INTEGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES IN TANZANIA By E .P. Mkwawa CEO Dar es Salaam Community Bank Limited
PRESENTATION OUTLINE • Introduction • An overview of poverty reduction strategies in Tanzania • Policy and legal framework for financial services • Mainstreaming micro and rural finance • Challenges and the way forward
INTRODUCTION • the paper addresses the country’s economic situation • highlights the social economic condition and the background of poverty reduction strategies in Tanzania. • analyse the financial system in Tanzania with emphasis on how financial institutions have been strengthened through policies and legal framework.
INTRO………. • Social Economic Situation of Tanzania -Tanzania remains one of the poorest countries in the World. -GDP per capita is US$ 267 which is far less than the average for Sub-Saharan Africa and East Asia of US$ 500 and US$ 970 respectively. • -GDP (2004): $10 billion.Average growth rate (2004): 6.7%. • Population: 33.82 million
Cont… • GDP growth rate consistently rose reaching 6.2 percent in 2002. Per capita income (2004): $300 • In 2004 there has been a remarkable rise to record 6.7 per cent GDP growth rate. • The annual inflation rate was 4.4 percent in 2003 compared to 6 percent in 2000. • The annual inflation rate – 2006 6.9 percent
Cont… • 2006/07 Govt Budget • Attaining a real GDP growth of 5.91 percent in 2006, 7.3 percent in 2007 and 7.7 percent in 2008 • Planned inflation rate not exceeding 4.0 percent by June 2007
Overview of Poverty Reduction Strategies in Tanzania • Poverty in Tanzania is mainly a rural phenomena, rural households comprise over 90% of the poor. • Household budget Survey of 2000/01 the proportion of the population below the national food poverty line is 18.7% and that below the national the national basic needs poverty line is 35.7%
Overview of Poverty Reduction Strategies cont… • Agriculture is the lead sector, accounting for 45% of GDP, 60% of export earnings in the past 3 years. Provides livelihoods to 82% of the population • Lack of banks services in the rural areas has forced majority to resort into informal financial services such as ROSCAS, ASCAS
Overview of Poverty Reduction Strategies cont… • NMB has 130 branches but majority failed to use due to distance, high minimum balance, travel time, transport costs. • Strategies • Poverty eradication strategy • National Strategy for growth and reduction of Poverty (MKUKUTA)
Policy and Legal Framework for Financial Services • 1st Generation financial sector reforms 1991 • To permit banking institutions to operate on a commercial basis • Strengthen BOT role in regulating and supervision of financial institutions • Restructuring of state owned banks such as NBC and allowing the entry of both local banks and foreign banks in the market.
Policy and Legal Framework cont… • In 1995 the Government made provision that allowed formation of regional and rural financial institutions; which saw the birth of Kilimanjaro Cooperative Bank, Kagera Farmers Cooperative Bank, Mwanga Community Bank, Mufindi Community Bank, DCB, Mbinga Community Bank. • The Microfinance Policy in 1996 approved in 2001
Policy and Legal Framework cont… • An overview of the financial sector after reform • 1899 Microfinance institutions, 1813 in the mainland and 86 in Zanzibar • 28 commercial banks regulated by BOT • 6 Non bank financial institutions regulated by BOT • 1635 SACCOS, 105 Govt Programmes, 48 SACAS, 48 CBOs, 53 NGOs
Policy and Legal Framework cont… • 2nd Generation Financial Sector Reforms - Strengthening the policy environment for the financial sector to grow; and be able to extend its services to more people • Strengthening financial markets so as to bring more competition and efficiency • To reform regulatory framework of pension funds;
Policy and Legal Framework cont… • Strengthening the insurance industry • Creating an environment for facilitating the availability of micro credits services; • Reforming the land registration system for enabling land to be used as a collateral against credit or mortgage; • Putting in place arrangements for development of medium and long term finance
Cont…. • Requirements for licensed banks
Outreach • Competitive matrix and outreach on Microfinance– 31st Mar 06
Outreach cont….. • The above table, shows that • Just about 600,000 of clients have been reached out of the population of 16 million adults • Only Tshs 289 billion deposits tapped, while Tshs 293 billion have been given to the poor in Tanzania. This is by no means insignificant.
Outreach cont…. Unregulated MFI’s • Community based financial services organizations -SACCOS offers the most wide spread source of financial services for low income people in both rural and urban areas -Saving and Credit Associations ‘SACAs’ • NGO MFIs- considered as pioneers of the development of the microfinance sector in Tanzania.
Outreach cont…. • Informal Financial Systems Informal financial system continue to dominate the financial sector particularly among the poor. This includes • Rotating Savings and Credit Associations ‘ROSCAS’ or ‘UPATU’ • Accumulated Savings and Credit Associations ‘ ASCAS’ • Funeral Associations
Mainstreaming Micro and Rural Finance • The concept of mainstreaming is considered in the context of incorporating the poor into formal financial system • Emphasizing financial sustainability as a corner stone of successful inclusion of the poor in the financial sector • Providing microfinance services as a product by commercial ban or linking informal and formal groups or associations with mainstreams banks
Mainstreaming cont….. • Promotion of mainstreaming the case of Dar es Salaam Community Bank Limited • A licensed and regulated bank – operated from year 2002 • With a mission of providing sustainable microfinance services to the poor in Dar es Salaam Region
Mainstreaming cont….. • DCB … • Products offered includes micro individual loans, solidarity group lending, salary loans for low income workers, savings accounts, money transfer. • Two branches, Arnautoglu and Magomeni • Social and economic impact study and analysis found that financial needs of the poor extend far beyond working capital loans.
Mainstreaming cont….. • The loans have enabled the poor to have access to better housing, education and clean water • 78% of loans were used for construction of houses and renovations • 16% of loans used in promoting children’s education • 6% for enhancing small businesses including drilling of water wells.
Mainstreaming cont….. • Solidarity Group lending methodology for greater outreach • Dar es Salaam Community Bank has opened credit delivery centers in the communities • The product had reached 17,630 clients by April 30th 2006 • 74.44 % are women
Mainstreaming cont….. • Collaboration among community banks – DCB, Mbinga Community Bank and Mufindi Community Bank - Developed money transfer product for their clients to address the problem of network and loss of money through highway robberies.
Mainstreaming cont….. • Taking financial service to rural communities in Mbinga District • Mbinga Community Bank has linked informal groups called ‘Benkjamii’ and SACCOS and AMCOS (Agricultural Marketing Cooperatives. • The link model helped the bank to reach over 7500 households with minimum resources in a profitable manner.
Challenges and the Way Forward Challenges: • Limited outreach • NGO MFIs dominate the market • Highly depended on donor funds • A very thin and fragmented microfinance sector
Challenges cont… • Infrastructure poor developed a constrain for rural outreach where over 80% of population live • Human resources development - For microfinance to grow the country needs highly qualified staff with articulated skills and experience in microfinance best practices. - Tanzania has no institution training in various fields of microfinance.
Challenges cont… - Banks and MFIs resort to training abroad which is costly and un-sustainable strategy for developing an industry so important for addressing poverty and economic growth in the country. - Short and long term HR development strategy is needed. Govt initiatives and intervention is needed in this respect.
Challenges cont… • Financial contract and dispute resolution - Commercial contracts to a minimum value of Tshs 30 million admissible at newly established commercial court in Tanzania. - MFIs do not benefit because their loans are far below the stipulated minimum value of contract. - Commercial court or legal mechanism need to be established to handle contracts and disputes between microfinance clients and providers.
Challenges cont… • Prudential standards for licensed banks on collaterals and investment in fixed assets - the regulation requires banks to lend not more than 5% of core capital to unsecured loans to single brower including SACCOS, SACAS, NGOs MFIs. - this could be a limiting factor for greater outreach as linkage between banks with SACCOS, SACAS or NGOs MFIs which can reach the poor in a cost effective manner is restricted. - the 20% limit on investment on fixed assets is a challenge for small banks to be properly and adequately quipped for efficient banking operations.
Challenges cont… • Impact of taxes on loan loss provisions - The current Tax regime does not permit provision for possible loan loss to be an allowable expense - the BOT prudential requirements procedures requires to comply with the asset classification and provisioning of delinquent loans. - the inconsistent between tax treatment poses a great constrains to financial institutions
Way Forward • the demand is huge and the existing MFIs have reached relatively insignificant portion of the population • Understanding the theoretical basis and the best practices of microfinancing is essential • Understanding the triangle of outreach, financial sustainability and impact is essential for practitioners as they choose their target clients and product design
CONCLUSION • Tanzania enjoys peace and tranquility. • The Government of Tanzania with its pragmatic approach to issues of poverty reduction through its MKUKUTA and MKURABITA policies, there are very obvious signals that Tanzania will move ahead in the next 10 years. • This is also evidenced by the allocation of Tshs 500 million to each region to support SMEs through banks in the Prime Ministers budget speech 2006/07.
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