Microfinance Business Opportunities in Tanzania

Microfinance Business in Tanzania entails Business that Provides Microfinance Services. These are the banking services provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.

Microfinance services can also be construed to refer to the financial services provided to low-income individuals or groups who are typically excluded from traditional banking.

So in general, microfinance refers to the provision of basic financial services such as loans, saving accounts and insurances for low-income but economical active people.

Note that, in most cases the term microfinance refers to the provision of small loans (=micro credits) for micro-entrepreneurs.

A: Microfinance in Tanzania – Introduction

The banking industry in Tanzania is relatively young and limited in scale. Consequently, only a small portion of Tanzania’s population has access to mainstream banking services. And because of that, most banks started targeting the poor by extending collateral-free and low interest microcredit and loans.

Due to lack of skills and experience within the market these efforts are not widespread and mostly favor borrowers in urban areas, leaving the rural areas largely underserved. Most of the banks are reluctant to move into rural areas due to the poor national infrastructure, perceptions of high risk and due to the higher expense of operating costs.

Since 2003, there have been positive developments in Tanzania’s microfinance industry as numerous banks and financial institutions have provided increased funding either directly to beneficiaries or through intermediary institutions. Despite this progress, it is estimated that microfinance service providers have a combined outreach of approximately 5% of the estimated total demand.

B: Regulation of Microfinance in Tanzania

Microfinance is a regulated business sector in Tanzania, the main regulator being the Central Bank, that is, the Bank of Tanzania. For the purpose of regulating the sector, the Microfinance Act was enacted.

The Act categorizes microfinance into four tiers. That is, Banks and Microfinance Banks, Credit Companies and Financial Organizations, SACCOS and Community Microfinance Groups.

In summary, the four tiers are as shown in the table below:

Description	Category
Banks and microfinance Banks (Deposit Taking Microfinance institutions)	Tier 1
Credit companies and financial organizations (Non-Deposit Taking Microfinance Service Providers).	Tier 2
Savings and Credit Cooperatives Societies (SACCOS).	Tier 3
Community microfinance groups.	Tier 4

C: Microfinance Business Opportunities in Tanzania

Because of the limited access to the mainstream banking services, opportunities in the microfinance sector are vast. Note that, this post is specific for microfinance business. For this purpose, Tier 3 and Tier 4, that is SACCOS and Community Microfinance Groups are not taken as microfinance businesses. These are rather cooperatives aimed at helping their members.

So the discussion will focuss on Tier 1 (Deposit Taking Microfinance Businesses) and Tier 2 (Non Deposit Taking Microfinance Businesses. Discusson about Tier 3 (SACCOS) and Tier 4 (Community Microfinance Groups) is reserved for a separate post.

D: How to Start a Microfinance Business in Tanzania (Tier 2)

Note that, a microfinance business can be started by an individual lender (sole proprietorship), or a company.

D1: Procedures to Start a Microfinance Business as Individual Lender

1. First prepare the minimum required capital. This is Tshs 20 million for individual lender. Deposit into your account and take bank statement.
2. Then register business name as a sole proprietor at BRELA under the Business Names (Registration) Act. Click here to learn how to register business name in Tanzania using BRELA ORS. Note that the business name must include either of the following words “microfinance”, “finance”, “financial services”, “credit” or “microcredit”.
3. Then arrange for the premise and get rental agreement for it.
4. Then register for Tax Identification Number at Tanzania Revenue Authority (TRA). Here you should get TIN certificate and Tax Clearance Certificate. Both will be required.
5. Then Pay Tshs 300,000 application fee. Get details at the Bank of Tanzania. (as we write this post, the details are Account No at BOT: 9924DDBGHQT and Account Name: Intermediary Account Banking). The payment can be by Cheque, Cash of Transfer. Keep the slip, will be required.
6. Then prepare the required documents which are:
   1. Letter of application in the prescribed form.
   2. Proof of payment of application fee.
   3. Certified copy of certificate of a business name registration.
   4. Proof of availability and source of capital of the proposed microfinance service provider.
   5. Certified copies of academic and professional certificates of the Chief Executive Officer.
   6. Copy of latest audited financial statements including balance sheet, income statement and cash flow statement for an existing microfinance service provider.
   7. Certified Copy of TIN certificate.
   8. Certified copy of tax clearance certificate for the applicant.
   9. Lending policy.
   10. Certified declaration that the funds invested or to be invested have not been obtained criminally or associated with any criminal activity.
   11. Proof of citizenship of the Chief Executive Officer/individual money lender including curriculum vitae, two recent passport size photographs and certified copy of either:
       • Page of passport which contain personal information or
       • National ID or
       • Birth certificate.
   12. Dully filled Questionnaire for Chief Executive Officer/individual money lender contained under the Fourth Schedule to the regulations.
   13. Credit report from Credit Reference Bureaux.
   14. Details of the Contact Person including Name, Postal Address, Telephone Number and E-Mail Address.
7. Apply for business license at the local authority.

D2: Procedures to Start a Microfinance Business as a Company

1. First prepare the minimum required capital. This is Tshs 20 million for a corporate lender. Deposit into your account and take bank statement.
2. Then register company at BRELA under the Companies Act. Click here to learn how to register a company in Tanzania using BRELA ORS. Note that the company must include either of the following words “microfinance”, “finance”, “financial services”, “credit” or “microcredit”.
3. Then arrange for the premise and get rental agreement for it.
4. Then register for Tax Identification Number at Tanzania Revenue Authority (TRA). Here you should get TIN certificate and Tax Clearance Certificate. Both will be required.
5. Then Pay Tshs 500,000 application fee. Get details at the Bank of Tanzania. (as we write this post, the details are Account No at BOT: 9924DDBGHQT and Account Name: Intermediary Account Banking). The payment can be by Cheque, Cash of Transfer. Keep the slip, will be required.
6. Then prepare the required documents which are:
   1. Letter of application in the format prescribed in the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2019.
   2. Proof of payment of non-refundable application fee.
   3. Proof of availability and source of capital of the proposed microfinance service provider.
   4. Certified copies of academic and professional certificates of members of the Board and the Chief Executive Officer.
   5. Certified Copy of TIN certificate.
   6. Lending policy.
   7. A certified declaration that the funds invested or to be invested have not been obtained criminally or associated with any criminal activity.
   8. Proof of citizenship of the Chief Executive Officer/individual money lender including curriculum vitae, two recent passport size photographs and certified copy of either:
      • Page of passport which contain personal information or
      • National ID or
      • Birth certificate.
   9. Dully filled Questionnaire for Directors, Owner(s) or Chief Executive Officer contained under the Fourth Schedule to the regulations.
   10. Certified copy of certificate of incorporation
   11. Certified copy Memorandum and Articles of Association, constitution or by laws.
   12. Board resolution authorizing application for licence.
   13. List of subscribers, members of the Board and Chief Executive Officer.
   14. Credit reference reports for every subscriber with ownership of 5% or more, member of the Board and Chief Executive Officer.
   15. Certified copies of tax clearance certificates for the applicant, subscriber with ownership of 5% or more, member of the Board and Chief Executive Officer.
   16. Certified copies of latest annual returns of an existing microfinance service provider.
   17. Details of the Contact Person including Name, Postal Address, Telephone Number and E-Mail Address.
   18. In addition to documents listed above, foreign owned entities shall submit the following:
       • Home Country Regulator approval
       • A training plan indicating specific time frames for imparting microfinance skills and expertise to Tanzanian staff
       • A succession plan and strategies on mode, time and contents of the extent to which Tanzanian staff shall occupy senior management positions in the Institution.
7. Apply for business license at the local authority.

E: Sample Business Plan of a Microfinance Company

A business plan for a microfinance business has to provide details of the market and marketing plan, analysis of the business environment, corroborations and partnerships, institutional assessment and financial projections.

Below is a sample business plan for a microfinance business in Tanzania.

F: Sample Credit Policy of a Microfinance Company

Credit policies are set of objectives, standards and parameters to guide bank officers who grant loans and manage the loan portfolio. Thus, they are procedures, guidelines and rules designed to minimize costs associated with credit while maximizing the benefit from it.

Initially microfinance was limited as only provision of micro loan to the poor entrepreneurs and small businesses lacking access to banks and related services then the concept of financial inclusion introduced and based on the guidelines given by different regulators in different countries MFIs defines their credit policies.

A credit policy that is too strict will turn away potential customers, reduce sales and finally lead to a decrease in the amount of cash inflows to the business.

On the other hand, accredit policy that is too liberal will attract slow paying (even non-paying) customers ,increase in the business average collection period for accounts receivables, and eventually lead to cash inflow problems.

A good credit policy help management to attract and retain customers, without having negative impact on cash flow.

G: Challenges Facing Microfinance Businesses in Tanzania

Notwithstanding the vastness of opportunities in the microfinance industry, drawbacks exists. MFIs have performed poorly due to high operating costs, low revenue generation ability, and limited outreach to low-income earners.

The following are the main challenges facing Microfinance Business in Tanzania:

1. Cost of outreach – Reaching the unbanked populations of Tanzania means servicing small loan amounts and servicing remote and sparsely populated areas of the country, which can be dangerously unprofitable without high rates of process automation and mobile delivery.
2. Lack of scalability – smaller microfinance systems often struggle to preserve the profitability and performance in the market, as the mainstream banks experience high growth rates that result from getting the service delivery right. This results in thwarting the growth of most microfinance businesses.
3. Geographic Factors – Tanzania is vast and hence the geographic factors make it difficult to communicate with clients of far-flung areas which create a problem in growth and expansion of microfinance businesses.
4. Diverse business models – Supporting the very wide range of features and lending activities is difficult and requires a considerable amount of funding and efforts.
5. High Transaction Cost – High transaction cost is a big challenge for microfinance businesses in Tanzania. The volume of transactions is very small, whereas the fixed cost of those transactions is very high.
6. KYC and security challenges – The customers serviced by Microfinance businesses are usually the ones having none or very limited official identification or able to provide tangible security, this makes it extremely difficult for microfinance businesses in Tanzania to offer any banking services.
7. Limited budgets – Making provisions for large upfront investments is not possible for most of the microfinance businesses in Tanzania which limits their capability to purchase world-class banking solutions that can help them fulfil their requirements and support their growth targets.

H: BOT Registered/Licensed Tier 2 Microfinance Companies

The table below provides a list of microfinance companies that are registered and licensed by the Bank of Tanzania as of August 2023.

I: Way Forward

Besides the challenges, MFIs have the opportunity to adopt the growing digital technology for reducing the impact of distance, time, and workload to reach low-earning clients, both rural and urban.

And in addition, a fully-fledged due diligence process shall be undertaken to determine the risks involved. Certainly, a due diligence process will uncover potential risks and hence guide the prospective investor in formulating appropriate policies and initiatives.

Below are the recommended ways to ensure growth and sustainability of microfinance business in Tanzania:

1. Close monitoring of credit rendered to clients
2. Promoting effective implementation of credit policies and regulations
3. Promoting an effective credit assessment and appraisal system
4. Developing a good credit policy, implementing it, monitoring it and
   ensuring proper and effective assessment of credits.
5. Promoting proper and adequate information flow within the microfinance business
6. Adopting continuous improvement approach on credit lending procedures
7. Developing and improving profiling systems and hence create different credit portfolio for different customers segment
8. Developing proper risk management policy and credit management strategies and ensuring proper and effective implementation

Published by Kessy Juma

Kessy Juma is the founder of Miamia Trading Company (miamiatz). He is a Techpreneur with roots in accountancy. He believes that any business is good as long as it caters to the right market using the right strategy.

Published by Kessy Juma

Kessy Juma is the founder of Miamia Trading Company (miamiatz). He is a Techpreneur with roots in accountancy. He believes that any business is good as long as it caters to the right market using the right strategy.