AN EXAMINATION ON THE AVAILABILITY OF FINANCIAL SERVICES IN COMMUNITIES AROUND SOUTH NGURU MOUNTAINS IN MVOMERO DISTRICT, TANZANIA

1.0 Introduction
Finance services refers to the broad range of services, such as: savings, credit, payment transfers, leasing, insurance, etc provided by formal and informal financial services providers operating in urban and rural financial markets. Finance services address the financial needs specifically of the rural population, which form the majority of the Tanzanians. Financial services are a facilitator rather than a creator of economic opportunities. Where economic opportunities already exist, access to credit facilities can contribute to faster and more extensive adoption of improved technology which is consistent with raising the level of productivity and therefore the level of incomes. Therefore, financial services are considered important for business and investment growth in the economy because for any community in order to develop need money for business and investment development.

Economic reforms have been implemented in Tanzania since the mid-1980s which essentially entailed the shift from an administratively managed and public sector led economy to a market oriented and private sector led economy. Financial sector reforms were part of these broader economic reforms. Financial sector reforms took the form of decontrolling interest rates, restructuring existing public sector banks and allowing entry of private banks.


A successful financial sector reform was expected to generate a dynamic process involving substantial changes in the country’s real activities of production, exchange (trade) and finance. Sustainability of the reforms was expected to result in financial deepening, increase in the range of financial products in order to better serve the needs of the economy and enhance transformation of the economy (urban as well as rural) so that production, exchange and other economic activities take place in different ways and in the context of new or reformed institutions.

Growth with economic transformation has at least two implications for the financial system: First, new methods of production and trade require improved technology and infrastructure which exert new demands which may stimulate new changes in finance. Second, changes in the institutional structure may call for changes in the financial operations to match it. For instance, changes from public sector-led development to private sector-led development in a market economy would imply fundamental changes in the operations of financial intermediaries.

The design of the financial sector reforms was initiated with the establishment of the Presidential Commission of Enquiry into the Monetary and Banking System in 1988. The Commission was tasked to examine the banking sector and make recommendations on how to improve its overall performance to support economic growth. The commission recommended broad based financial sector reforms. The main aspects of the proposed reforms were enacted in the Banking and Financial Institutions Act (1991). The Act provided the legal framework which permitted major changes in the financial sector, notably, the entry of private banks into the market and vested Bank of Tanzania with its supervisory and regulatory role. The Government took the initiative to restructure major banks and financial institutions, which included the restructuring and down sizing of the National Bank of Commerce and the recapitalization of the Co-operative and Rural Development Bank through selling of shares to the general public. With introduction of new banks competition has been enhanced, resulting into improvement of quality and quantity of financial services and products offered, at least in urban centres.

Despite this progress in financial services, the rural population has been slow to develop. In some respects there has been a retreat of financial services to the rural areas as indicated by closures of several rural based bank branches during the restructuring program. The composition of financial services was changed as windows for rural finance in those banks were closed or considerably reduced even by those banks which were formerly devoted to rural financing (e.g CRDB). The financial sector reforms are still in progress but there is increasing concern that the majority of the rural population which constitutes 70-80% of the population and comprise 90% of all the poor in Tanzania have not benefited from the financial reforms. They have largely been bypassed by these reforms. The need to enhance accessibility of financial services to the rural poor in Tanzania deserves high priority on the agenda of the on-going financial sector reforms. In recognition of the need for improving access to financial services by the rural population this paper focus on “Examining Rural Finance Services” available in communities around South Nguru Mountains in Mvomero District, Tanzania and propose on what should be done in order to access the reliable financial services.

2.0 Literature Review
2.1 Background information on Rural Financial Services
Samwel Wangwe(2004) in his paper on an “Innovation in Rural Finance in Tanzania” argues that, most of the period since the late 1960s and 1970s the Tanzanian financial sector was mainly government-owned with pervasive government interference in the financial system.

Credit was directed on the basis of government priorities with little regard to credit-worthiness, and banks were convenient agents of fiscal policy. Two institutions, the National Bank of Commerce (NBC) and the Cooperative and Rural Development Bank (CRDB) were dominant in providing rural financial services.

NBC provided working capital and other short term finance to agriculture and other rural activities while CRDB provided development finance to rural development activities. These two institutions had virtual monopoly in their functional areas: Each institution was governed by its own stature and the Bank of Tanzania’s (BOT) supervisory role had been limited. Finally, the environment in which the formal financial institutions operated was also regulated by the state.

Credit was allocated administratively by the BOT which established legal ceiling in bank lending and deposits in addition to regulating interest rules. In the prevailing environment, the financial sector’s performance was very poor and savings mobilisation was neglected. Loans to cooperatives increased, and no pressure was applied on borrowers to repay their loans.

The Government of Tanzania’s(GOT) policies resulted in over-staffed and inefficient banks. These loan policies led in 1988 to 70% of NBC’s loan portfolio to be in arrears and 95% of this was accounted for by parastatals and a substantial share by cooperatives. The Cooperative Rural Development Bank’s (CRDB) rural sector loan portfolio was no better, with 66% of its loan portfolio in arrears as of end 1988. With a non-performing loan portfolio and unable to attract deposits, the formal financial sector was bankrupt, and dependent on financing from the GOT. In response to the difficult financial position, LART was established in 1991 as an institution which would specialize in the recovery of non-performing assets of banks and financial institutions in Tanzania with a view to rescuing public banks and financial institutions burdened with non-performing assets (NPAs).

Most of the loans to the rural sector had been channelled through the cooperatives. In the recovery process, the experience of LART suggests that loan recovery from cooperative unions, where only 44% of the face value was recovered, has been most challenging followed by that from parastatals where 71% of the face value had been recovered by June 2002. The remaining work of loan recovery was hindered by the poor quality of collateral attached to the loans (mainly depicted by the absence of title deeds on land) and to litigations following appeals made by some NPA owners (LART. Annual Report, June 2002).

GOT reformed the financial sector in 1991 and established the Banking and Financial Institutions Act. Banks were restructured and some of them were privatized. Interest rates were liberalized, and financial operations were to be conducted on a more commercial basis. Along with banking de-regulation, the Cooperative’s Act of 1991 was passed which authorized the re-structuring of the Cooperative movement and permitted the establishment of the Savings and Credit Cooperatives (SACCOs). Non-Governmental Organizations (NGOs) also started micro-credit operations in Tanzania.

2.2 Financial services policy frame work
The policy framework has been evolving at various levels. With the Tanzania Development Vision 2025 emphasizing on the need to transform the economy from a predominantly agricultural one with low productivity to a semi industrial economy with modern rural sector, great emphasis is placed on the role of the private sector in stimulating economic growth and developing the rural areas. Thus, the promotion of income generating activities, development of a diverse and strong micro and small scale enterprise sector, and diversifying the skill base through vocational training is an integral part of the strategy for achieving the vision.

Since development of rural finance is dependent on a variety of factors that cut across different sectors, the formulation of the Rural Development Policy and Strategy and the Agricultural Sector Development Strategy are an integral part of the overall policy framework for rural finance. The rural development strategy sees the need to diversify the structure of the economy with a view to reducing dependence on agriculture.

The National Micro-finance Policy covers all policy aspects related to the financial instruments and institutions relevant to rural finance. The policy is a framework that lays out the principles guiding the operations of the microfinance systems, as it covers the provision of financial services to households, small scale farmer and micro enterprises in urban and rural areas.

Cooperatives are a critical institution for facilitating rural finance. Therefore reference to the Cooperative Development Policy (2002) is in order. The new Cooperative Development Policy (2002) has repositioned government commitment to support cooperatives which are owned and managed by their members by creating a conducive environment for their development into competitive entities in the context of a market economy. The policy recognizes economic groups as important initiatives towards membership based cooperatives and emphasizes business minded leadership in running the cooperatives.

In the context of rural finance, the Cooperative Development Policy (2002) supports the establishment of viable cooperative financial institutions. The policy aims to increase participation of marginalized groups in cooperatives and recognizes business groups and commits to assist these groups towards attainment of fully registered cooperatives. According to the policy, the government will encourage the formation of cooperative financial institutions in order to reactivate thrift and saving habits among members. In particular, the policy states that the government will encourage formation of SACCOs within the area of operation of primary societies and will provide technical assistance to the SACCOs. The policy continues to state that the government is committed to encourage and assist the establishment of cooperative banks.


3.0 Financial services available in communities around South Nguru Mountains in Mvomero District
Although finance services is becoming a mature industry in many parts of the world, it has proven largely unable to penetrate remote rural areas because the costs of doing so are high and the demand for credit is quite restricted. Most of the people who live in rural areas (and particularly women and the very poor) receive no services. Thus there is still a large gap between the needs of the poor for financial services and the ability of banks and micro-finance institutions (MFIs) to provide these services. Moreover, the gap cannot be filled by these types of institutions because in most cases they will never be able to cover their costs. In addition to the gap in service delivery, there is also a gap between the products that MFIs can offer and those that are needed by the poor. MFIs tend to emphasize credit. Most are unable to offer savings services, because they are not licensed to take deposits. The conventional view is that credit is the most important service that an MFI can offer, because it provides the means by which the poor can invest their way out of poverty. But this view is increasingly being challenged by practitioners, who observe that many poor people prefer to build their assets through savings rather than increase their risk exposure by taking out loans.

It has found that finance services which are available in communities around the South Nguru Mountains are in four categories of institutions:- banks (i.e CRDB and NMB Bank), member based organizations and associations such as cooperatives (i.e MTIBWA OUTGROWER ASSOCIATION (MOA)- SACCOS) and NGOs (i.e CARE in Tanzania). It has found that, CRDB and NMB Bank within the communities provide financial services to a majority of the low-income population either directly or indirectly through linkages with NGOs or savings and credit institutions as a viable poverty reduction tool. But community members have experienced the following lessons with CRDB and NMB financial services:
· Security in rural areas is problematic in the absence of formal registration of assets that could function as collateral titles and even when they are registered their market value is low.
· Short term lending is not appropriate for most of production activities in the rural areas.
· Linking with intermediate institutions which are closer to the farmer clients reduces the cost of collecting and processing information about potential borrowers. Linkage to SACCOs and Community Banks has proved useful in cutting down administrative costs, enhancing loan recovery and improving reach without having to physically locate branches in all areas of operation
CARE Tanzania is one of development organization among many things it promotes financial services to rural people in Tanzania. As part of a nation wide initiative for poverty reduction CARE Tanzania has been pursuing its objective of assisting micro entrepreneurs by promoting savings and loans service.

Currently, CARE TANZANIA is assisting self help groups commonly called Village Savings and Loan Groups in communities around South Nguru mountains in Mvomero District. The VS&L group is a self-selected group of people, (usually unregistered) who pool their money into a fund from which members can borrow. The money is paid back with interest, causing the fund to grow. The regular savings contributions to the group are deposited with an end date in mind (usually between 8-12 months) for distribution of all or part of the total funds (including interest earnings) to the individual members, usually on the basis of a formula that links payout to the amount saved. This lump sum distribution provides a large amount of money that each member can then apply to his/her own needs. From this perspective a VS&L groups is primarily savings clubs, which have proven popular worldwide.

VS&L groups are usually more attractive to participants, because they offer interest on savings and provide loans in useful amounts, usually in excess of the borrower’s savings, at times that are convenient to the borrower. In this way the funds are constantly working, earning interest and not just sitting idle in a bank, or being directed towards consumption. The loans allow the members to meet their small, short-term financial needs for income generating activities, social obligations and emergencies without having to borrow from a money lender, take an expensive supplier advance, or rely on their relatives. This offers a tremendous boost to social security. The reason that they are not so widespread is that they are more complex to administer and require a system of record-keeping.


The Mtibwa sugarcane out-growers’ scheme demonstrates a good example of institutional and organizational development that is desirable for effective production and marketing improvement. These include the out-growers associations; vertical linkages between growers and buyer, and interlinkages between output markets and credit markets that are beneficial to both parties.

Following the increase of capacity and commercialization of sugarcane production in Mtibwa, the out-growers saw the need of forming an association. In 1996 the association was formed with 25 founder members. It is known as the Mtibwa Out-growers Association (MOA). The aim is advocacy in cane production and business, fair play in price regulations, contractual agreement, payment, and sustainable development of cane production, credits, input supply, extension services and training. Currently MOA has 3,500 members. MOA has managed to motivate its members to start a Savings and Credit Cooperative Society (MOA SACCOS), which is operating under the consultation of CRDB Bank Ltd.

The Minister of Agriculture and Food Security (Hon. Charles Keenja) launched the organization on 28th June at Madizini village in Mtibwa, where the head office is situated. The organization has plans to become a leader on credit facilities in Morogoro region. The organization will have 65,000 shares worth TAS 10,000 each. MOA SACCOS is visioning to offer all bank services, like other commercial banks in the future. It expects to accumulate a capital worth TAS 1,761 million from the members’ shares, financial institutions, grants and customers’ savings. Mtibwa Outgrowers Association has facilitated acquisition of grants and loans from various organizations. For example, African Development Foundation provided a grant amounting to TAS 192 million to MOA in 2001/02. This loan was partly used in the establishment of the MOA-SACCOS. A total of TAS 83 million had already been loaned to members at 18% interest rate per year. Similarly, CRDB Bank has provided TAS 300 million to be loaned to farmers through MOA-SACCOS.

The Government and non-governmental organizations have volunteered in promoting the development projects in the area. The government extension officers in Mtibwa work in partnership with MOA, to ensure sustainable sugarcane production. In November 2001, the Sugar Act was established to ensure fair play in sugarcane business. In July 2002, the Sugar Board was launched. MOA participated in this process to ensure that farmers are represented in such forums.

Apart from all these efforts, the war against poverty is still ongoing. It is estimated that 40-60% of people who are engaged on the scheme live under the poverty line, although they are not among the poorest of the poor nationally. In addition, for out growers there are several risks associated with participation. These risks include the following:-
Over-dependence on a monophony buyer without legal mechanisms for back-up. Late payments to out growers for sugar cane delivered are a good example of this threat. Out growers indicated late payments limiting their opportunities, and sometimes resulting into reduced investments in agriculture.

Some small-scale farmers, who are in most cases also low-resource, have experienced special problems such as loss of produce as they are denied harvesting services. This problem may be associated with high per unit cost of harvesting due to bad plot conditions (e.g. when flooded), long distances, small farm size and poor crop. This is a significant source of risk to poor farmers.
Most of the production area is prone to natural disasters (such as drought, floods, and accidental burning). Families that grow sugarcane on marginal lands have, from time to time, experienced crop losses due to these problems.

Farm sizes and availability of credit are important factors that determine the profitability of the farm and its sustainability. Small-scale low resources farmers have continued living under undesirable conditions. For some they have worsened due to their inability to re-invest in their sugarcane plots. For such farmers, the sugarcane crop remains on the farm for too long leading to a 60% decrease in yield and decline in sugar content to as low as 3%.


4.0 Proposal on what should be done in order these rural communities to access reliable financial services
The Agricultural Inputs Credit Fund should be strengthened by government to extend credit for the purchase of agricultural inputs since the majority of rural people depend on agriculture. The allocations of financial resources to this Fund should be unstable and meet requirements. The Fund is supposed to be revolving and growing in order to reach large number of people.

Strengthening SACCOs and improving marketing (making sure that farmers have a market and at reasonable prices) are supportive attributes for the development of rural finance.The capacity of SACCOs should be built to operate like business and must be staffed by entrepreneurial and knowledgeable leaders. Building competence in SACCOs through capacity building initiatives deserves priority to enable these institutions operate more efficiently and competitively. SACCOs and community banks will need assistance in acquiring technical and managerial competence and institutional capacity building.

Since security in rural areas is problematic in the absence of formal registration of assets that could function as collateral titles and even when they are registered their market value is low. There is need to innovatively search for alternative ways of managing to provide financial services without necessarily demanding physical collateral. Longer term credit is needed.

There is a need to Link Banks to SACCOs and Community Banks in order to cutting down administrative costs, enhancing loan recovery and improving reach without having to physically locate branches in all areas of operation. In addition to this, banks should provide longer term credit to these SACCOs and community banks.

Emphasis should be put on Village Savings and Loan groups (VS&L) scheme since the experience shows that, working through groups has helped to introduce peer pressure in loan recovery and in providing information about borrowers at low cost. Therefore there is a need to encourage rural people to employ new and appropriate methods of saving and lending like VS&L, which provided very small loans without collateral at full cost interest rates that are repayable in frequent installments and that the vast majority repaid on time.

The savings banks should have an instinctive sympathy for improving access; moreover an economy is very unlikely to be approaching full access unless it has strong savings banks. As always the performance of banking systems cannot be understood in isolation from the system of political economy within which they operate. Governments are likely to do more to improve access by improving the foundations of civil society than by trying to mandate access and interfere with product design. For poor to be easy to access products and services, savings banks should be able to capture an important part of the savings, bringing in this way considerable parts of the world population in the formal financial sector. Furthermore, savings banks should recycle more than half of their deposits as credits, which means that they play an essential role in the field of consumer banking, micro financing and financial services to small and medium enterprises.

5.0 Conclusion
Access to finance services is an essential driver for economic growth in developing and transition economies. It is also important in developed economies, where it stimulates markedly the social inclusion of certain groups of the population. Access to finance empowers people, gives them the opportunity to have an account, to save and invest, to insure their homes or to take a loan and in many cases to break the chains of poverty. That is why savings banks and socially committed retail banks have made access to finance one of the underlying principles of their business activities. Savings and socially committed retail banks are well positioned to succeed in enhancing this access on a global level; they are traditionally very close to their customers, thanks to their extensive regional branch networks and the provision of low threshold products and services