The Role of Microfinance Institutions in Creating

1.0. INTRODUCTION
Microfinance involves activities directed at provision of access to financial services for working poor or small and micro-enterprises. Micro financial services comprise of micro credit, savings, micro leasing, micro insurance and other forms of financial services. The micro finance market consists of the poor who are essentially involved in some form of economic activities. The small and micro enterprises in Tanzania operate in the informal sector, which is estimated to support about 60% of the economically active population.
The Microfinance industry in Tanzania is relatively young. Individual players have been trying to deliver financial services to low-income communities since late 1980s and early 1990s but their efforts have been thwarted by lack of skills and experience, inappropriate methodologies, and above all difficulties in access to sources of funding
The World Bank estimates that less than 20% of Tanzania’s working population in both the rural and urban economies has access to the mainstream banking, which translates into 13 million people not having access to the banking services. It is estimated that 80% of the 13 million are informal sector players i.e. micro and small entrepreneurs (SME) and their number is growing by 4% annually. In general, the microfinance industry in Tanzania faces a tremendous challenge in developing an efficient and effective micro financial system that is capable of delivering appropriate, affordable, quality services to such a large sector with diverse economic undertakings.
A recent 2005 survey done by the Bank of Tanzania updated the directory of Microfinance practitioners and includes basic information on Microfinance institutions including commercial banks, financial institutions, financial Non-Governmental Organizations (NGO), Savings and Credit Cooperatives Societies (SACCOs) and Savings and Credit Associations (SACAs)। The directory includes a total of 8 banks, 45 CBOs, 2 companies, 95 Government programs, 1,620 SACCOs, 48 SACAs and 62 NGOs.

2.0. MICROFINANCE INSTITUTIONS’ SUPPORT TO SMEs
It is estimated that there are close to 8 million small and micro entrepreneurs (SMEs) who need financial services and the number is growing by 4% annually, the majority of whom are found in the rural areas। The SMEs are involved in a wide range of businesses including trading, small-scale manufacturing, agriculture (crop farming and animal husbandry) and services (food vending, transport, hair and beauty saloons etc).

Microfinance institutions operating in Tanzania provide financial services to the SMEs mainly in the form of micro credit with an exception of cooperative based microfinance institutions, which are predominantly savings based। The credit based institutions number between 80 and 100 out of which 42 are registered members of the Tanzania Association of Microfinance Institutions (TAMFI), the local microfinance network.

Microfinance institutions play an important role in micro-enterprise development in Tanzania, particularly as instruments to reduce the "financial exclusion"। As an economic development strategy, microfinance institutions encourage income-generating activities, assist entrepreneurs in stabilizing existing sources of income and enables micro-enterprises to grow into small businesses. In the development of market-based, microfinance institutions provide SMEs with micro-credits and other financial services on a sustainable basis with more flexible terms than those offered by traditionally risk-averse banks. The linking access to finance with business development assistance is an effective way to improve entrepreneurial behaviour and builds business integrity.

This linkage increases entrepreneurs’ chances of running successful businesses and becoming well-established customers of the finance system। Micro Finance Institutions (MFIs) play a significant role in the financial services sector by enhancing the capability of SMEs and co-operation including the exchange of best practices among SMEs.

It is estimated that all the MFIs in Tanzania put together serve a combined client population of about 400,000 SMEs, which is only around 5% of the total estimated demand। Commercial banks including community banks account for around 50,000 while the NGO category accounts for the an estimated population of 220,000 clients.

2.1. CATEGORIES OF MICROFINANCE INSTITUTIONS
The main microfinance institutions can be categorized as non-governmental organizations (NGOs), Cooperative based institutions namely SACCOS and SACCAs while the third category is the commercial banks। The major players in the NGOs category include PRIDE Tanzania, FINCA (Tanzania), Small Enterprise Development Agency (SEDA) and Presidential Trust for Self-Reliance (PTF). Others, which are relatively smaller in size, include Small Industries Development Organization (SIDO), Tanzania Gatsby Trust and Poverty Africa.

The rest consists of very tiny programs scattered throughout the country mainly in the form of community-based organizations (CBOs)। Banks that are actively involved in microfinance services delivery include the National Microfinance Bank (NMB), CRDB bank, Akiba Commercial Bank (ACB) and a few Community/regional banks namely, Dar es Salaam Community Bank, Mwanga Community Bank, Mufindi Community bank, Kilimanjaro Cooperative Bank, Mbinga Community Bank and Kagera Cooperative Bank.

PRIDE Tanzania is one of the largest microfinance NGOs in Tanzania since it was founded in 1994 with a dedication to microfinance। As part of a nation wide initiative for poverty reduction PRIDE Tanzania has been pursuing its objective of assisting micro entrepreneurs by providing loans and technical skills.

2.2. THE CHALLENGES OF MICROFINANCE INSTITUTIONS
It is observed that most Micro Finance Institutions use solidarity groups, as a methodology for issuing small loans while collateral is demanded for clients who seek big loans। The definition of small and big loans varies from one MFI to another, however, for many MFIs, loans start from Tshs. 50,000. Any amount greater than Tshs. 500,000 is regarded as a large loan. A new client is required to start with a small loan and after repayment of this loan the client graduates to receiving the next higher loan amount. This process has been observed to be a limiting factor, especially for new clients who seek large loans.

The experience shows the clients who had applied for big loans had to offer collateral to secure the loans। This condition had hindered some small business owners from accessing large loans and which lead to them being unable to expand their business. The kind of collaterals required include houses, and some expensive durable assets like television sets and refrigerators, which most low-income earners cannot afford.

Micro Financial Institutions outreach to people is also insufficient, for reasons such as badly designed financial products and required obligatory like weekly meetings, which lead to high transaction costs। MFIs require entrepreneurship, which leaves out many people. As a result many individuals are unable to obtain these services.

Conclusively, microfinance institutions, thus offers the potential for sustainability and development of vibrant businesses. Due to their demonstrated success in providing benefits to the poor, international donors and governments are more willing to support micro-finance institutions. Micro-finance is not a panacea but an important intervention in reducing poverty especially to the rural poor.

THE IMPORTANCE OF SAVINGS AND CREDIT CO-OPERATIVE
SOCIETIES (SACCOS) TO URBAN AND RURAL PEOPLES OF TANZANIA
Savings and Credit Co-operatives (SACCOs) are democratic, unique member driven, self-help co-operative organizations. They are owned, governed and managed by members who have the same common bond: working for the same employer, belonging to the same church, labour union, social fraternity or living/working in the same community. A Savings and Credit Cooperative’s membership is open to all who belong to the group, regardless of race, religion, colour, gender or job status.

These members agree to save their money together in the SACCOs and to make loans to each other at reasonable rates of interest. Interest is charged on loans, to cover the interest cost on savings and the cost of administration. There is no payment or profit to outside interest or internal owners. The members are the owners and the members decide how their money will be used for the benefit of each other.

Savings and Credit Cooperatives are democratic organizations and decisions are made in a structured democratic way. Members elect a board that in turn employs staff to carry out the day-to-day activities of the SACCOs. The number of board members is between nine and fifteen. Members also elect a supervisory committee to perform the function of an internal audit.

SACCOS is a prevalent saving device in Tanzania. Most SACCOS are capitalized by illiquid shares. The share savings function as an instrument of ownership, and a basic feature is that the SACCOS should be capable of running on the financial resources of the membership alone. Members work voluntarily and usually never get paid for their responsibility. Most SACCOS cannot afford hiring staff. A prevalent problem though is that the members responsible seldom have any education, which easily makes financial and general management weak.

The saving and credit cooperatives are to some extent regulated by law, which makes SACCOS more of a semi-formal financial institution. All SACCOS are subject to the same legal and institutional framework.

Normally, SACCOS maintains one shared account in a bank. The account represents a connection between SACCOS and the formal sector. The bank account is primarily needed for security. Well functioning SACCOS are popular because of their ability to provide low cost emergency or consumption loans without the burdensome bureaucratic procedures associated with formal banks. SACCOS are also often located near member’s workplace or home, which reduces transaction costs.

There are at least 646 SACCOS registered in Tanzania, of which 61 percent are rural SACCOS and 39 percent urban SACCOS। Urban SACCOS are usually occupational SACCOS, which means that they are tied to a working place. In occupational SACCOS member’s savings and repayment are directly withdrawn from their salaries, which gives this type of SACCOS advantages from a security point of view. Occupational SACCOS have also shown better results. Another reason may be that the education and literacy in urban SACCOS are higher.

1.1. THE IMPORTANCE OF SACCOS
SACCOs create the opportunity for members to take responsibility for their own financial organization. The democratic process is an integral part of the co-operative and encourages members to take control of their own financial affairs. Among the many advantages of SACCOs are:
· Savings are mobilised locally and returned to members in the form of loans. The ideal model invests 80% of mobilised savings to members in the form of loans. The money stays and works within the members.
· SACCOs interest rates on both savings and loans are generally better than rates given by banks and the reason for this is that SACCOs have very low overheads as compared to banks who pay low interest on savings but charge a lot of interest to cover their overheads.
· SACCOs encourage members to save, essential for economic empowerment.
· SACCOs educate their members in financial matters by teaching prudent handling of money, how to keep track of finances, how to budget and why to keep away from hire purchases and loan sharks
· SACCOs pay dividends on shares to their members once the SACCOs is established and profitable. Members therefore take pride in owning their own SACCOs.
· SACCOs do not raise equity from outside interests. All money borrowed to members is money mobilised by members. Because its members funds members are committed to paying back their loans.
· Shares and loans are insured. Upon the death of a member the estate will not have to repay any loans outstanding to the SACCO and the value of any shares owned by the deceased will be repaid double to the estate.
· SACCOs perform a critical and unique function as financial intermediaries। They mobilize significant volumes of personal savings and channel them into small loans for productive and provident purposes at the community level.

1.2. THE CHALLENGES OF SACCOS
Apart from its importance, in some places, especially in the rural areas and especially among the less educated groups, running SACCOS has shown to be challenging. In general especially rural SACCOS have shown major weaknesses in financial and general management. Some SACCOS tries to reach new members through offering a more beneficial interest rate, than the market. The purpose of this is to compete with other financial institutions over potential members. This is obviously not sustainable in the long run, for a small institution with minor resources. Further on, running a SACCOS requires good bookkeeping skills, which makes it hard for the poor who often are illiterate.

2.0. CONCLUSION AND RECOMMENDATIONS
The microfinance industry in Tanzania is still young. The fact that only around 5% of the market is being served by all institutions involved in microfinance combined is an indication that there is a huge demand for microfinance services in Tanzania particularly in the rural areas, which is prone of high risks and costs. There are only a handful of MFIs that operate in the market mostly concentrated in the urban centres an aspect that has left the rural areas grossly under-served. The government has played its part by creating an enabling environment. All in all, it can be concluded that the microfinance market in Tanzania promises a potential avenue for investment of patient capital.

Financial failures, particularly insufficient institutions and high transaction costs limit poor people’s access to formal finance and prevent low income people from borrowing, and saving. Providing extended access to financial services through microfinance institutions would enable Tanzania to reallocate capital, through mobilizing savings and increasing investments. The result could be increased capital accumulation, which in turn can lead to improved businesses and economic growth. From a micro perspective, individuals acquiring adequate financial services would be able to improve their private economy, which in turn can increase human capital, the individuals’ productivity and ultimately contribute to poverty reduction.

Developing and improving saving and credit cooperatives (SACCOS), is recommended to be one effective alternative to formal banks. SACCOS are reaching low-income people with financial services. If improvements are made and regulations are recognized they could operate as intermediating institutions, allocating resources between low income savers and borrowers. In those areas where it wouldn’t be cost-effective to operate a formal bank, the presence of SACCOs is especially valuable.

3.0. REFERENCES
http://www.pride-tz.org/pwinner.asp?pcat=aboutus&cat=microfinance&sid, (Microfinance in Tanzania, PRIDE Tanzania).
International Co-operative Alliance (2001), “Rural savings and credit co-operative societies in Tanzania”, International Co-operative Alliance Regional office for East and Southern Africa 2001

http://www.bot-tz.org (2003), Bank of Tanzania, Primary Objective and Function of the Bank, Bank of Tanzania 2003.

http://www.MicroSave-Africa.com (1999) Mutesasira L. (1999), “Use and impact of savings among the poor in Tanzania”, MicroSave-Africa.

URT: Financial Services Act of 1991. Ministry of Finance, Dar es Salaam: Government Printer.

URT: Co-operative Development Policy, 2002. Ministry of Co-operatives and Marketing. Dodoma: Government Printer.

URT, National Micro-Finance Policy (2000). Ministry of Finance. Government Printer, Dar es Salaam, Tanzania.

URT, Small and Medium Enterprise Development Policy (2002). Ministry of Industry and Trade. Government Printer, Dar es Salaam, Tanzania.