Introduction of a new Microfinance Act in Tanzania: What impact will it have on the housing sector?

In December 2018, the parliament of the United Republic of Tanzania enacted a Microfinance Act which seeks to clarify the framework under which microfinance institutions are governed, regulated, and operate. The Act provides for licensing, regulation and supervision of a highly segmented microfinance sector in Tanzania Mainland and Zanzibar.[1] It concretised a commitment made by the Ministry of Finance and Planning and the Bank of Tanzania (BoT) to transform the microfinance sector through better integration and regulation. This was to be realised through the National Microfinance Policy 2000 (NMP 2000), however the implementation of the policy was unsuccessful, leading to its revision in 2017.[2] The 2018 Microfinance Act was enacted “in order to operationalise NMP 2017” whose main objective was to create an enabling environment for the microfinance sub sector to contribute to poverty reduction.[3]

Understanding the context and challenges for the microfinance sector

A microfinance regulatory framework is highly relevant for a country with high levels of financial exclusion and increasing involvement by non-bank financial services providers. Only 16.72 percent of Tanzania’s population is banked, and 27.85 percent is entirely financially excluded.[4];[5]  Mobile money and microfinance have extended financial inclusion to almost half of Tanzania’s population. By 2017, 48.6 percent of the population was served by financial NGOs, mobile money, and other micro institutions. Almost half of Tanzania’s population was financially serviced by less formal financial institutions such as Savings and Credit Cooperatives (SACCOs), Savings and Credit Associations (SACAs), Rotating Credit and Savings Associations (ROSCAs) and other microfinance institutions (MFIs).[6];[7]  Less than 10 percent of the adult population is covered by credit bureaus.[8] This is consistent with the means in which personal revenue is generated; seven percent of Tanzanians receive monthly or weekly wages, 34 percent are casual labourers, and 59 percent (mostly traders and farmers) receive money seasonally, while the rest of the population are dependents.[9] With various lenders offering housing improvement loans at more favourable terms, microfinance has also improved access to housing finance.

The microfinance sector thus services a large portion of the population who would not have had access to credit and finance otherwise. While this has had a significant impact on the economy, a lack of regulation has left the sector vulnerable to financial irregularities and the target of fraudsters and money launderers. In October 2018, for example, the former managing director of a collapsed microfinance institution was sought by Tanzania’s anti-corruption body for allegedly swindling 1.8 billion Tanzanian shillings (US$782 550).[10] A loan officer at another institution allegedly forged documents and diverted money from the Higher Education Students Loans Board for personal use.[11] These are but two examples of more wide-spread fraud, money laundering, and unfair lending practices in the microfinance sector.

Existing microfinance institutions

The Bank of Tanzania developed a national microfinance directory which to date has listed 1620 Savings and Credit Cooperatives (SACCOs), 48 Savings and Credit Associations (SACAs), 45 Community Based Operations (CBOs), 62 Non-governmental Organisations (NGOs), eight banks, two companies, and 95 government programs.[12] The directory organises the institutions by district and lists each institution’s registration details, its target group (gender and sector), number of clients and branches, and number of loan officers. It also provides their contact details i.e. physical address, mailing address, telephonic and facsimile details, emails and names of designated contact person.  Amongst the main banks are DCB Commercial Bank, EFC Tanzania Microfinance Bank[13], Yetu Microfinance Bank[14], and Akiba Commercial Bank.[15] The National Microfinance Bank, Akiba Commercial Bank and Yetu Microfinance Bank are among the more prominent actors in the sector:

  • The National Microfinance Bank of Tanzania is an independent institution which sustains its operations through capital, deposits, and loans given to micro and small businesses for inventory, supply of goods and services. It also provides a collection and payment service to large corporate clients to and from micro and small enterprises, as well as an add-on service for money transfers and payrolls.[16] The bank was founded in 1991 and publicly listed on the Dar es Salaam Stock Exchange in 2008.
  • Akiba Commercial Bank was established in August 1997 with the goal of transforming the lives of the “unbanked” and “commercially ill-equipped” in Tanzania. It began as an “initiative of over 300 Tanzanian entrepreneurs who were inspired to move into micro-finance by the moral and economic concern for the light of millions of Tanzanians.”[17] It offers micro loans of up to 20 million Tanzanian Shillings (US$8 695.70), Biashara [18] loans for businesses, and home improvement loans. Biashara loans given to assist businesses with rolling capital. The home improvement loans cover the completion of home construction, repairs, and extensions. A Tanzanian who is over the age of 18, is the owner of a business that has been active for at least one year, and who is the legal owner of a property in which they have lived for over a year can borrow up to 20 million Tanzanian Shillings (US$8705,49) for home improvement. The payback period for home improvement loans is 24 months.[19]
  • Yetu Microfinance Bank positions itself as “the bank of the unbanked and underbanked.”[20] It offers solidarity group loans which it defines as a “system of group lending where an organised group of five enterprising youth, women and other micro entrepreneurs acting under the principle of co-guarantee apply for micro loans. Clients are organized into groups whose members serve as an informal bank and cross guarantee each other’s loans.”[21] Additionally, Yetu Microfinance Bank gives Mavuno (business) loan products to individual members who have reached their cap loan limit of four million Tanzanian Shillings (US$1741.48) provided they have a good track record and security. The Bank also offers housing loans which are designed for Tanzanians in rural areas and small towns. The housing loans are issued at an interest rate of 17 percent per annum, a loan insurance of 1.5 percent, with a preliminary fee of 1.5 percent of the loan amount. Loans range from 300 000 to 10 million Tanzanian Shillings (US$130.45 – US$4 348.20).[22]

Amongst other microfinance issuing institutions are the CRDB[23] and EFC[24], both of which also offer home improvement loans and other loans to individuals, micro institutions, and SACCOs alike. CRDB Microfinance Services Company of Tanzania does not do direct lending to clients.

Introduction of the 2018 Microfinance Act

The aim of the Microfinance Act is to “license, regulate, monitor and supervise microfinance institutions” in the country.[25] The Bill defines a microfinance company as “a financial institution licensed to undertake banking business mainly with individuals, groups and micro in the rural and urban areas of Tanzania Mainland and Tanzania Zanzibar.”  The nature of microfinance business undertaken by microfinance service providers includes receiving money through deposits, savings, and interest accumulated on borrowing; the provision of micro credit, micro savings, micro insurance, and micro housing finance; transfer and payment services; and financial education.

The Act structures microfinance businesses, categorizing them into four tiers that reflect their size, function, and potential for development:

  • Tier 1 is comprised of deposit-taking institutions such as banks and microfinance banks;
  • Tier 2, non-deposit-taking institutions such as those that offer credit;
  • Tier 3, SACCOs; and
  • Tier 4, community financial groups

What the Act requires of microfinance service providers

Microfinance service providers are expected to have a place or places of business with a ‘proper’ address subject to the approval of the Bank of Tanzania. Additionally, a service provider cannot open or close a place a place of business without the prior approval of the Bank of Tanzania. Failure to comply would be an offence subject to penalties.  Should micro finance service institutions desire to transform their tier, they would have to meet the minimum capital and regulatory requirements corresponding with the different tiers. The categorisation of microfinance service providers into tiers allows for the regulation and supervision of MFIs to be based on the nature of their microfinance business and their financial capacities.

Microfinance service providers are also expected to adhere to additional legislation such as the Anti-money Laundering Act and keep proper books of accounts in accordance to international reporting standards. Accounts should be audited by a qualified and registered auditor at least once a year, with these institutions disclosing their financial statements annually to the Bank of Tanzania.

The Role of the Bank of Tanzania

Part III of the Act vests the Bank of Tanzania with the powers and responsibilities to oversee and monitor microfinance service providers. The responsibilities include the issuing and revocation of licenses; and the inspection, monitoring, and evaluations of the performances of microfinance businesses. Bank shall issue licences to qualified microfinance service providers; inspect, monitor and evaluate the performances of MF businesses; and undertake the assessment and issuing of approvals for transformations amongst other responsibilities. This section also vaguely says that the Bank should protect consumers of microfinance service providers (“ensure protection of consumers of microfinance service providers”). The Bank of Tanzania would also have extended powers to investigate the operations of microfinance service providers, inspect their books and records, and access information in storage rooms and safes on their premises.

Registration and licensing under the Act

The Bill requires all microfinance service providers to be registered and licensed, exacting fines for institutions that do not adhere to this requirement. Fines range from 20 million and 100 million Tanzanian Shillings (U$8 703 – US$435 150) for Tier 1 and 2 institutions, and between 10 and 50 million Tanzanian Shillings (US$4 351 – US$21 757) for Tier 3 institutions.

To register as Tier 1 and Tier 2 microfinance service providers must provide:

  • Particulars
  • Place of business
  • Certified copy of certificate of registration or incorporation
  • Prescribed non-refundable application
  • Other relevant information or documents which may be required by the Bank of Tanzania

To register as Tier 3, SACCOs must provide:

  • Certified copy of certificate of registration issued in terms of Cooperative Societies Act
  • Prescribed non-refundable application fee
  • Other relevant information or documents which may be required by the Bank of Tanzania

To register as a Tier 4 (community financial group) microservice provider:

  • Two copies of the constitution signed by all members
  • Members resolution to form and register a microfinance entity
  • Proposed organisational structure
  • Letter of recommendation from associated ward or village
  • Prescribed non-refundable fee
  • Other relevant information or documents which may be required by the Bank of Tanzania

If applications are satisfactory the Bank is to issue a license which is immediately effective, and record the microfinance service provider in the registry. In the event of an unsuccessful application, the Bank is to issue a written explanation and the applicant given a chance to re-apply or appeal within 21 days.

Foreign-owned microfinance service providers wishing to operate in Tanzania are also bound by the same registration and operational procedures. They would also be required to employ and train Tanzanians.

Revocation of licenses

The Bank of Tanzania may revoke a license in instances where the microfinance service provider discontinues microfinance businesses, is deregistered, liquidated or dissolved, or if it violates the terms and conditions of the license or the provisions of the Act. In the event of revocation, the Bank of Tanzania is to publish the name of the microfinance service provide whose licence has been revoked in the Gazette or public newspaper. The microfinance service provider will also be removed from the register.

New concerns and further questions

While formalisation and regulation of the microfinance sector promises stability and security in the sector, it also introduces new concerns. The appraisal of the microfinance sub-sector as a key role in “poverty reduction and economic growth”[26] is not new; it echoes sentiments from similar contexts where governments recognised the economic potential of unregulated sectors and those segments of the economy that are not products of governments’ own planning practices. The City of Johannesburg for example changed its stance on informal trading from “an unwanted sector of disordered and dangerous activities” to “a viable means to reduce poverty and unemployment.”[27]

This move for ‘inclusion’ into the formalised mainstream economy may manifest as adverse incorporation – inclusion on worse terms.[28] Regulation of informal sectors which previously enjoyed freedom and ease of operation often introduce new forms of control and co-option. What is often ignored is that on the other side of legalisation is criminalisation. For those microfinance institutions who cannot meet registration, licensing and operational requirements, their operations de jure become illegal, thus creating the dangerous equation of informality with illegality. The multiple demands on microfinance institutions may create new barriers of entry for smaller institutions and may jeopardize those who cannot meet requirements.

In these respects, the Microfinance Act in Tanzania raises further questions about microfinance institutions:

  • Does this change the nature of MFIs or does it fundamentally challenge a financial system that has long been criticised as not suitable for the local context?
  • What does it mean for housing microfinance institutions to be elevated to the status of banks? (Are they?)
  • How does this, if at all, change the capacity of microfinance institutions to generate capital?

As the Act comes into effect and its provisions implemented and enforced, the effects of the legislation will be felt on the ground by microfinance institutions, customers and the sector as a whole. It remains to be seen whether the legislation will have the positive impact envisioned within the policy.

 

Exchange rate used: 28 May 2019

 

[1] Parliament of the Republic of Tanzania 2018. The Microfinance Act, 2018.

[2] Tanzania Ministry of Finance and Planning 2017. National Microfinance Policy 2017. g.http://www.mof.go.tz/docs/news/Policy%20-%20Fedha%20English%203.pdf

[3] Ibid.

[4] Financial Sector Deepening Trust 2017. Tanzania FinScope. https://i2ifacility.org/data-portal/TZA/2017

[5] FinScope uses financial exclusion to describe individuals above the age of 26 “who use no financial mechanisms and rely only on themselves, family or friends for saving, borrowing, and remitting, with their transactions being cash-based or in-kind” Ibid. pg.44.

[6] Ibid.

[7] Tanzania Ministry of Finance and Planning 2017. National Microfinance Policy 2017.

[8] Financial Sector Deepening Trust 2017. Tanzania FinScope. https://i2ifacility.org/data-portal/TZA/2017

[9] Ibid. pg. 32.

[10] The Citizen, Tanzania 2018. Anti-graft body hunts for ex-Pride Tanzania boss over missing Sh1.8 billion. https://www.thecitizen.co.tz/news/Anti-graft-body-hunts-for-ex-Pride-Tanzania-boss/1840340-4824192-7wjh1x/index.html

[11] Ibid.

[12] Bank of Tanzania 2005. Microfinance Institutions Directory. https://www.bot.go.tz/MFI/Documents/MFIs%20Directory%202005%20-%20Main%2030%20-%2010%20-%202005%20-%20final.pdf Directed from https://www.bot.go.tz/MFI/Default.asp?Menu=PRACT

[13] EFC Microfinance Bank Limited. https://www.efctz.com/

[14] Yetu Microfinance Bank PLC. https://www.yetumfplc.co.tz/

[15] Akiba Commercial Bank PLC. https://www.acbbank.co.tz/#

[16] National Microfinance Bank of Tanzania. https://www.nmbbank.co.tz/

[17] Akiba Commercial Bank Plc 2019. https://www.acbbank.co.tz/about-us/background/

[18] Biashara is a Swahili term which translates to business, trade, or commerce.

[19] Akiba Commercial Bank Plc 2019.   https://www.acbbank.co.tz/loans/home-improvement-loan/

[20] Yetu Microfinance Plc 2019. https://www.yetumfplc.co.tz/

[21] Yetu Microfinance Plc 2019 https://www.yetumfplc.co.tz

[22] Yetu Microfinance Plc 2019. https://www.yetumfplc.co.tz/housing-loans/

[23] CRDB Bank Plc 2019.  https://crdbbank.co.tz/

[24] EFC Tanzania Microfinance Bank Limited https://www.efctz.com/

[25] Parliament of the Republic of Tanzania 2018. The Microfinance Act, 2018.

[26] National Microfinance Policy 2017. Pg xv

[27] Pezzano, A. 2016 ‘Integration’ or ‘Selective Incorporation’? The Modes of Governance in Informal Trading Policy in the Inner City of Johannesburg. The Journal of Development Studies. 52(4):502 cf City of Johannesburg, 2011 Joburg 2040: Growth and Development Strategy

[28] Hickey, S. and du Toit, A. 2007. Adverse incorporation, social exclusion and chronic poverty. Chronic Poverty Research Centre Working Paper 81

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