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506Intergrating financial services into poverty reduction strategies - Tanzania

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					      INTEGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION
                      STRATEGIES IN TANZANIA

       (E .P. Mkwawa CEO Dar Es Salaam Community Bank Limited).

1.0 INTRODUCTION

The objective of this paper is to provide the general position on the extent to which
financial services in Tanzania have been integrated into poverty reduction strategies.
It examines the financial services, its key players, and the linkages with poverty
reduction strategies. The paper goes further to explore the policies and the legal
frameworks that have been put in place to ensure the process is successful. The
author also highlights the challenges that have been experienced by financial
services with a focus on micro finance.

As an introduction, the paper addresses the country‟s economic situation which
highlights the social economic condition and the background of poverty reduction
strategies in Tanzania. It then continues to analyse the financial system in Tanzania
with emphasis on how financial institutions have been strengthened through policies
and legal framework.

The paper concludes by looking at challenges experienced in micro and rural finance
and makes recommendations on the way forward.

1.1    Background of Social Economic Situation of Tanzania

1.1.1 Macro economic, policy context and overall development
      environment

       Tanzania remains one of the poorest countries in the World. Its GDP per
       capita is US$ 300 which is far less than the average for Sub-Saharan Africa
       and East Asia of US$ 500 and US$ 970 respectively. Poverty remains to be
       the biggest challenge since independence 1961, as of to date half of
       Tanzanians survive with less than one dollar a day. The level of poverty in the
       rural areas where approximately 70% of Tanzanians live is high. The main
       features of the macroeconomic and policy context is summarised in table 1:




                                          1
        Table 1: Macroeconomic and policy context
Geography and the economy
Area: Mainland--945,000 sq. km. (378,000 sq. mi.);
Zanzibar--1,658 sq. km. (640 sq. mi.).
Cities: Capital--Dodoma (legislative), Dar es Salaam (executive). Major metropolises-
-Arusha, Mwanza, Dodoma, Mbeya, Mtwara, Stonetown, Zanzibar.
Terrain: Varied.
Climate: Varies from tropical to arid to temperate.
GDP (2004): $10 billion.
Average growth rate (2004): 6.7%.
Population: 33.82 million
Urban/Rural Distribution in percentages; 24%/76%
Per capita income (2004): $300.
Natural resources: Hydroelectric potential, coal, iron, gemstones, gold, natural gas,
nickel, diamonds, crude oil potential, forest products, wildlife, fisheries.
Agriculture (2004): 46.4% of GDP. Products--coffee, cotton, tea, tobacco, cloves,
sisal, cashew nuts, maize, livestock, sugar cane, paddy, wheat, pyrethrum.
Industry/manufacturing (2004): 8.8% of GDP. Types--textiles, agro-processing, light
manufacturing, construction, steel, aluminium, paints, cement, cooking oil, beer,
mineral water and soft drinks.
Trade (2004): Exports--$1.33 billion (merchandise exports, 2004): coffee, cotton,
tea, sisal, cashew nuts, tobacco, cut flowers, seaweed, cloves, fish and fish
products, minerals (diamonds, gold, and gemstones), manufactured goods,
horticultural products; services (tourism services, communication, construction,
insurance, financial, computer, information, government, royalties, personal and
other businesses). Major markets--U.K., Germany, India, Japan, Italy, China and the
Far East. Primary imports--petroleum, consumer goods, machinery and transport
equipment used clothing, chemicals, and pharmaceuticals. Major suppliers--U.K.,
Germany, Japan, India, Italy, U.S., United Arab Emirates, Hong Kong, Singapore,
South Africa, Kenya.




1.1.2. There has been improved economic performance at the macro- level in the
past six years. GDP growth rate consistently rose reaching 6.2 percent in 2002.
National Accounts estimates show that the growth rate dropped to 5.6 percent in
2003 due to drought that led to reduced food supplies and decreased power supply.
In 2004 there has been a remarkable rise to record 6.7 per cent GDP growth rate.
During the same period, inflation has been under control. The annual inflation rate
was 4.4 percent in 2003 compared to 6 percent in 2000. The rate increased from
4.0 percent in July 2004 to 4.6 percent at the end of March 2004 due to drought
and the sharp rise in oil prices. Foreign reserves reached 8.9 “months of imports” in
2000. At the end of March 2004, the reserves could cover imports of goods and
services for about 8 months, which is above the target of 6 months. The nominal


                                         2
exchange rate is market-determined with interventions limited to smoothing
fluctuations.

       Increase in investments in infrastructure such as roads, telecommunications,
       mining and tourism have been recorded owing to increased inflows of foreign
       direct investments (FDI) and domestic revenue efforts. Progress has been
       noted in the social services and public support services.          Significant
       improvement in performance is evidence in areas such as primary education
       and road network. Overall, the current levels of delivery of services require
       further improvements in quantity and quality, which calls for sustained
       investments in all sectors.

       However over the past ten years significant progress has been made and
       continued to be made in the macroeconomic and structural reform. The
       inflation rate has remained at two digit level and the economy growth at
       annual rate of 6.5% in 2006.

       As mentioned above, poverty in Tanzania is mainly a rural phenomenon
       because rural households comprise over 90% of the poor. Various studies
       indicate that the poor state is due to the lack of access to credit and other
       financial services. A study conducted by Micro save Africa in 20021 found that
       concept of savings was well known; poor people in rural and urban areas
       save for emergencies or life cycle risks/events. The poor use of informal and
       formal microfinance institutions to save and access credit and other financial
       services such as money transfer and micro insurance. Lack of banks services
       in the rural areas has forced majority to resort into informal financial services
       providers such as Rotating Savings and Credit Associations (ROSCAS),
       Accumulated Savings Associations (ASCAS) and Savings and Credit Societies

       Although National Microfinance Bank (NMB) has 130 branches the study
       found that majority failed to use the services because of distance, high
       minimum balance, travel time, and transport costs. Access to loans has by
       rural communities limited because of lack of collateral and other bank
       conditions. Microfinance remained urban focused, while the most effective
       efficient SACCOS are those owned by employees in the private and public
       sector.




1
  Assessing the demand for Micro insurance in Tanzania by MicroSave Africa and Micro
insurance centre. 2002


                                             3
2.0    AN OVERVIEW OF POVERTY REDUCTION STRATEGIES IN TANZANIA

       According to a report published by the Vice President Office on the 2National
       Strategy for growth and reduction of poverty (MKUKUTA) the prevalence of
       income poverty is still high in Tanzania. According to the Household Budget
       Survey of 2000/01 the proportion of the population below the national food
       poverty line is 18.7 percent and that below the national basic needs poverty
       line is 35.7 percent. Comparing these results a big proportion of the
       populations are below the national poverty lines. Basic needs poverty
       decreased from 38.6 percent to 35.7 percent and food poverty from 21.6
       percent to 18.8 percent. Poverty remains overwhelmingly in rural areas
       where about 87 percent of the poor populations live. As the population is
       growing, the absolute number of the poor raises concern. There is also a big
       disparity between urban and rural poverty for both food and basic needs
       poverty.

       Agriculture is the lead sector, accounting for 45 percent of GDP and about 60
       percent of export earnings in the past three years. It is the source of goods
       and raw materials for industries. It also provides livelihoods to 82 percent of
       the population. Recently, the sector has registered average annual growth
       rates of 4.8 percent compared the average growth of 3.1 percent during 1998
       to 2000. The constraints to rural growth are largely related to those in the
       agriculture sector, broadly defined to include livestock and bee-keeping. The
       constraints include low productivity of lands, labour and production inputs,
       underdeveloped irrigation potential; limited capital and access to financial
       services; inadequate agricultural technical support services; poor rural
       infrastructure hindering effective rural urban linkages; infestations and
       outbreaks of crop; animal pests and diseases; ‟ erosion of natural resources
       base and environmental degradation. Others include gender relations, weak
       producers‟ organizations, poor coordination and limited technological capacity,
       depressed prices for primary commodities in global markets and insecurity
       with respect of property rights to land and its use as collateral for credit. The
       nuisance taxes and levies have been reduced but further steps are needed to
       reduce administrative fiats that often constrain marketing of agriculture
       output.

       Urban poverty, formal and informal sector

       Urban poverty is evident in households with low and unreliable incomes, the
       unemployed, urban vulnerable groups and those in the informal sector.
       Urban poverty has brought to the spotlight stress on urban public facilities


2
 National Strategy for growth and reduction of poverty (MKUKUTA), Vice President‟s Office, the
United republic of Tanzania


                                                 4
          and services. Urban poor live in congested, mainly un-surveyed areas,
          overcrowded residences and on streets (especially street children). These
          areas lack safe and reliable water and have poor waste management and
          lighting. Trade liberalization has prompted an influx into urban areas of a
          vast number of petty traders mainly youth aged 20 – 29. The PHDR (2002)
          estimates 92 percent of these have primary level education but no formal
          skills training. They lack capital and business premises. In many municipal
          areas the informal sector includes also men and women engaged in sand
          mining, quarrying and like making to support the growing construction
          industry.

          The rise in unplanned settlements and crime remain a challenge to urban
          planning. These strain the government capacity to provide adequate security
          and social services. Settlements developments, land surveying, propagation
          of simple construction technologies for affordable housing, urban waste or
          environmental management and slum upgrading standing out as other key
          challenges. Regularization and titling of land is expected to facilitate
          residents‟ use of their land and property thereon (dead capital) as collateral
          with which they may obtain credit from banks and building societies for socio-
          economic investment.

          The Government of Tanzania embarked on financial reforms in 1991, in order
          to create an effective and efficient financial system. The reform was a
          component in the overall strategy of the country to liberalize the economy a
          process which started in 1985. The core element of the reforms consisted in
          the Government‟s commitment to permit banking institutions to operate on a
          commercial basis making the decisions based within the norms of prudential
          supervisions. The key elements of the financial sector reforms included
          liberalization of interest rates, elimination of administrative credit allocation,
          strengthen of the Bank of Tanzania‟s (BOT) role in regulating, and
          supervising financial institutions, restructuring of state owned banks such as
          National Bank of Commerce (NBC) and allowing the entry of both local and
          foreign banks in the market. These elements of the financial sector reforms
          were embodied in the Banking and Financial Institutions Act of 1991. On the
          same direction, the Cooperative Societies Act of 1991 provided the basis for
          development of Savings and Credit Cooperatives (SACCOS)

          Despite the reforms outlined above, financial services to the poor remained a
          distant dream. 3Restructuring of the state owned banks included elements of
          closing of rural branches and a stop in opening new branches. In 1995, the
          Government made provision in the Banking and Financial Institutions Act that
          allowed formation of regional and rural unit financial institutions. The move

3
    National Microfinance Policy, Ministry of Finance, United Republic of Tanzania, May 2000


                                                 5
          helped the establishment of Kilimanjaro Cooperative Bank (KCB), Kagera
          Farmers Cooperative Bank, Mwanga Community Bank, Mufindi Community
          Bank and of recent (2002), Dar es Salaam Community Bank and Mbinga
          Community Bank (2003)

          Based on the outcome of the reform during the 1990s, the government
          realised that in order to have an effective and efficient financial system,
          additional focus must be placed on the expansion of financial services to low
          income people who formed the majority in the country particularly the rural
          poor. Hence microfinance was found to be the only strategy that will provide
          the necessary machinery for financial deepening but only under the condition
          that it is an integral part of the financial system. In 1996 the Government
          initiated an important action to the Microfinance industry by initiating the
          process of formulation of the National Microfinance Policy. The formulation
          process of the policy document was completed in 1999 following a
          stakeholder‟s workshop which was held on May 1999. The Microfinance Policy
          was approved by the Government in February 2001.

          The National Microfinance Policy articulates a clear vision and strategy for the
          development of a sustainable microfinance industry in Tanzania, specifying
          the respective role of key stakeholders, the Government, Microfinance
          financial services providers and donors4.


3.0       Policy and legal framework for financial services

          3.1    Overview of the financial sector

As mentioned above, the basis for the financial sector in Tanzania currently rests on
the financial sector reforms set in motion in the early 1990s. The reforms
transformed the sector from public sector dominance to private sector based. The
reforms among others provided the basis for liberalized interest rates, licensing of
private owned banks and strengthening the role of the Bank of Tanzania (BOT) in
supervising and regulating financial institutions. Government owned banks were
restructured and later privatized.      The lynchpin of these reforms was the
government commitment to allow banking institutions to operate on a commercial
basis making business and management decisions free from outside interventions
within the norms of prudential regulations and supervision.




4
    National Microfinance Policy, Ministry of Finance, the United Republic of Tanzania, May 2000


                                                 6
Records by 5 BOT indicate that by 2005 Tanzania have a total 1899 microfinance
institutions.1813 in the mainland and 86 in Zanzibar. This includes 8 banks, 53
NGOs,
1 financial service Association, 105 Government programmes, 1635 SACCOS, 48
SACAs, 45 CBOs, 26 commercial banks, and 6 Non Bank financial. Banks and Non
Bank financial institutions are the only ones , subject to licensing, regulation and
supervision by the BOT under the provision of the Bank of Tanzania Act (1995),
Banking and Financial Institutions Act (1991) ( the parliament recently passed a bill
to change the two Acts) and Foreign Exchange Act (1992). All licensed and
supervised institutions are subject to regulatory guidelines issued by the Bank of
Tanzania such as foreign exchange regulations (1996), Banking and Financial
Institutions Regulations (1997), Publication of Financial Statements regulations
(2000), Concentration of Credit Regulations (2001), Management of Risk Assets
Regulations (2001), Capital Adequacy regulations, 2001) etc.

The Microfinance sector has three types of providers, Non Governmental MFIs (un
regulated), Commercial banks, Non Bank financial Institutions and Regional Banks
(regulated by BOT) and member based financial services providers (savings and
credit societies-SACCOS). Commercial banks which provide microfinance services
include Akiba Commercial Bank, National Microfinance Bank and CRDB. CRDB
provides microfinance services through a linkage with SACCOS and its services are
spread across the country. However CRDB is more visible to contract farmers in the
sugar cane industry and rural based SACCOS. CRDB has a fairly large network of 29
branches. Akiba Commercial Bank which was established in 1997 with a mission of
providing financial services to Small and Medium Enterprises (SMEs) provides a
range of financial services to the intended target. Akiba Commercial Bank is also
identified with its strong and unique services of providing microfinance services. The
Bank has four branches in Dar es Salaam, one in Arusha.

Table 2: Requirements for licensed banks

Type of the bank                       Minimum Capital requirement
6
  Commercial Banks                     Tsh5.0 billion
Microfinance Companies                 T shs 800 million
(National)
Unit Microfinance Company              Tshs. 200 million




5
 Bank of Tanzania, Tanzania Microfinance Institutions Directory, 2005
6
 Recently a bill was passed to increase the minimum capital requirement for a Commercial bank
to Tshs 5 billion


                                              7
TYPES OF UNREGULATED MFIs
a)     Community Based Financial services organizations
SACCOS offer the most wide spread source of financial services for low income
people in both rural and urban areas. In some rural areas this is the main source of
financial services. The other type of community based financial services providers
are Savings and Credit Associations (SACAs) which are commonly found in Mbeya
regions and Rombo District. Operations both SACCOS and SACAs are member based
financial services providers. SACCAS are registered under the Cooperative Act while
SACAS registered under the Associations Ordinance.

Although there are over 2000 SACCOS countrywide but their outreach remain limited.
The SACCOS are weak in capacity, they have very limited range of products they
offer to their members and always run out of cash for on lending. Rural SACCOS are
the most disadvantaged since demand for loans come at the same time for all
members while core rule of operation is save one get two. It is hard to ration loans
in rural area in a situation where rural clients needs loans for inputs at the same
time there is only one farm season for all members. Our review found that the most
financially stable SACCOS are those urban based and more specifically employee
based and those linked to contract farming like the case of smallholder sugarcane
and tea growers. These SACCOS receive much of their lending money from Banks
particularly CRDB for the case of sugar cane and tea growers. A further major
problem for the SACCOS is lack of proper or ineffective regulatory systems. SACCOS
are regulated by the Registrar of Cooperatives who fall under the Ministry of
Agriculture and Cooperatives. SACCOS have their own network organization, the
Savings and Credit Cooperative Union League of Tanzania (SCULT)

b)     NGO MFIs
The NGOs MFIs sector could be considered as pioneers of the development of the
Microfinance Sector in Tanzania. They started to emerge strongly in the 1990s. The
Microfinance NGO was able to reach a segment of a market which banks failed to
reach. Most of the NGOs MFIs have taken a lead in addressing access to finance by
both rural and urban women.

The NGO are not subject to any regulation with respect to microfinance services
they provide which mainly focus on credit and compulsory savings. The NGO MFIs
are registered legal entities either as Companies Limited by Guarantee or
Incorporated as Trusts or as Societies under the Societies Ordinance. The major
NGO MFIs include PRIDE, FINCA, SEDA, PTF, YOSEFO and CREW. Although the start
up capital and lending funds were provided by donors, much had changed in recent
years. The NGO MFIs have started to access commercial or subsidised loans for on
lending activities. Banks such as CRDB, NMB have provided loans for NGO MFIs for
on-lending on commercial terms. The NGOs MFIs mainly use group based Grameen
Bank type of group methodology; they focus on loans and mandatory savings.




                                         8
Table 3: Donors and Government Agencies and programs which
wholesale credit to MFIs
 Organization Location    Type of           Type            Other support
 /Entity                  Organisation      investment      apart from loan
                                            /support        fund
 SELF          Tanzania   Government        Loan            MFIs staff training
                          Program
 Gatsby        Tanzania   Foundation-       Equity          Capacity Building
 Foundation               International     Participation & (CB) - Training
                                            Loans
 Incofin-      Tanzania   International NGO Equity          CB – Training and
 Tanzania                                   participation   product
                                                            development
 Stromme       Uganda     International NGO Loan            Capacity building-
 Foundation                                                 Cost sharing 50:50
 Grameen Trust Bangladesh International NGO Loan            Training          at
                                                            Grameen Bank
 CRDB7         Tanzania   Commercial Bank Loan              Capacity building
 NMB           Tanzania   Commercial bank Loan              -
 Councils-     Tanzania   Local Government Loan         and -
 District,                Authority         Equity
 Municipal and                              participation
 Cities8
 MTAJI Fund    Tanzania   Foundation        Loan             Capacity building
 OIKO Credit   Kenya      Foundation        Loan            -

Source: Donor and Government support to microfinance-main report, Ministry o
                                            of Finance Tanzania

c)       Informal financial systems

Informal financial systems continue to dominate the financial sector particularly
among the poor. The informal providers include Rotating Savings and Credit
Associations (ROSCAs) or “UPATU”, Accumulated Savings and Credit Associations
(ASCAS) and Funeral associations. These providers of financial services do not
provide a competition to formal MFIs by providing a perfect market to tap. The
informal associations, when accessible, use banks and other financial institutions
to deposits their savings.




7
     CRDB targets SACCOS
8
     Muungano SACCOS of Mbarali District Mbeya Region had a loan from the District Council. Ilala, Temeke and
     Kinondoni Municipal councils are major shareholders of Dar es Salaam Community Bank.



                                                          9
3.2 Policy, licensing and regulatory framework for Microfinance
In 2001 the Government approved the National Microfinance Policy. The
National Microfinance Policy articulates a clear vision and strategy for the
development of a sustainable microfinance industry in Tanzania. In the
statement of the overall microfinance policy, the Government recognizes
Microfinance as an integral part of the financial sector. The policy covers the
provision of financial services to households, smallholder farmers Small and Micro
enterprise, in both rural and urban areas.

The Microfinance Policy sets a framework for provision of a range of
microfinance products which include savings, loans, money transfer etc. Further
to that, the policy focuses on increased access to finance low income people in
both rural and urban areas.

The Bank of Tanzania exercise prudential oversight on licensed banks and non
Bank financial institutions providing financial services. These include CRDB, Akiba
Commercial Bank, Mufindi Community Bank, Dar es Salaam Community Bank,
Kilimanjaro Cooperative Bank, Kagera Farmers Cooperative Bank and Mwanga
Rural Community Bank. These banks provide microfinance services which include
loans, savings and money transfer. These banks currently use the standard
regulations set by BOT for all commercial banks and non bank financial
institutions. In March 2005 the Government issued a new policy through
Government Notice No. 79 published on 23/3/2005 the Banking and Financial
Institutions (-Microfinance Companies and Microfinance Activities) 2005. These
regulations are applicable to financial institutions licensed by BOT as
microfinance companies established to undertake banking business mainly with
individuals, groups and micro enterprises in the rural and urban areas. The 2005
Banking and Financial Institutions apply to banks and other financial institutions
engaged in microfinance business. Although the regulations were released in
2005, the country is yet to see the first Microfinance Company.

The Microfinance companies are expected to be incorporated as companies
limited by shares, with a minimum core capital of eight hundred million shillings
in the case of microfinance companies with a nationwide branch network and
two hundred million shillings in a case of a unit microfinance companies. .


3.3 Micro and rural finance
Microfinance practices reflect the diversity of landscape and population density in
Tanzania. In the urban areas, more densely populated, with better transport
infrastructure and easier access to clients, the Grameen Bank model has been
adapted by a large number of MFIs. These include the Promotion of Rural
Development Enterprises, Presidential Trust Fund for Self-Reliance, Youth Self
Employment Foundation and Small Enterprise Development Agency.


                                        10
In the rural areas, community-based organizations (CBO), such as Savings and
Credit Associations, Credit and Savings Cooperative Societies, Financial Services
Associations (FSAs) and Village Banking Model seem to be the most adapted to
the remoteness and isolation of Districts and Villages. Linking them to Banks
could significantly increase the outreach of microfinance services in the rural
areas. As in many countries, deepening the outreach and targeting the poorest is
still a difficult task in Tanzania.

As examples of these linkages, banks are making loans to and building networks
through existing MFIs. Additionally, some MFIs are beginning to receive
wholesale loans, but with conditions on providing collateral that is as high as 2/3
the value of loan funds received. Normally Microfinance operates using the
following models:


i)    Solidarity Group lending methodology

First introduced to Tanzania in the late 1980s, the Grameen Bank methodology is
based on peer groups of five members incorporated into centres up to ten
groups. Weekly meetings are used to collect compulsory payments from
members to contribute to the group‟s fund - incorporating both savings and
loans. The fund, managed by the group, may be used to make additional loans
to members. Loans are made initially to two members, then to two others and
finally to the last member, with a four to eight week interval between each
disbursement.

The group members guarantee each other‟s loan repayments. MFIs using the
Grameen methodology will typically offer general loans for business expansion.
Clients must have existing businesses in order to qualify for loans (i.e., start-ups
do not qualify for a loan).

Savings products are generally a compulsory loan guarantee, as well as any
additional voluntary or personal savings. Grameen loans extended through
solidarity groups have a maximum duration of one year. They aim at meeting
working capital needs although there is incidental data indicating that some loans
finance housing improvement, acquisition of durables such as house furniture,
refrigerators, television sets as well as productive equipment.

In recent years, a few MFIs have modified the traditional Grameen model,
developing new practices, streamlining of operations, providing more customer
friendly products, and focusing strongly institution and staff capacity building.
New products include micro-insurance covering risks related to health, loan
portfolio and life and funeral salary loans and Micro Leasing.




                                        11
Solidarity group methodology was adopted by organization and credit scheme
programs in the 1990s such as Crew (transformed from DANIDA funded project,
Credit for Productivity activities for Women in Tanzania), Women
Entrepreneurship Development Trust Fund (WEDTF), Zanzibar, Presidential Trust
Fund (PTF) the Mennonite Development Associates (MEDA), Promotion of Rural
Development Enterprises (PRIDE) and Poverty Africa.

ii)    Member Based MFIs

Member based MFIs are used by Savings Credit Cooperative Societies (SACCOS),
Savings and Credit Associations SACAS (“Benki Kata”) and Financial Services
Associations (FSAs). They provide a wide range of savings and loan products to
their members. They commonly require compulsory savings, but also offer
individual or group saving products and deposits. They tend to serve a salaried
population but also the rural poor. As examples, out of total membership of
SCCULT almost all with more than 1000 members are employees‟ based SACCOS
and the exceptions are tea and sugar cane out growers based SACCOS.

In addition, as successfully demonstrated in other countries particularly India,
Self-Help Groups (SHGS) can be linked to commercial banks, an approach taken
by the Banking with the Poor Program implemented by the Mbinga Community
Bank (MCB). This methodology was introduced by MCB to reach its rural-area
customer base in a sustainable manner. Despite the institutional and regulatory
challenges, MCB has lent directly to SHGS under this approach and results so far
indicate that the model is working.

iii)   Village Bank Model

The Village Bank model was introduced in Tanzania by Foundation for
International Community Assistance (FINCA). Village banks are community-
managed credit and savings associations designed to provide financial services to
members living in rural areas. This methodology focuses on empowering
relatively large groups of people (20-40) in building their own financial institution,
with a savings first approach. First, the village bank promoters, in this case
FINCA, provided training to the village banks, focusing on building the capacity
of membership and management committees. The promoters also lend fund
capital to build up the „external account‟ of the village bank (VB), for on lending
to members. The VB collects repayments from members, which repay its main
obligation to the promoters. In parallel, the VB members build up their „internal
account‟ through savings and on lend internally this fund.




                                         12
iv)    Individual Micro lending methodologies

Akiba Commercial Bank and National Microfinance Bank (NMB) have successfully
developed individual lending methodologies. Among other rules, individual
microfinance use chattel mortgages as collateral for loans and strict rules on
management of delinquency. Other MFIs, which have developed individual micro
loans, include, Mufindi Community Bank, Mbinga Community Bank and Dar es
Salaam Community Bank.

On the savings mobilization side, Tanzania Postal Bank (TPB) has a strong
outreach to poorest clients through their network of 30 functional branches and
more than 170 deposit taking outlets. TPB is working in conjunction with
MicroSave Africa in new productive development and improvement of customer
service. Regional and Rural bank units such as Mufindi Community Bank,
Kilimanjaro Cooperative Bank and Mbinga Community Bank continue to mobilize
deposits from the poor through savings passbooks:

4.0 Mainstreaming micro and rural finance
The concept of mainstreaming here is considered in the context of incorporating
the poor into the formal financial system. This is done through emphasizing
financial sustainability as a corner stone of successful inclusion of the poor in the
financial sector. During the 1980s and 1990s the Government of the United
Republic of Tanzania in collaboration with donors promoted access by the poor
to credit. However, the focus was on access to credit at a subsidized interest rate.
No emphasis was placed on savings or other microfinance products. Notable
projects include Credit for Productive Activities for Women which was financed
by DANIDA and implemented by the ILO in-collaboration with the Ministry of
Community Development and Women Affairs. The actual delivery of credit was
delivered by the then National Bank of Commerce. The other project was Action
to Assist Rural women that was funded by the Dutch Government and
implemented by ILO in Collaboration with the Ministry of Community
Development and Women Affairs and Cooperative and Rural Development Bank.
The banks which worked in this project only delivered credit; risks for the
services were covered by donors and did not consider such services as part of
the core activities. Savings and other products were considered less important
and hence the projects were at the end of the day not sustainable.

After the various experiments through credit projects, practitioners including
banks came to learn that mainstreaming microfinance within the financial system
became an inevitable approach for successful financial services delivery to the
poor. It is now widely acceptable that microfinance cannot meet the needs of
millions of the poor unless it is incorporated in into the wider continuum of
financial sector development. A sole SACCOS or credit project cannot meet the
financial needs of the poor on a sustainable basis.


                                        13
Attempts have been made to mainstream microfinance by various players in the
microfinance sector. The experiences outlined below provide specific cases which
involve providing microfinance services as a product by a commercial bank or
linking informal and formal groups or association with mainstreams banks. In
addition the case study provides an opportunity for collaboration between a
regulated insurance company and NGO MFI.

4.1 Promotion of mainstreaming the case of Dar es Salaam Community
Bank
In the study we considered efforts by Dar es Salaam Community Bank and other
Microfinance institutions in ensuring access to wider financial services by the
poor on a sustainable basis. Like any other clients, the poor need access to an
array of financial services beyond credit. These services include savings, loans,
insurance, and transaction services such as money transfer.

Dar es Salaam Community Bank is a licensed and regulated regional bank unit
which was established with a mission of providing sustainable financial services
to the poor in the three municipals of Dar es Salaam namely Temeke, Ilala and
Kinondoni. The City has a population of over 3 million people.

The bank offers an array of products in order to meet the needs of its target
market. The services include micro individual loans, solidarity group lending, and
salary loans for low income workers, savings accounts, money transfer. Services
of DCB are designed to meet demand driven financial services to the poor. The
Bank‟s branches are located in areas easily accessible by the poor. The Bank has
currently two branches, Arnautoglo and Magomeni and plans to open a third one
in the next few months.

DCB has learned that financial needs of the poor extend far beyond working
capital loans. Recently 9study found that loans from DCB are meeting needs of
the poor in various forms. The loans have enabled the poor to have access to
clean water, education and better housing.

4.1.1 Loans for facilitating access to safe water
One of the challenges faced by Dar es Salaam City is frequent outbreak of
cholera and other water born diseases. The locations which are frequently
affected by cholera are where majority of the poor live. The study found that a
loan extended by DCB to drill a borehole has made a difference to the
community of five thousand people at Mbagala.




9
    Socio and Economic impact of DCB services by Altemius Millinga –March 2006


                                             14
   A community based organization (CBO) namely Mtakuja Development
   Association approached the bank for a loan to drill deep well for
   providing safe water to about five thousand people in Mbagala. DCB
   provided the association with a loan of Tshs 4 million in August 2004.
   The association sells the water to the residents of the community.
   Residents are happy to have access to safe water, the project is
   sustainable since people pay for use of service and no free donor
   money was involved. The association fully repaid its loans on time and
   the community continue to enjoy access to safe water.


Loans for water projects are not only limited to CBO, DCB has issued a number
of loans to individuals for drilling boreholes.

   In August 2004, DCB issued a loan of Tshs 3.5 millon to Mr. Hakuna
   Matata. Mr. Hakuna Matata used the loan to drill borehole for safe water.
   He sell the water to neighbours at vijibweni area. Mr. Matata had this to
   say regarding the loans “Before approached DCB, I had visited several
   banks in Dar es Salaam, all of them denied my loan request. I was told
   by these banks the project is not viable and some said do not finance
   such project despite my efforts to explain to them that I will be able to
   repay the loan and the community will have access to safe water. DCB
   was able to finance the project without a detailed feasibility study, the
   just needed a one page of description of the project and some cash
   flows. I am glad the project was financed, my neigbours are now safe
   from cholera and I have been able to repay the loan”.


The outreach of such loans can not only be looked into the number of loans, but
the impact it creates to the community and more importantly how it addresses
immediate needs of the poor.

4.1.2 Loans for housing
One of the challenges faced by the poor is access to good housing. DCB does not
have a special product for housing since that will need a long term loan facility of
at least 10 years. A recent study on the social and economic impact of DCB
services revealed that 78% of loans were used for construction of houses and
renovations. This was a shocking result to many but not to microfinance
practitioners. The construction of housing for the poor follows the clear pattern
for loan repayment of microfinance products. The construction process takes
step by step process. The first step is to buy a plot of land, second start is focus
on one room, then a toilet, another room and later electricity. A construction of



                                        15
such houses uses various sources of cash in flow at the household. Mary from
Ukonga had this to say” the loan enabled me to construct my second room and
build a decent toilet for my family, I am proud of DCB because it addressed my
needs. Once I repay my current loan, I will use the new loan to connect
electricity in my house. The microfinance loans and salary loans provide an
opportunity for clients to decide the optimal way to invest loan money that is
what makes the difference.

4.1.3 Promoting children’s education
One of the things poor people do with their income from micro enterprises is to
invest in children‟s education. Studies show that children of microfinance clients
are more likely to go to school and stay in school. Students dropout rates are
much lower in microfinance clients households. A recent study on the social and
economic impact of Dar es Salaam Community Bank revealed that 27% of the
micro loan borrowers indicated that they used their loans funds to pay schools
fees. A follow up study using focus group revealed further that one of the
incentives for repaying loans is long term commitments for clients with regard to
the education of their children. Once clients decide to send her/his children to a
secondary or vocation schools he/she commit her/himself to a long-term financial
obligation.

Mariam of Tegeta, a client of DCB had this to say “My daughter has just joined
secondary school, I have at least four years of financial commitment for paying
school fees, thanks to DCB for supporting my micro enterprise through a loan, I
can assure I have no choice but to be a good client through timely repayment of
my loans and by this way, my daughter will have a bright future”

In the year 2002, MicroSave Africa conducted a study on demand for Micro-
insurance in Tanzania. The study coffered clients of Presidential Trust Fund
(PTF), Youth Self Employment Foundation and informal microfinance services
providers, ROSCAS and ASCAS. The finding of the study revealed that education
of children was one of the factors for high level of savings and desire to join
microfinance program among the poor in Tanzania. This observation is consistent
with the findings on the socio and economic impact of Dar es Salaam Community
Bank.

4.1.4 Solidarity group methodology for greater outreach
Group based lending methodology provides vehicles to reach number of poor
clients especially women. DCB trained a special group of staff to provide
specialised services to the poor through solidarity groups. The groups based
methodology has provided an opportunity for DCB to offer low cost service to
poor women in Dar es Salaam. The bank has opened credit delivery centres in
the communities where the clients leave. These include Mburahati, Mbagala,
Tegeta, Ukonga, Segerea, Mtoni, Kunduchi, Mikocheni, Mbezi Juu, Kawe, Kurasini,


                                       16
Keko, Kigogo, Mabibo, Mbuyuni, Sinza, Mburahati, Jitegemee, Tegeta-Namanga,
Makongo and Magomeni. The bank benefits from reduced costs of delivering
small loan amounts while the clients reduce transport costs and other transaction
costs. Solidarity group product had reached 17,630 clients by April 30th, 2006 of
whom 74.44% percent were women. While the product has proved to be very
profitable, it is worth to share the experience on the challenges the Bank faced.
When the product was introduced a good team of field staff were recruited and
trained on microfinance and group lending methodologies. However, other staff
did not receive such training this include Branch Managers, IT people and other
back office staff. As a result the field officers felt isolated and received little
support from the managers and other staff. This had on impact on outreach and
high staff turnover. The bank realised this and has embarked on training of all
staff on Microfinance and solidarity group lending methodology in general. The
training also reach Board Members which are charged with the responsibility of
approving major polices of the bank.

  Table 4    Solidarity Group Loans disbursed up to 30th April 2006
   Gender           Number of              Value of loans in
                    clients     Percentage Tshs               Percentage

  Female                  13,123      74.44%            1.81 billion       72.38%

  Male                     4,507      25.56%            0.69 billion       27.62%

  Total                  17,630        100%           2.50 billion         100%

4.2 Offering insurance products for the poor Youth Self Employment
Foundation
In July 2004, Youth Self Employment launched a group life and funeral insurance
product in collaboration with Jubilee Insurance Company, an International
Insurance Company. As of April 2005 the product benefited 5600 clients of
YOSEFO in Dar es Salaam and Ifakara. The insurance product increases financial
sustainability of YOSEFO by protecting the MFI from losses stemming from the
death of borrowing members. The policy provides the write off of an outstanding
loan in the event a borrower dies and the payment of Tshs 100,000 to meet
burial costs for the deceased borrower. YOSEFO pool and remit policy premiums
to Jubilee Insurance Company. All the clients covered did not have access to
insurance before the product was introduced. The insurance product has
provided additional incentive for the poor to use financial services to manage
their life cycle risks.


4.3 Money transfer for SMEs and the poor by DCB, Mbinga Community
Bank and Mufindi Community Bank


                                        17
This is a joint product developed by three community banks in order to address
money transfer needs of the clients. MCB and Muccoba are rural based MFIs
whose clients get their trade stock from Dar es Salaam. In order to address the
problem of loss of money through highway robberies, the three banks designed
a money transfer products. Traders from Mbinga and Mufindi Districts instead of
travelling with large some of money, they simply instruct the MCB or Muccoba to
transfer the money through DCB which has a branch just at the centre of
commercial district of Dar es Salaam City. The same traders also brings to Dar es
Salaam commodities such as maize, potatoes, timber etc, they use the same
facility to transfer money to their respective locations through DCB. The three
banks are providing a service long waited by their clients and there is a feeling
among the clients that these banks are not only concerned with financial services
but also their safety.

4.4. Taking financial services to rural communities in Mbinga District
Mbinga Community has linked informal groups called 10 Benkijamii and formal
member based financial services associations such as SACCOS and Agricultural
Marketing Cooperatives (AMCOs). The Bank was established with the purpose of
providing financial services to rural communities in Mbinga District.

The Bank work with existing association or facilitate the formation of such in
collaboration with a local NGO, Centre for Microfinance and Enterprise
Development. The association save with the bank and each member of the
association is required to deposit a minimum of Tshs 500 per week with his/her
association. The association can borrower three times their loan deposits. The
approach had also developed a mechanism to serve rural SMEs. These SMEs
have to save through the association and access loans through the guarantee of
the associations. The link model has helped the bank to reach over 7500
households with minimum resources in a profitable manner. Although the Bank is
less than three years old and it provides services to remote villages, is profitable.
This is a clear proof that with appropriate lending methodology, financial services
to the poor and rural in both rural and urban areas is a profitable venture. Both
Mbinga and DCB have proved beyond doubt that the poor do repay their loans
and such services are profitable too.

5.0 Challenges and the way forward
The more notable characteristics of the Microfinance in Tanzania are:
     (i)    Limited outreach with urban concentration
     (ii)   NGO MFIs dominate the market
     (iii)  Highly dependent of donor funding for most players-NGO MFIs,
            Banks, Government at policy and regulatory level



10
     Benkijamii is a Community Financial Services organization


                                               18
      (iv)   A very thin and fragmented microfinance sector ( NGO MFIs,
             SACCOS) a situations which makes MFIs to lack the massive
             numbers needed for microfinance operations to be profitable and
             sustainable.

During the last five years some initiatives by the Government and Bank of
Tanzania have created some hope for the sector. These includes existence of the
National Microfinance Policy, Financial laws Act, 2003-Microfinance Companies
and Financial Cooperatives and Microfinance Companies and Micro credit
Activities regulations, 2005. However, these changes are yet to bring the
necessary results on the ground, as alot need to be done to overcome the
challenges outlined below.

Outreach to the rural
Microfinance in other parts of the world, particularly in Asia and Latin has proved
to be an effective tool to combat rural poverty. One of the key factors is the
density of population which has proved to be compatible with microfinance
lending models such as solidarity groups (Grameen Bank Type). In Tanzania a
similar situation is mainly found in urban areas, rural areas are sparsely
populated hence costly to be reached. On the other side infrastructure (roads,
electricity) is poorly developed in Tanzania hence providing yet another constrain
for rural outreach where over 80% of population live. Effective collaboration
between the Government and Microfinance providers is highly needed in
Tanzania in providing microfinance services to the rural poor. This could be in
the form of targeted subsidy, tax incentive and improvement basic infrastructure
(roads, electricity, security services, telephone and ICT)

Human resources development
In order for microfinance to grow the country needs highly qualified staff with
articulated skills and experience in microfinance best practices. Unfortunately
Tanzania does not have any institution which provides professional training in
the various field of microfinance. It is hard to get even auditors who are well
versed in the industry. Banks and MFIs have to resort on sending a few abroad
for training which is costly and un-sustainable strategy for developing an industry
so important for addressing poverty and economic growth in the country. The
government in collaborations with her partners (donors) need to work a strategy
for short and long term development of the human resources needed for the
industry.




Financial contract and dispute resolution




                                        19
While commercial contracts to a minimum value of Tshs 30 million benefits from
newly established commercial court in Tanzania, banks and MFIs do not benefit
from services because all their loans are far below the stipulated minimum value
of contract. The existing option for going through the normal courts has proved
to be costly to microfinance institutions. Therefore, for more banks and other
players to be attracted to the sector, a commercial court or legal mechanism
should be established to handle contract and disputes between microfinance
clients and providers.

Prudential standards for licensed banks
Microfinance by definition is un-collateralized debt obligation business. Majority
of the poor for many years have failed to access loans because they lack
collaterals which technically entail ownership of landed property. In this sense
when you are in a microfinance business all loans could be considered as
unsecured as defined by Bank of Tanzania regulation. The regulation requires
banks to lend not more than 5% core capital to unsecured loans to single
borrower. Single borrower includes SACCOS, SACAs and NGO MFIs. In this case
a rural unit bank with a paid up capital of Tshs 200 can not lend an amount
exceeding Tshs 10 million. This could be a limiting factor for greater outreach as
linkage between such banks with SACCOS or SACAS or NGO MFIs which can
reach the poor in a cost effective manner is restricted. Small banks also face the
challenge of being properly and adequately equipped for efficient banking
operations because under the current prudential regulations they are mandated
to limit their investment on fixed assets no more than 20% of the core capital.

Impact of taxes on provisions
The current tax regime does not permit provision for possible loan loss to be
recorded as an allowable expense in the bank‟s statement for income and
expenses for tax purposes. At the same, banks are required to comply with Bank
of Tanzania requirements and prudential procedures for asset classification and
provisioning for delinquent loans. The inconsistency between tax treatment of
provisions and compliance requirements by BOT poses a great constrains to
banks. Since microfinance is a new area to most banks, its take a lot of courage
to venture into the industry because of possible big number of non performing
loans and hence erode profitability.




                                       20
   Appendix 1 MFIs outreach
 S/N Institution                       Number        Value in Tshs.     Remarks
                                       of Clients
                                                                         Up to Jan.
 1       National Microfinance Bank        104,121       97.5 billion         2006
                                                                       Wholesale
 2       CRDB Bank LTD                        190                      product to
                                           SACCOS         20 billion    SACCOS
         Akiba Commercial Bank                                       Up to Dec2006
 3       LTD                                               50billion
                                                                         Up to Dec.
 4       Pride Tanzania LTD                 65,000         9 billion          2005
         Dar es Salaam Community                                         Up to Dec.
 5       Bank LTD                           65,520     36.15 billion          2005


Appendix 2       Clients outreach - Dar es Salaam Community Bank LTD
          (For the total loan portfolio)
                             Number Percentage Value in Tshs. Percentage
 S/N Gender                  of
                             Clients

 1        Female              16,851          25.72%        6.34 billion       23.53%

 2        Male                48,669          74.28%        20.61billion       76.47%

          Total               65,520          100%       36.15billion          100%

Appendix 3     Financial performance of DCB
 Performance indicator          2002     2003                  2004           2005
 Return on average total assets            -18.45%   -0.55%        5.53%       2.72%
 Share ordinary shareholders
 funds                                     -23.45%   -1.23%       29.98%      20.71%
 Non- interest expense to gross
 income                                    1373.52   83.64%       51.33%      47.64%
 Interest margin to average
 earning                                    1.26%    17.66%           21.16   12.29%
                      Source: Financial data, DCB



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