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Policy Initiatives for Improved Financial Services Provision in Rural Areas: Tanzania Mainland’s Experience

Policy Initiatives for Improved Financial Services Provision in Rural Areas: Tanzania Mainland’s Experience. Paper Presented at AFRACA Eastern Africa Sub- Regional Workshop of 22nd – 24th 2008 July, Addis Ababa, Ethiopia By: Flora Lugangira Rutabanzibwa

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Policy Initiatives for Improved Financial Services Provision in Rural Areas: Tanzania Mainland’s Experience

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  1. Policy Initiatives for Improved Financial Services Provision in Rural Areas: Tanzania Mainland’s Experience Paper Presented at AFRACA Eastern Africa Sub- Regional Workshop of 22nd – 24th 2008 July, Addis Ababa, Ethiopia By: Flora Lugangira Rutabanzibwa Deputy Director of Microfinance – Analysis and Policy July 2008

  2. Scope • “Recent experience in developing policy and sector initiatives geared to enhancing FSs in rural areas. The paper should highlight key findings that have underlined the formulation of these strategic options that have been put in place to improve the FSs provision among the rural population especially the poor”.

  3. PAPER: SCOPE AND ORGANISATION • SCOPE: focus on Tanzania Mainland • ANALYTICAL APPROACH: • Section 1: Introduction • Second 2: The present policy framework for RF • Section 3: Most Recent country experience in developing a national RF strategy (centre piece) • Section 4: Conclusion • Paper Methodology

  4. Country Profile: Key Statistics

  5. Country Profile Cont…

  6. Country ProfileCont…

  7. Country Profile Cont…

  8. Country Profile Cont…

  9. INTRODUCTION • +ve causal link btn financial development and econ growth • Tanzania’s historical perspective: • Importance of provision of FSs but different policy intervention: • Early years after independence • 90% of the total pop: rural • Adoption of Socialism – public centered policy

  10. A historic perspective cont.. • On the financial sector - state controlled: • Nationalised all banks – 4 public • Corporate type of services • Postal Corp – savings outlet • At production level: • Cash crop prod- cooperative unions • Heavily subsidised credit schemes • Savings: Postal Services Corp

  11. Historical perspective Cont…. • Therefore: • Credit provision – supply driven • Govt intervened heavily • But: • Credit prog not self sustaining facilities • Ceilings on lending rates • Recovery rates low • Official agric often costly

  12. Historical perspective Cont…. • Effect: • Very limited availability and access • Agric remained rudimental • Inadequate macroecon. & structural policies crippled: • economic growth • private entrepreneurship • Growth of demand for credit & other Financial services

  13. Historical perspective Cont…. Conclude: • Public centered development charter • No Fin policy/RF framework • Only public financial institutions • Public credit focus • Private credit/savings ignored

  14. 2. THE PRESENT POLICY FRAMEWORK FOR RURAL FINANCE • Financial sector reforms(1st Gen) • Crisis in the fin system/econ crisis – reforms - pluralism • Obj. of the fin reforms • Privatisation &strengthening regulations • Expanding gap in fin system: • Reforms- >sed number & efficiency of banks but no >se in access • Rural fin. services shrunk • Private banks – urban/peri-urban • Agric reforms – dismantled credit by cooperatives • Result (1997): 6-8% credit by banks

  15. Policy, Legal & Regulatory Framework Cont… • To address gap: • NMP in 2000: rural/urban • Amended the Financial Laws Act - to mainstream microfinance • Cooperative Act (2003) – SACCOS regist. • Microfinance Regulations (2005) • Recognising RF as a cross-cutting issue

  16. RURAL FINANCE RELATED POLICIES AND STRATEGIES (Appendix 1) • 9 Govt ministries & agencies • 17 Policies & Strategies • 11 Govt programmes

  17. Policy, Legal & Regulatory Framework cont… • Effect of the framework: • 2003 Joint FS Assessment • 2nd Generation FS Reform Programme • Rural Micro Finance Component: • Recommendation to enhance rural FSs

  18. 3. DEVELOPING A FRAMEWORK FOR ENHANCING FINANCIAL SERVICES IN RURAL AREAS • Undertook a RF Study: • Review of the state of RF • A medium-term framework to enhance provision • Make an action plan for implementation

  19. Rural Finance Study • Institutional Set-up • Org. under the Financial Sector Support Programme • Undertaken by the Rural and Micro Finance Technical Committee (9) • A high level stakeholders’ workshop – for buy-in

  20. Rural Finance Study Cont.. • Methodology of the study • To establish state: DD & SS sides • Undertook literature review: contextualise • Analysed primary data - define study areas: • NBS master sample frame • Focused on sparsely pop area • Also institution in urban/peri-urban • Urban areas with no outlets

  21. RF Study cont.. • Income/Asset profile: HBS &ILF surveys • DD side: disaggregated & analysed Finscope • SS side: Did a mini-supply: • Sample (43): • SACCOS (80%), others (20%) • Formal/semi/informal • Included very remote areas • Issues: providers & users • Questionnaire – Swahili translated • Interviews (private & public)

  22. Findings of the RF Study1. On the Landscape of Rural FS i. Rural Characteristics: • DD &SS of FS is impacted by the rural state • Characteristics: poor infrast & access • 99% of roads unpaved • 60% trunk road unpaved • Rural households isolated • Very low electricity connection: 9% rural % mainly urban • Mobile Phone expansion: 98% total phones • On source of income (table2 – next slide)

  23. Study findingscont… ii. Income/asset poverty profile • High rural poverty (40%) • High vulnerability • Poor housing • Low formal educ (43%)

  24. iii. On characteristics of econ activities:Table 1: Sources of Income of Households: Rural vs. Urban

  25. Rural Landscape Cont.. iv. On Access Pattern: FINSCOPE overall: • Formal - about 91% • Semi- formal – only 2% • Informal 35% • Excluded 54%)

  26. On more disaggregated data (FINSCOPE):Fig 1:The Financial Access Strand: Rural vs. Urban

  27. On Factors that Cause this Poor State:Fig 2:Reasons cited for not having a bank account (rural-based respondents)

  28. Key factors causing low access: • Low household income • High dependence on agric • Vulnerability • Right of land – customary law • High transaction costs • Inadequate knowledge – Financial illiteracy

  29. (v). Fig. 3: Supply and Lack of Supply in the Mainland Millions of adults URBAN RURAL Banks & other formal financial institutions Semi-formal: SACCOS Semi-formal: NGO-MFIs Informal: eg ROSCA, VICOBA, friends, family Excluded: non-monetary Excluded totally unserved 3 2 1 0 1 2 3 4 5 6 <<< out of 6 million out of 15 million >>>

  30. vi. The Financial Sector • Monetization: TZ (20.7%) par with LIC-Africa, Kenya(38%) and South Africa (61%). • Domestic private credit/GDP: 5.6 % (1999 to 2003), LIC-Africa (8.3%), Kenya (21.3%) and South Africa (142.1%). • FS efficiency: very weak - spread between deposit and loan rates: TZ 13.7% (1999 to 2003) above LIC-Africa (12.9%) -very high in absolute terms. So effective interest rate for borrowers is very high (10.5%), Kenya (4.7%) or South Africa (8.5%). • FS is still a critical constraint

  31. vii. State of Financial Institutions • a. banking sector: • very limited level of penetration • 4/32 FIs have national-wide branch network • 7 regional comm. banks with microfinance operations • About 5% of the rural pop has a bank account. • Cost of open/maintain a bank account favourable • But rural transaction cost are generally high due to poor transport

  32. State of the FIs Cont… b. Remote access banking: • Rapid expansion in mobile phone • Telecom may help cost barriers to geographical outreach c. Financial NGOs: • About 100 NGOs provide microfinance services; • Tend to be urban / peri-urban based,hardly in rural • Use of group-based lending schemes to decrease costs • Unlicensed

  33. State of the FIs Cont… d. SACCOS: • Most dominant rural based semi-formal institutions - 4,400 (60% rural) • A variety of types/size • Urban/Rural

  34. Fig 4: Operational size of a sample of rural-based SACCOS

  35. e. On Informal ProvidersFig 5: Distribution of rural respondents with informal financial access

  36. f . Govt. Credit Programmes • In response to enormous public demand

  37. Other Finding: 2 : Policy, Legal and Regulatory Framework”Fig 6: On Rural Finance Policy Framework: Overlapping strategies and policies Economic and Poverty Reduction Strategies & Policies Financial Sector Strategies & Policies Rural Financial Services Strategy Agricultural and Rural Development Strategies & Policies Cooperatives (including SACCOS) Strategies & Policies

  38. (ii) Legal and Regulatory Framework: • The framework is capable generally okay • But some regulatory issues need to be changed - for the RFSS:

  39. 3. Elements of the Rural Financial Services Strategy • Objective to broaden and deepen rural financial services in the country. • SACCOS a central element

  40. Fig 7: Components of the RFSS

  41. 4. CONCLUSION • magnitude of the problem • A RF unit at NBS • 3 bi-annual DD & SS census instituted • Annual reporting mechanism: min reporting standards • District MFIs Mapping • National Fin. Literacy Strategy: urgent FSP agenda • RFSS coordination Framework: BOT New data:R/Urban:65/45%; Agric/GDP: 45%

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