Of recent times, microfinance has demonstrably become the most coveted solution to building a robust and efficient national economy that is inclusive of the low-income segment in both urban and rural areas.
The historically nascent level of microfinance services in Tanzania has prompted various non-government organization (domestic and foreign) and financial institutions to take up active roles in providing this service. Institutions such as the Foundation for International Community Assistance (FINCA), SEDA, PRIDE and Bangladesh Rural Advancement Committee (BRAC) are some of the active players to have taken up this role in the microfinance subsector. Meanwhile, larger financial institutions have also ventured into carrying out microfinance operations. Banks such as NMB and CRDB which was established in 1995 as a hybrid of a commercial and microfinance bank are key examples of this.
The exciting evolution ofmicrofinance can be traced from before 2000.
Before 2000
The microfinance movement, which is a rightfully autonomous movement albeit closely linked to the farmers’ cooperatives, experienced mixed fortunes because of changes in government policy.Cooperatives had firstly been promoted as a model and were then replaced by the Ujamaa village. Since that time these cooperatives have not regained the status they enjoyed in the years of 1965-1970.
Following nationalizing of the industry for 24 years (1967-1991) and then the more commercial privatization period the microfinance movement saw a decline in the level of financial services provided to smallholder clients. This resulted in the farmers’ cooperatives creating regional institutions such as the Kilimanjaro Cooperative Bank (KiCoBa). Savings and credit cooperative unions in Tanzania also formed their own financial institutions in their need for financial service providers that would best serve them.
The 1990s witnessed the government of Tanzania commence financial sector reforms to rebuild and strengthen an efficient and effective financial system.During this time the Banking and Financial Institution Act (BAFIA), 1991 and Cooperative Societies Act, 1991 came into existence. By March 1999 a total number of 31 institutions were in existence including commercial banks, non-banking financial institutions, rural banks and cooperative banks.
Post 2000
Implementation of the financial sector reforms was accompanied by the National Microfinance Policy, 2000 which led to an increase of microfinance products and services and mobile network operators. Currently there aretwo categories of microfinance service providers:formal microfinance services such as banks and financial institutions, SACCOs, financial NGOs, government funds and programmes and community financial groups; and informal microfinance services which include community based organization (CBOs), village community banks (VICOBA), village savings and loan associations (VSLA), rotation savings and credit associations (ROSCA), money lenders, saving and credit associations (SACA) and accumulated savings and credit associations (ASCA).
The implementation of the National Microfinance Policy 2000 has succeeded in increasingthe number of financial service providers as there are more than 50 banks of which eightcommercial banks, three microfinance banks and 11 community and cooperative banks are offering microfinance products and services. Concurrent to this growth, NGOs, microfinance companies and government funds and programs including self-microfinance, Presidential Trust Fund, National Entrepreneurship Development Fund and other such development funds increased from only nine (9) in 2002 to over 200 institutions by 2016.
Limitations of the National Microfinance Policy 2000
Notwithstanding the success of the National Microfinance Policy, its strategy focused more on output rather than outcome. The microfinance movement has continued to be plagued by inadequate legal and regulatory frameworks, poor management information systems, lack of central loan registers, high dependency on donors, inadequate internal capacity, inadequate processes and procedures, and inadequate tracking and analysis of microfinance operations.
Suggested remedial measures
Firstly, the establishment of an independent microfinance regulatory authority would support the Bank of Tanzania by giving much needed focus to the microfinance subsector.
Secondly, financial NGOs should be allowed to find other means of registering their business as they make a difference in regulating the industry with other sister institutions.
Furthermore, sharing of experience and cooperation and technical assistance between SACCOs and their apex is necessary to improve the microfinance ecosystem.
Entrusting the aforesaid authority to license all microfinance institutions and supervise them by both on-site and offsite surveillance; and to restructure the microfinance subsector into tiers in order to incentivize growth.
The regulation should also allow incubation of the informal financial service providers as a path to formalization through mergers and acquisitions. Market confidence and protection should be guaranteed by establishing SACCOs’protection; SACCOs stabilization and SACCOs investment funds.
Donors should not complement microfinance services but rather they should subsidize them in order to lower the high administration costs of credit. All these measures will strengthen the microfinance movement and help improve access-to-finance for small enterprises.
Finally, the poor need a variety of financial services, not just loans. Micro-financial services are a powerful instrument against poverty and their financial sustainability is necessary if they are to make an impact on the country’s economy.
Microfinance means building sustainable financial systems that serve the poor. Enabling the strengthening of the institutional capacity of the players in this subsector will go a long way to unlock the potential of small enterprises in Tanzania.
Simon Musiba is a member with TIOB
