Introduction
“The Future of Microfinance Institutions in Tanzania” was the theme on 9th November 2021 at a microfinance event hosted by PwC Tanzania which explored the current state of microfinance, its challenges, future prospects, including discussions on regulations, financial inclusion, and the role of technology.
In setting the scene the guest of honour, Dr Bernard Kibesse, the then Bank of Tanzania Deputy Governor (Financial Stability and Financial Deepening) in his opening remarks highlighted the extent of financial exclusion of a significant proportion of the adult population. Challenges (and related opportunities) that he mentioned included language, collateral, digital penetration, and literacy. Language barrier comes about where most communication is carried out through the use of the English language (for product promotion, communication and contractual documents) in a population that is more conversant with the National language - Kiswahili. On collateral, the concern is that a large population does not have title deeds to land, which is the most accepted form of security against borrowings. In addition, despite the high penetration of mobile phones, cost effective digital financial products are few. Lastly, low literacy levels of borrowers can result in their exploitation.
At a regional level, although there are subtle differences the overall state of microfinance is broadly similar. For most countries the non-deposit taking microfinance sub sector is not regulated, and the tendency is for micro lenders to charge high interest rates (even up to 20% per month) and in certain instances engage in unfair loan collection and recovery measures. Furthermore, there are no structured forms of customer protection such as customer complaint mechanisms and, in some cases, lenders are not particularly transparent on key terms.
What are the challenges experienced by micro lenders?
Given the size and structure of our economies, a major challenge for micro lenders is the financial illiteracy of most of their customers. While this would point to a need to provide extensive financial education, limited operational budgets have rendered this expectation impractical to achieve to date.
For non-deposit taking micro lenders another challenge is the lack of available alternative cheap sources of funds, this forces them to resort to borrowing from commercial banks. In addition, credit risk for microfinance institutions is heightened by over leveraged customers who do not own credible assets which can be pledged as collateral. Operational inefficiencies and limited use of technology also impede growth of the sector.
“Availability, Accessibility, Affordability, Awareness and Adequacy (the so-called “5As”) were highlighted as the key pillars for financial inclusion, and consequently an impactful microfinance drive.”
Why the growing interest in microfinance?
Well, in the words of Mark Malloch Brown, Chef de Cabinet, Office of the Secretary General to the United Nations: “Microfinance is much more than simply an income generation tool. By directly empowering poor people, particularly women, it has become one of the key driving mechanisms towards meeting the Millennium Development Goals.”
In other words, the significance of microfinance particularly for poor countries, lies in the role it can play in poverty eradication; in particular, microfinance entities target the section of the society underserved by traditional financial institutions and consequently play a pivotal role in driving financial inclusion.
Impact of a growing microfinance sub sector
By design micro lenders lend mostly to Micro, Small and Medium Enterprises (MSMEs) whose contribution to economic growth is significant. Recent reports indicate that MSMEs contribute in excess of 25% of East African countries’ GDP and above 30% of employment opportunities. An inclusive and sustainable economic development vision must embrace MSMEs and by extension their key enabler, namely microfinance institutions.
A thriving microfinance sub sector will supplement efforts to grow credit to the private sector. World Bank reports show the ratio of domestic credit to private sector as a percentage of GDP for poor countries is still very low in comparison with some of the fast-growing economies. 2020 statistics indicated the following ratios for East Africa: Kenya (32.7%), Rwanda (24.7%), Uganda (14.3%), Tanzania (14%). These statistics pale in comparison with countries in South East Asia such as Vietnam, Malaysia, Thailand all with in excess of 100% of their respective GDPs. Another interesting comparison is India at 55% of its GDP, whose ratio has been boosted by the vibrancy of its regulated and well-established microfinance industry. So, what should be done to foster growth?
What can be done to foster growth?
Key takeaways in this regard from the PwC Tanzania workshop included greater focus on areas such as regulations, technology, capital markets and education. The introduction of appropriate regulations, with sufficient consultation with key stakeholders during drafting phase, is key. On this front, Tanzania is ahead of the pack in East Africa following enactment of the Microfinance Act, 2018 and its various regulations (encompassing all sorts of non-deposit taking micro lenders). It is envisaged that compliance with regulations will force micro lenders to improve on governance and record keeping, structure appropriately lending terms and embed customer protection mechanisms in their operations. The rest of the regulators in the region are likely to take a similar approach. Availability, Accessibility, Affordability, Awareness and Adequacy (the so-called “5As”) were highlighted as the key pillars for financial inclusion, and the strategic deployment of digital platforms as a bedrock for achieving these 5As. Certainly, the increasing role of technology in microfinance is important given the impact it has by extending reach and minimizing costs (through improved operational efficiencies and use of data in value adding ways such as borrower risk assessment and development of suitable products). Partnerships with the fintech sector, mobile network operators (MNO’s) and banks can help accelerate digitisation of the micro lenders.
Micro lenders were encouraged to explore capital market opportunities (such as the Dar es Salaam Stock Exchange) to access public funding whether in the form of equity or debt. Whilst it was acknowledged that increased transparency requirements prior to listing can deter smaller micro lenders, in practice the consequent benefits normally far outweigh the additional reporting burden. Furthermore, improved governance and quality reporting can make it easier to also attract other funding such as from Government (special funds), donor funds, and private equity investors. Last but not least, continuous provision of financial education should be embraced by all stakeholders. Whilst Government has a unique role to play but micro-lenders should commit to do their part in relation to this noble endeavour.
Conclusion
In conclusion, let us reflect on insights from Muhammad Yunus, the Bangladeshi economist who founded the Grameen Bank and who was awarded Nobel Peace Prize for pioneering the concepts of microcredit and microfinance. To quote him: “If you go out into the real world, you cannot miss seeing that the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor. They have no control over capital, and it is the ability to control capital that gives people the power to rise out of poverty.”
