TABLE OF CONTENTS Page
1.0 Introduction…………………………………………………………………. 2
2.0 Definition of Key Concepts………………………………………………… 2
3.0 Types of Microfinance Institutions……………………………………….. 3
4.0 Background of Microfinance in Tanzania……………………………….. 3
5.0 Impacts of Microfinance Institution to economic development………… 4
6.0. The role played by Microfinance Institutions in creating morale to
7.0. The importance of SACCOS to Rural and Urban people of Tanzania….. 8
8.0 Conclusion……………………………………………………………………. 13
9.0 References……………………………………………………………………. 15
The emergence of microfinance Institutions in Tanzania has promoted development of vibrant economic businesses all over the country. This paper tries to examine the role of microfinance Institutions in creating entrepreneurial morale to small businesses in Tanzania. However, the importance of SACCOS to urban and rural people of Tanzania will also be explained.
2.0 Definition of Key Concepts:
v Microfinance Institutions: Microfinance institutions are “financial intermediaries formed to serve the needs of special group of people” (Wilson &Clark 1993). Microfinance and Micro-credit are mostly used to finance small and medium scale enterprises. Microfinance in general includes Micro credit, Micro-savings, Micro-insurance and payment services. Micro-credit is extension of small loans to micro-entrepreneurs who lack collateral and do not qualify for traditional bank loans. In developing countries Micro-credit enables very poor people to engage in self-employment projects that generate income. Micro-credit is crucial to the microfinance field by providing access to financial capital. (Micro-finance Alliance.htm 17/10/2007)
Micro-finance Institutions also, refer to “transactions in small amounts of both credit and savings, involving mainly small–scale and medium-scale businesses and producers. The poor, who cannot run a small business because they lack capital, may also benefit from micro-finance organisations. The poor, especially poor women are the prime targets for micro-finance intervention in many countries”. (Khandker, 2000)
v Entrepreneurial Morale: Is the habit of being highly confident with entrepreneurship undertakings. An entrepreneur is the one who perceives a business opportunity, assumes a significant amount of risk associated with it, undertakes the entire coordinating functions in bringing together other factors of production to create a new business and which is continuously, managed by him/herself.
3.0 Types of Microfinance Institutions
There are several types of Microfinance Institutions (Azoki 2005) which are
Savings and Credit Cooperatives Societies, Non Governmental Organizations, private companies, government projects.
4.0 Background of Microfinance in Tanzania
Microfinance in Tanzania began with NGOs (Non Government Organizations) and SACCOS (Savings and Credits Cooperative Societies) in 1995 and has continue to grow with the increased success of microfinance internationally.(answers .com/microfinance in Tanzania 17/10/2007)
According to 2005 survey done by bank of Tanzania ( the overseer of microfinance under the Ministry of finance) updated the directory of microfinance practitioners identify basic information on microfinance institutions namely commercial banks, financial Institutions, financial non-governmental Organizations (NGO), Savings and Credit Cooperatives Societies (SACCOS) and Savings and Credit Association (SACAs) the directory has counted a total of 8 banks, 45 Community Based Organizations, 2 companies, 95 Government programs, 1,620 SACCOS, 48 SACAs and 62 NGOs.(answers .com/microfinance in Tanzania 17/10/2007).
Between 2001 and 2003, the number of new retail outlets increased by 20%, clientele grew by 72%on average, outstanding loan portfolio and savings deposits grew by 88% and 52% respectively, with a low non-performing loan ratio of less than 5% on average. (Answers .com/microfinance in Tanzania 17/10/2007)
5.0 Impacts of Microfinance Institution to economic development
According to the progress report of the Poverty Reduction Strategy (URT, 2003) the Government is committed to strengthening ties between the rural and urban economy, improve rural infrastructure, encourage development of small and Medium Enterprises (SMEs), facilitate provision of micro-credits, strengthen local capacity and strive to achieve a more broad based economic growth.
By enabling the poor to save in a secured place, the provision of accounts (or other savings facilities) and insurance allows the poor to establish a buffer against shocks, thus reducing vulnerability and minimizing the need for other coping strategies such as asset
According to the FinScope data, about 6 percent of Tanzanians borrow from microfinance institutions.
Microfinance helps the poor, the majority of whom are women, to borrow for business expansion, and to save and buy other relevant products like micro insurance. Research on micro credit initiatives targeted at women shows that improving access to credit for women in developing countries enables them to improve their standard of living. They also have superior credit repayment records compared to men, and lending to women has a greater effect on household welfare than credit directed toward male borrowers (Stotsky 2006). Additional research broadens the social implications. Anecdotal evidence that the benefits of microfinance can extend beyond the purely economic it is now seems to solve some crosscutting issues such as spread of HIV/AIDS and gender imbalance in Tanzanian communities. Poor people particularly women who engaged to prostitutions in order to get capital now have access with Microfinance services hence being rescued from vulnerabilities. In one way or another HIV/AIDS and gender imbalance ruin the development.
6.0.Roles played by Micro Finance Institutions in creating entrepreneurial morale to small businesses in Tanzania.
Micro Finance Institutions have important roles to play in creating entrepreneurial morale to small businesses in Tanzania. The roles of these financial institutions fall under the category of most quasi formal institutions that were established through donor/government support to fill the lacuna/vacuum left by formal financial institution in meeting the financial needs of small business. Quasi Formal Financial Services are those offered by institutions which fall outside the regulatory power of Bank of Tanzania but are regulated by the government. These includes the NGOs offering financial services, some of which are SACCOS and other government and donor backed institutions is known as microfinance institutions. These are such as:-
v SIDO, Small Industries Development Organization started in 1970 with the aim of promoting small scale industry as a government initiative.
v PTF, the Presidential Trust Fund established in 1988 as a venue for providing credit throughout the country to informal sector operators with low credit needs currently donor funded and supported by the FORD foundation and national income generating project (NIGP)
v FAIDA, Finance and Advice in Development Assistance to small enterprise promotion is a Dutched funded credit programme which aim at promoting small scale entrepreneurs in Arusha, Dodoma and Ruvuma Regions.
v TYDF – The Tanzania Youth Development Foundation (the ILO- promotion programme), which was established in 1994 and confined in DSM. Initially funded by UNDP but now registered as an NGO with support from Government, SODA and IPP.
v PRIDE TANZANIA- Promotion of Rural Enterprises Initiative Development opened in 1966 as subsidiary of pride Africa started with assistance of 1.2 million from NORAD.
v CREW TANZANIA – found in 1995, it is a local based NGO serving as a catalyst for empowering low income. It is funded by UNDP and united Nations Development funds for women.
v MEDA – Mennonite Economic Development Association focusing on microfinance involvement in urban economic activities more concentrate in Mbeya and DSM.
v FINCA – Foundation for International Community Assistance facilitating village banking implementation projects in Latin America and Africa and other developing countries.
v BLUE FINANCE – a donor funded organization founded in 2007 in Tanzania aiming at enabling small business owners by providing micro loan facilities.
v POVERTY AFRICA CREDIT SHOP is an NGO devoted at promoting local initiative that fights poverty. It initiated saving and credit schemes in Morogoro, Arusha Moshi and DSM. SACCOS – Saving and Credit Corporative Societies are established under the Act of 2003. The objectives are to provide thrift services and credit facilities to the members of societies.
v SCCULT (1992) LTD, This is Savings and Credit Cooperative Union league of Tanzania which re-established in 1992 after the former SCULT died politically. One of its functions is to provide savings and credit services to her members (SACCOS) through its fund known as Central Finance Programme (CFP).
All of the above mentioned are micro finance Institutions which have positive contributions towards creating entrepreneurial morale to small businesses in Tanzania as explained below:-
Firstly, microfinance institution satisfies basic needs and protection by helping individuals and house holds to meet basic needs and protected against risks, hence creating chance or possibility of establishing small business.
Secondly, these institutions, improve economic welfare of the community and enterprise stability or growth of low income house holds. If the community is well off, then the possibility of enterprise development is greater.
Thirdly, Microfinance institution empowering people of all kind economically hence promoting gender equality and improve house hold wellbeing.
Fourthly, microfinance institutions provide education on thrift. Before individual businessmen gets a loan she/he has to make small savings either at home or to that particular institution, that help to create awareness on the importance of saving in business.
Another role played by microfinance institution is to provide education and training to their clients on the utilization of the loan as well as the manner of operating their business, which equip borrowers with enough knowledge in manipulating their business operation.
Microfinance institution act as creator of new entrepreneurs. By availing small loans within the community, they bring about the possibility of establishment of small businesses who can develop and result to big business establishments.
7.0 The importance of SACCOS to urban and rural people of Tanzania
v Definition of SACCOS
SACCOS is an abbreviation of the words Savings and Credits Cooperatives Societies.
Objectives of the SACCOS are to mobilize savings for the purpose of creating source of credits to its members at the competitive rates of interests so as to eliminate poverty to its members. SACCOS has been appointed as one of the strategy of eliminating poverty as has been mention on the National Strategy for growth and Reduction of Poverty (NSGRP/MKUKUTA) and Zanzibar Strategy for Growth and Reduction of Poverty (ZSGRP)/MKUZA) as well as other national development and poverty reduction program as one of the important tool of eliminating poverty.
v The importance of SACCOS to Urban and Rural people of Tanzania
SACCOS are among of the financial intermediaries in the financial sector. There fore they are very important for business and investment growth in the economy due to the fact that they have impact on capital accumulation including human and physical capital, and on the rate of technological progress. Also it has a direct impact on the poverty reduction, by widening access to the poor. These impacts/effects arise from the intermediation role provided by financial institutions which enable the financial sector to; mobilize savings for investment, facilitate and encourage inflows of foreign capital and optimize the allocation of capital between competing uses, ensuring that capital goes to its most productive use. Levine (1997) identifies five basic functions of financial intermediaries which give rise to these effects.
These effects are; Savings mobilization, Risk management, Acquiring information about investment opportunities, Monitoring borrowers and exerting corporate control and Facilitating the exchange of goods and services.
Savings mobilization: The mobilization of savings is perhaps the most obvious and important function of the SACCOS. The provision of savings facilities or transaction bank accounts enables households to store their money in a secure place, and allows this money to be put to productive use i.e. lent to individuals or enterprises to finance investment, thus encouraging capital accumulation and promoting private sector development.
Lack of access to secure savings facilities leads people to save in physical assets, or store their savings at home. In addition, the returns on investment can create positive expected returns for the savers, which may in turn increase savings.
It can also facilitate the development and adoption of better technologies. McKinnon
(1973) a farmer who cannot afford a particular investment out of his own savings – he needs to borrow in order to buy some piece of equipment (i.e. to invest in “new technology”) which would increase his productivity, and enable him to earn a higher income thereafter. Thus by mobilizing savings, and hence increasing the availability of credit, SACCOS facilitates investment in new technologies across the urban and rural economy, increasing overall productivity.
Credit may also be made available to finance investment in education or health, and can thus promote the accumulation of human capital (De Gregorio, 1996). Thus savings mobilization can have a significant impact on growth by increasing investment, productivity and human capital. Savings facilities can also play an important role in reducing risk and vulnerability for the Poor.
(a) Liquidity risks: Many projects or enterprises require a medium commitment of capital, whereas most savers prefer to have the option to draw on their savings, or move them into another investment opportunity, should the need arise i.e. they like their savings to be ‘liquid’. Because SACCOS combine many households’ savings, and because savers usually won’t all want to withdraw their money at the same time, this allows SACCOS to simultaneously provide small to medium-term capital for investment, and liquidity for savers (Levine, 1991).
(b) Risk diversification: Investing in an individual project is riskier than investing in a wide range of projects whose expected returns are unrelated. As savers generally dislike risk, SACCOS facilitate risk diversification – such as banks and stock exchanges - allow investments to be made in riskier projects with higher expected returns in aggregate (e.g. Saint-Paul, 1992, and Obstfeld, 1994). This again increases overall investment returns, and improves capital allocation, with a subsequent impact on growth.
Acquiring information: Individual savers are unlikely to have the time or capacity to collect process and compare information on many different enterprises, managers and market conditions before choosing where to invest. Thus high information costs may prevent capital from flowing to its highest value use. In addition, they will be less keen to invest in activities about which they have little information.
So the creation of financial intermediaries like SACCOS such as banks and fund managers, who will collect this information on behalf of many investors, and share the costs of doing so between them, will improve resource allocation and increase investment (though in Tanzania, SACCOS may have only limited information on investment opportunities, as much of the economy is informal). They may also increase the rate of technological progress by identifying and thus allocating capital towards those innovations with the best chances of succeeding (King & Levine, 1993).
Monitoring borrowers, and exerting corporate control: Similarly, the ability of SACCOS to monitor the performance of enterprises on behalf of many investors – who would not otherwise have the resources to do so individually – and to exercise corporate control (e.g. lenders holding meetings with borrowers to discuss business strategy), helps to ensure that investors receive returns that properly reflect the enterprise’s performance (i.e. insures they are not being defrauded by the firm’s managers as a result of their lack of information), and creates the right incentives for the managers of the borrowing enterprises to perform well.
Facilitating exchange: Another importance is that, SACCOS as other financial intermediaries in the financial sector facilitates transactions in the economy, both physically by providing the mechanisms to make and receive payments, and by reducing information costs in the ways outlined above. So by providing financial intermediation in this way, the SACCOS may reduces transactions costs, and facilitates the trading of goods and services between businesses and households.
SACCOS are the most accessible by the poor people or low income earners in the both rural and urban settings. Apart from being owned by the members themselves, they charge low rate of interest on the loans and no collateral is required to access loans.
SACCOS, also provide a voice of poor in the policy making since some representatives are participated in higher authorities including at their apexes in those ways are offering their views which are collected together to the formation of policies.
SACCOS are have created employment, directly and indirect to most of the citizens hence improving economic standard of rural and urban people.
SACCOS is facilitating financial services, as it offers the most wide spread source of financial services for low income people in both rural and urban areas. In some rural areas this is the main source of financial services.”
SACCOS offers a way of poor community producers in general, and ambitious and educated Tanzanians in particular, in cash production, creating an avenue for upward mobility and political advancement
In enhancing women participation; SACCOS have opened various chances to women participation in the leadership, membership and befits from SACCOS activities. Thus empowering women in leadership and economic and social well being.
Microfinance increases the options and self-confidence of poor households by helping them to expand and diversify their enterprises, to decrease risks, to smooth consumption, to obtain higher return on investments, to improve management and increase their productivity and incomes, to store their excess liquidity safely and obtain returns on their savings, to escape or decrease exploitation by locally powerful, and to conduct their businesses with dignity. The quality of their lives improves. Children are sent to school, and housing, health and self-confidence improve. In addition, the economic activities often create jobs for others; among those who gain employment in this way are some of the extreme poor.
On the other hand, SACCOS are among the financial intermediaries in the financial sector since they are very important for business and investment growth in the economy. Also it has a direct impact on the poverty reduction, by widening access to the poor. These impacts/effects arise from the intermediation role provided by financial institutions which enable the financial sector to; mobilize savings for investment, facilitate and encourage inflows of foreign capital and optimize the allocation of capital between competing uses
Generally, there is a need to create favourable environment for attracting more establishments of Micro Finance Institutions for sustainable economic development in the poor communities.
Wilson and Clark (1993): Economics the Science of Cost. Benefits and Choice
Amanda E, Mark B, Jozefine C, Fiolina M, and Holger S (2007): Gender and Economic growth in Tanzania
Cooperative act of number 20 of 2003
E.P Mkwawa (2004): Integrating Financial Services into Poverty Reduction Strategies in Tanzania.
M.J. Sizya (2001): The role of Cooperatives Play in Poverty Reduction in Tanzania.
Micro-finance Alliance.htm 17/10/2007)
Answers .com/microfinance in Tanzania 17/10/2007).