NOTES

1. MICROFINANCE IN TANZANIA
 Microfinance in Tanzania began with NGOs
and SACCOs (Savings and Credit
Cooperative Organizations) in 1995 and has
continued to grow with the increased success
of microfinance internationally.
 Until mid 1990s Microfinance was still a
relatively new concept in Tanzania
3/15/2024 J. Macha 1

2.  Demand for Microfinance
 According to the 1997 Microfinance Demand
Study that was undertaken by K-Rep (K) in
Tanzania, conducted by BOT:
 82 percent of households were saving in their
homes;
 Although 21 percent of the households had
savings accounts in banks, the saved amount
was only 12 per cent of their total savings;
3/15/2024
J. Macha
2
MICROFINANCE IN TANZANIA

3.  79 percent of the households were willing and
able to save if appropriate products and
saving mechanisms were there;
 94 percent were willing to borrow more if
resources and appropriate methodologies
were available.
 It was clear that the size of unmet demand
was huge and that the population required
high quality savings and tailor made loan
products. This was the basis for establishing
the NMP.
3/15/2024 J. Macha 3
MICROFINANCE IN TANZANIA

4.  The government tried to convince commercial
banks to support small and medium
businesses
 Once the National Microfinance Policy was
implemented in 2001, microfinance was
officially recognized as a tool for poverty
eradication and with its increased use and
exposure to the country, banks interest in
offering microfinance services was enhanced
3/15/2024 J. Macha 4
MICROFINANCE IN TANZANIA

5.  In 2005 a survey was done by the Bank of
Tanzania (the overseer of microfinance under
the Ministry of Finance) and updated the
directory of microfinance practitioners and
included basic information on microfinance
institutions including commercial banks,
financial institutions, financial Non-
Governmental Organizations (NGO)
3/15/2024 J. Macha 5
MICROFINANCE IN TANZANIA

6.  Savings and Credit Cooperatives Societies
(SACCOs) and Savings and Credit
Associations (SACAs).
 The directory included a total of 8 banks, 45
CBOs, 2 companies, 95 Government
programs, 1,620 SACCOs, 48 SACAs and 62
NGOs.
3/15/2024 J. Macha 6
MICROFINANCE IN TANZANIA

7.  Formal sector institutions
 Semi-formal sector institutions
 Informal sector institutions
3/15/2024 J. Macha 7
SUPPLY OF MICRO-FINANCE SERVICES

8. FORMAL SECTOR
 These are institutions, which are subjected
not only to general company laws and
regulations but also to specific banking
regulations and supervision. These include
 Commercial banks
 Savings banks
 Rural banks
 Postal savings banks
3/15/2024 J. Macha 8

9.  Cooperative banks
 Development banks
 Finance companies
 Building societies and Credit unions
 Pension funds
 Community banks
 Insurance companies
 E.g. CRDB, Akiba bank, TPB, NMB, Access
bank,
3/15/2024 J. Macha 9
FORMAL SECTOR

10. SEMI-FORMAL SECTOR
 They are not regulated by banking authorities
but are usually licensed and supervised by
other government agencies.
 Semi-formal institutions provide products and
services that fall somewhere between those
offered by formal sector and informal sector
institutions.
3/15/2024 J. Macha 10

11.  The design of their loans and savings
products often borrows characteristics from
both sectors.
 In most countries semi-formal institutions
often receive donor and government support
through technical assistance or subsidies for
their operations. Examples
3/15/2024 J. Macha 11
SEMI-FORMAL SECTOR

12.  Savings and credit cooperatives
 Multipurpose cooperatives
 Banques populaires (Credit union)
 Village banks
 Registered self-help groups and savings club
 Non-governmental organizations , e.g. Pride
Tanzania, YOSEFO, FINCA, SEDA, PTF,
SELFINA
3/15/2024 J. Macha 12
SEMI-FORMAL SECTOR

13. INFORMAL SECTOR
 Informal financial intermediaries operate
outside the structure of government
regulation and supervision.
 Often they do not comply with common book
–keeping standards and are not reflected in
official statistics on the depth and breadth of
the national financial sector.
3/15/2024 J. Macha 13

14. INFORMAL SECTOR
 It is an unorganized ‘nuisance’ sector whose
members, for example do not pay any form of
tax, on the other hand it provides jobs and
increase incomes of the most vulnerable
groups in a city – the very low income group.
3/15/2024 J. Macha 14

15.  Savings associations
 Rotating savings and credit associations
 Non-registered self-help groups
 Individual moneylenders
 Pawnbrokers
 Traders and shopkeepers
 Families and friends
3/15/2024 J. Macha 15
INFORMAL SECTOR

16.  They provide the rural population with access
to savings within the local area and with a
certain cushion against economic
fluctuations, and they encourage a
cooperative and community feeling, as
evidenced by
3/15/2024 J. Macha 16
ROLES OF MICROFINANCE
INSTITUTION

17.  Informal and small-scale lending
arrangements that have long existed in many
parts of the world, especially in the rural
areas, and they still survive. Good examples
are schemes in Ghana, Tanzania, Kenya,
Malawi and Nigeria
3/15/2024 J. Macha 17
ROLES OF MICROFINANCE
INSTITUTION

18. ROLES OF MICROFINANCE
INSTITUTION
 Microfinance institutions play a
complementary role to the banking system by
extending credit to borrowers whom banks
view as too costly or too risky to reach.
 Microfinance institutions can play an
important role in development in
circumstances where other sectors of the
economy are repressed.
3/15/2024 J. Macha 18

19.  Microfinance institutions attempt to compete
with moneylenders by offering credit to a
broader range of households on more
favorable terms.
 Lacking collateral, and often living far from
banks, poor households often turn to
expensive informal moneylenders when
confronted with urgent credit needs.
Repayment of these moneylenders may
leave some families worse off.
3/15/2024 J. Macha 19
ROLES OF MICROFINANCE
INSTITUTION

20.  The groups formed provide joint collateral
and serve as instruments for spreading
valuable information that is useful for
economic and social progress.
 Micro finance is regarded as an effective tool
for poverty alleviation
 All economies rely upon the financial
intermediary function to transfer resources
from savers to investors.
3/15/2024 J. Macha 20
ROLES OF MICROFINANCE
INSTITUTION

21. PRINCIPLES OF MICROFINANCE
 The poor need a variety of financial
services, not just loans
 Poor people need a wide range of financial
services that are convenient, flexible, and
reasonably priced.
 Depending on their circumstances, poor
people need not only credit, but also savings,
cash transfers, and insurance.
3/15/2024 J. Macha 21

22.  Microfinance is a powerful instrument
against poverty
 Access to sustainable financial services
enables the poor to increase incomes, build
assets, and reduce their vulnerability to
external shocks. Microfinance allows poor
households to move from everyday survival
to planning for the future, investing in better
nutrition, improved living conditions, and
children’s health and education.
3/15/2024 J. Macha 22
PRINCIPLES OF MICROFINANCE

23.  Microfinance means building financial
systems that serve the poor
 Poor people constitute the vast majority of the
population in most developing countries. Yet,
an overwhelming number of the poor
continue to lack access to basic financial
services.

3/15/2024 J. Macha 23
PRINCIPLES OF MICROFINANCE

24.  In many countries, microfinance continues to
be seen as a marginal sector and primarily a
development concern for donors,
governments, and socially-responsible
investors.
 In order to achieve its full potential of
reaching a large number of the poor,
microfinance should become an integral part
of the financial sector.
3/15/2024 J. Macha 24
PRINCIPLES OF MICROFINANCE

25.  Financial sustainability is necessary to
reach significant numbers of poor people.
 Most poor people are not able to access
financial services because of the lack of
strong retail financial intermediaries. Building
financially sustainable institutions is not an
end in itself.
3/15/2024 J. Macha 25
PRINCIPLES OF MICROFINANCE

26.  It is the only way to reach significant scale
and impact far beyond what donor agencies
can fund. Sustainability is the ability of a
microfinance provider to cover all of its costs.
It allows the continued operation of the
microfinance provider and the ongoing
provision of financial services to the poor.
3/15/2024 J. Macha 26
PRINCIPLES OF MICROFINANCE

27.  Achieving financial sustainability means
reducing transaction costs, offering better
products and services that meet client needs,
and finding new ways to reach the unbaked
poor.
3/15/2024 J. Macha 27
PRINCIPLES OF MICROFINANCE

28.  Microfinance is about building permanent
local financial institutions
 Dependence on funding from donors and
governments—including government-
financed development banks—will gradually
diminish as local financial institutions and
private capital markets mature.
3/15/2024 J. Macha 28
PRINCIPLES OF MICROFINANCE

29.  Micro-credit is not always the answer
 Micro-credit is not appropriate for everyone or
every situation.
 The destitute and hungry have no income or
means of repayment need other forms of
support before they can make use of loans.
3/15/2024 J. Macha 29
PRINCIPLES OF MICROFINANCE

30.  In many cases, small grants, infrastructure
improvements, employment and training
programs, and other non-financial services
may be more appropriate tools for poverty
alleviation.
 Wherever possible, such non-financial
services should be coupled with building
savings.
3/15/2024 J. Macha 30
PRINCIPLES OF MICROFINANCE

31. 3/15/2024 J. Macha 31
MICRO FINANCE AND TRADITIONAL
BANKING
 Providing microfinance services is very
different from providing traditional banking
services and various models have been
developed and adapted to deal specifically
with the unique requirements of microfinance
clients.

32. 3/15/2024 J. Macha 32
DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING
 Size of Loans
The micro-finance institutions have relatively small
capital base than commercial banks. MFIs therefore
deal with small loans relatively to their size
 Operations and requirement
Micro operations are simpler than commercial banks
operations. Commercial banks have complex loan
procedures that take long to process and require a lot
information to be provided

33. 3/15/2024 J. Macha 33
 Cost of loans
MFIs charge high interest rates because their
borrowers have no sizeable overheads and
can afford to pay. Due to their size, follow up
costs are high. Commercial interest rates are
relatively lower.
DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING

34. 3/15/2024 J. Macha 34
DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING
 Type of borrowers
MFIs target the poor. By the very nature of
the business, micro finance institutions face
high administrative costs per loan. Also
intensive monitoring efforts are required to
ensure payment. Most of the micro
entrepreneurs do not keep financial records
and assessment of performance is difficult
and costly.

35. 3/15/2024 J. Macha 35
DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING
 On the contrary conventional commercial
banks target customers who can afford bank
conditions. Banks prefer large businesses
where they can obtain big interest income.

36. 3/15/2024 J. Macha 36
DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING
 Collateral
the banking and financial institutions act
requires lending be subject to collateral.
Micro-finance has other forms of collateral
which are substitute and alternative
collaterals

37.  Compulsory savings (compensating
balances) represent funds that must be
contributed by borrowers as a condition for
receiving a loan, sometimes as a percentage
of the loan, sometimes as a nominal amount.
 Compulsory savings can be considered as
part of the loan product rather than an actual
savings product, since they are so closely tied
to receiving and repaying loans.
3/15/2024 J. Macha 37
COMPULSORY SAVINGS

38. 3/15/2024 J. Macha 38
 They are useful to:
 Serve as an additional guarantee mechanism
to ensure repayment of loans
 Demonstrate the ability of clients to manage
cash flow and make periodic contributions
 Help to build up the asset base of the client
COMPULSORY SAVINGS

39. 3/15/2024 J. Macha 39
 Generally, compulsory savings can not be
withdrawn by members while they have a
loan outstanding, hence acts as collateral
 In some cases compulsory savings can not
be withdrawn until the borrower actually
withdrawals his or her membership from the
MFI
 This however may result clients borrowing
amount less than their accumulated savings
COMPULSORY SAVINGS

40. 3/15/2024 J. Macha 40
 By having compulsory savings clients can
smooth out their consumption patterns and
provide funds for emergencies provided the
savings are available for withdrawal by
borrower
 Clients thus will have additional cash flow for
investment or consumption at the end of the
loan term
 It also provides a means for building assets
for clients
COMPULSORY SAVINGS

41. 3/15/2024 J. Macha 41
 A variation of compulsory savings required by
bank Rakyat Indonesia is for borrowers to
pay additional interest each month, which will
be returned to clients at the end of loan,
provided full repaid
 Compulsory savings also provide a source of
lending and investment for the MFIs.
 They are generally stable source of fund
because they are illiquid
COMPULSORY SAVINGS

42. 3/15/2024 J. Macha 42
 Usually the deposit interest rate paid (if any)
on the savings is lower than the return
earned by the borrower if the savings were
put into other business or other investment
COMPULSORY SAVINGS

43. THANKS FOR LISTENING
 Why MFIs may decide to introduce voluntary
savings?
3/15/2024 J. Macha 43