Africa Region Working Paper Series No. 51

Microfinance Regulation in Tanzania:
Implications for Development and Performance of the Industry

Abstract

This study of microfinance in Tanzania looks at how the overall regulatory framework affects the ability of microfinance institutions (MFIs) to become more market-oriented and integrated with the formal financial system, and the set of incentives (or disincentives) for licensed financial intermediaries to move down market to provide financial services for the poor. The study identifies global best practices which might be adapted to the local context, and incorporated in operational support programs to institutional providers of microfinance services such that they are better able to provide their clients expanded access to financial services.

The financial sector reforms set in motion a decade ago included liberalizing interest rates, eliminating administrative credit allocation, strengthening Bank of Tanzania’s role in regulating and supervising financial institutions, restructuring state-owned financial institutions, and allowing entry of private banks into the market. Despite progress in the financial reforms, access by large segments of the rural and urban population to financial services has remained stunted. Government, in collaboration with the donor community, acted to facilitate microfinance development -- initiating a microfinance policy formulation process in 1996 with a nation-wide demand study, and the drafting of a National Microfinance Policy document. The Policy was discussed at a stakeholder meeting in May 1999, and gained approval in February 2001. The Policy articulates the vision and strategy for the development of a sustainable microfinance industry as an integral part of the financial sector, specifying the respective roles of the key stakeholders – the Government and its principal agencies in policy formulation and implementation, the different institutional providers of microfinance services, and the donor community.

Tanzania has a tiered but relatively new and shallow financial sector, consisting of 20 licensed banks and 11 non-bank financial institutions, and a 17.5% degree of monetization. Most bank branches are concentrated in Dar es Salaam, and only a few have a countrywide network that could be linked to the provision of microfinance services. Three commercial banks have entered into microfinance. The limited-license regional and rural banks are the only banks with head offices located outside Dar es Salaam, but none of these have branch offices and thus have limited outreach to microfinance clients in spite of the lower minimum capitalization required for the banking tier.

Thus, the principal providers of microfinance services are Savings and Credit Cooperatives (SACCOs) and several foreign donor-assisted NGOs. They have preceded the establishment of a microfinance-specific regulatory framework, operating in spite of significant difficulties in several key areas of limited access to external funds and the lack of skilled manpower with banking and financial competence. The regulatory frameworks for microfinance institutions (MFIs) and cooperative financial institutions (CFIs) are still in process of being enacted into pertinent laws and corresponding implementing regulations. There is need for a clearly defined strategy on how to integrate SACCOs and NGOs into the emerging microfinance regulatory framework, and what policy environment, resource and capacity requirements will be required not only by the institutions but also by the regulatory bodies. The gap between requirements for and the supply of manpower with financial skills for banking and microfinance operations is becoming increasingly more apparent as a major constraint to development of sustainable microfinance. Capacity constraints are a major issue, not only for providers of banking and microfinance services, but also for the regulatory agencies (BOT and the Cooperatives regulator. It is also important to understand why, in spite of the lower minimum capital requirements for special-license community banks, none of the larger microfinance organizations have taken steps toward transformation to licensed status.

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