneurs. When the movement gained momentum globally, Tanzania adopted microfinance institutions in the 1980s as the proper tool to reduce poverty, allowing poor citizens from lower socioeconomic classes to participate in building the country’s economy. Microfinance is a government strategy used to help Tanzanians to fight poverty by providing a variety of financial services to poor and low-income individuals who do not have access to banking and related services for the growth of the economy at the household level.