2 August 2012

Tanzania: Grim Future Seen On Microfinance Status

THE country scan on microfinance for Tanzania 2011 that is annually conducted by MicroNed paints a very grim future on the microfinance status in the country.

It cites that 650,000 rural Tanzanians are served by semi-formal service providers, 70,000 use Microfinance Institutions while SACCOS serve 320,000 and that mobile payment system are on the rise.

This dismaying picture, however, hasn't stopped more players entering the sector. The Progression Eastern African Microfinance Equity Fund (PEAMEF) is the newest player that has come into the microfinance sector. It is a local African fund operating as an actively involved, commercially and socially responsible equity investment partner for companies involved in furthering the financial inclusion agenda primarily in East Africa.

The PEAMEF Managing Partner, Mr Mathias Katamba,said that the aim of their coming is to promote financial inclusion and to facilitate the development of microfinance institutions and other companies directly or indirectly. "We hope to get involved in financial inclusion deepening in East Africa through equity and equity-related investments as a private equity fund organised under the Mauritian Law as a ten-year, close ended fund, with a final capitalisation target of 40m/- US Dollars," he said.

He explained that PEAMEF was an initiative of three partners with over three decades of experience in microfinance, commercial banking institutions that have invested in the fund. "Many people in this region are financially excluded and our fund has been set up specifically to address that need. We are keen to not only generate commercial returns, but to also achieve a social return," he said.

According to the 2011 Country Scan report, it cites that over the past few years, not much has been accomplished with regards to microfinance companies (MFCs), where no MFC has been licenced. It says that the ones that have considered the transformation into a MFC like Pride and Finca were still in the process of applying. The report says that the major hurdle to overcome is the ownership of the MFCs and that it was not clear why MFCs in Uganda have successfully managed to transform into MDIs, while in Tanzania the process seemed to be stagnant.

"It seems this might be related to various factors, including possibly that regulations were more stringent in Tanzania, and/or less urgency and importance is given to the transformation process by either the applicant or the regulator," the report said. The report further cited that rural Tanzanians have little access to financial services: Nearly one third (10 million) have no access at all: 29 per cent use non-monetary means to transact and 28 per cent use informal financial service providers.

It said that only 4 per cent use semi-formal providers, while a mere 8 per cent to a bank account or insurance policy. PEAMEF Managing Partner Mr Andrea Machacek said that in a bid to promote inclusion, they intend to do this through supporting companies that promote financial inclusion directly such as microfinance institutions by providing them with capital and other support. "As you can imagine at national level when you put this into context it is a moving target but we intend to measure the social performance of our portfolio companies periodically," he said.

Mr Machacek said that PEAMEF was aware that 80 per cent of the population was in dire need of financial literacy education and that by the nature of their target industry, particularly microfinance, financial literacy was in many ways part of the microfinance value proposition. He said that the fund wasn't there to have a rural presence as it did not make direct retail interventions but that they anticipated that through increased outreach of their portfolio companies, more rural Tanzanians would have better access to financial services.

Ms Lydia Koros, another managing partner of the fund said that in spite of the very grim picture that has been painted from different reports and the already existence of microfinance operators, their fund doesn't come as competitors to them. "We play a catalytic role through increasing the capacity of our portfolio companies to deliver on their mission. Our role is complementary," she said.

Ms Koros said that with the current level of financial exclusion (with some reports putting this above 70%), there was a lot of room for microfinance to make a difference particularly as many more players get regulated in the future. She predicted that regulation will have a huge impact not only through credit provision but most importantly through savings development. The 2011 Country Scan report also cited that the number of adults employed in the formal sector had risen from 2 per cent to 6 per cent.

Most people (69 per cent) make a living from agriculture, either employed by selling food crops, cash crops, cattle/livestock produce or livestock. Others run an informal small business (28 per cent), not directly related to agriculture. Nearly a third (31 per cent), depend on family and friends for money. "Such an environment is ripe for the development of financial inclusion. Formal financial services can play a key role in economic and social transformation across the agricultural value chain where as you mention the majority of the people earn a living," she said.

She said that this was even much clearer when one looked at the role of financial inclusion in the development of trade and small businesses or entrepreneurship in particular. The report also said that the common form of loan used by Tanzanian adults is taken from a kiosk: 9.3 per cent use this method, 5.5 per cent borrow from family and friends, 3.3 per cent use non monetary means while SACCOS and Microfinance Financial Institutes serve only a small per cent of all borrowers: 2-1.2 per cent.

Ms Koros said that as their portfolio companies increased their outreach, the percentage of those served by formal financial service providers would increase as well as to largely to improved security (for deposits) plus reduced cost and increased convenience for credit. She said that as a responsible investor, they actively promote good corporate citizenship among their portfolio companies through promoting best practices at all levels. PEAMEF's score investors include the European Investment Bank, the Norwegian Microfinance Initiative, German development finance institution KfW Entwicklungs bank and CDC Group plc of the UK.

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