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Tanzania MSME Access to Finance Assessment Funded by the IFC Netherlands Technical Assistance Trust Fund

August 2005 Submitted by John Kashangaki

Strategic Business Advisors Centenary House, Westlands, 4th floor P.O. Box 43483, Nairobi, 00100 Tel. 4452722 Nairobi, Kenya [email protected]

Copyright © 2005 International Finance Corporation 2121 Pennsylvania Avenue, N.W. Washington, DC. 20433 USA The International Finance Corporation, part of the World Bank Group, fosters economic growth in the developing world by financing private sector investments, mobilizing capital in the international financial markets, and providing technical assistance and advice to businesses and governments. It is the world’s largest multilateral organization providing assistance directly in the form of loans and equity to private enterprises in developing countries. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily reflect, the views of IFC or its Board of Directors, or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data included in this publication and accept no responsibility whatsoever for any consequence of their use. Some sources cited in this volume may be informal documents that are not readily available. For additional copies of this publication, please contact Ms. Sylvia Zulu, [email protected], International Finance Corporation, 2121 Pennsylvania Ave., N.W., Washington, D.C. 20433. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Copyright Clearance Center, Inc., Suite 910, Rosewood Drive, Danvers, Massachusetts 09123, USA.

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Tanzania MSME Access to Finance Assessment Final Report

Executive Summary | 1

Table of Contents Executive Summary 1 1.0 Introduction 3 2.0 Structure of the MSME Sector 4 3.0 Overview of the Banking Sector 9 4.0 SME Credit Demand and Supply 13 5.0 Microfinance Demand and Supply 19 6.0 Capacity Building Programmes 27 7.0 Expanding Commercial Bank MSME Finance Operations 28 8.0 Conclusions/Recommendations 29



Executive Summary

Introduction The Government of Tanzania (GOT) – in collaboration with the International Development Association, the World Bank, the International Finance Corporation and bilateral development partners – seeks to significantly enhance the growth and productivity of the micro, small and medium enterprise (MSME) sector. The proposed Tanzania Access to Finance Project, one of the key initiatives to support the government’s development strategy, will include a strong focus on expanding MSME access to finance from formal financial institutions. In order to access sufficient information to make judicious decisions on appropriate options for implementation, the IFC commissioned an assessment of the market for finance to MSMEs in Tanzania (TOR is attached as an annex). The study is funded by the IFC’s Netherlands Technical Assistance Trust Fund. The report presented below covers the key areas outlined in the TOR viz: an overview of the MSME sector structure; an assessment of the SME credit demand and supply; an assessment of the micro-finance demand and supply; an overview of other capacity building programmes in Tanzania and an assessment of the scope for expanding commercial bank MSME finance operations. Structure of the MSME Sector Key elements of the structure of the MSME sector include the following:

There are approximately 2.7 million MSMEs in Tanzania; sixty percent of these are located in urban areas.

Most (98%) of MSMEs are micro enterprises employing less than 5 people; the majority (66%) have annual sales of less than Tshs. 2 million annually and are operating largely survival type of business.

Most MSMEs are fairly young businesses; over sixty percent are less than five years old. MSMEs operate in all sectors but the most dominant are trade (54%) and services (34%).

Demand and Supply of Credit to MSMEs The survey data indicates that about 5% (127,000) of all the enterprises are receiving credit from micro-finance institutions. About 1% (26,000) are receiving credit from commercial banks. Effective demand for SME credit is approximately 300,000 enterprises although the bulk of the unmet demand will be from small enterprises.



Constraints to Lending There are a number of constraints to SME lending in Tanzania. Keeping in mind that most SMEs are really micro-enterprises in Tanzania, the core constraints facing any potential lender to these enterprises include the following:

Lack of Expertise and Mindset to SME lending: most banks lack the systems, delivery network and skills to appraise and manage credit to SMEs especially as the latter lacks credit history and reliable financial statements normally required by the banks.

High Transaction Costs and limited delivery mechanisms: There is limited knowledge and resources to invest in new systems/technologies that will allow greater access to financial services in rural areas and small towns. Banks with easier options may not be willing to invest sufficiently to develop the appropriate solutions.

Culture of non-repayment: this culture pervades the business environment and increases the risk for financial institutions interested in SME lending. No systems for credit reference have been effectively set up in the country to reduce this risk

Lack of collateral; most SMEs do not have adequate collateral to meet the requirements of commercial banks. This constrains their ability to access capital.

Challenging Legal and regulatory environment: challenges include needs for additional improvements in the land law, a bureaucratic Judiciary, overregulation of small business and the need to harmonize existing laws to iron out inconsistencies.

Conclusions/Recommendations Based on the findings above, a number of conclusions can be made:

While there are a large number of micro and small enterprises that have not yet received access to financial services, their characteristics, purchasing power, informality etc, coupled with most banks own rigid requirements, make it difficult for commercial banks to provide them with financial services.

Due to the largely survival nature of almost 50% of MSMEs, any new program will need to take into account that the effective demand is much lower than the number of MSMEs in the economy. Efforts to expand and improve the performance of micro enterprises (e.g. BDS) might be more successful at this stage than finance for most enterprises.

Evidence suggests that there are very few medium sized enterprises in the economy and most banks are fighting to get their business; it is recommended that any new programme focus on micro and small enterprises as these are less well attended to.

Trends in the banking sector indicate that the sector has grown and developed tremendously over the past ten years. The number of banks has increased dramatically and competitive pressures are beginning to emerge. Some banks are voluntarily beginning to move downmarket. Any new programme will need to be designed to ensure that these competitive pressures are maintained in the economy and distortions are avoided. It would appear that subsidies are most warranted in the micro and possibly the small enterprise sector to achieve much larger scale.

A programme geared towards increasing access to finance for the poor already exists in Tanzania and is well funded; any new program will need to co-ordinate carefully with this to ensure no duplication occurs


1.0 Introduction | 3

1.0 Introduction The Government of Tanzania (GOT) – in collaboration with the International Development Association, the World Bank, the International Finance Corporation and bilateral development partners – seeks to significantly enhance the growth and productivity of the micro, small and medium enterprise (MSME) sector. The proposed Tanzania Access to Finance Project, one of the key initiatives to support the government’s development strategy, will include a strong focus on expanding MSME access to finance from formal financial institutions. In order to access sufficient information to make judicious decisions on appropriate options for implementation, the IFC commissioned an assessment of the market for finance to MSMEs in Tanzania (TOR is attached as an annex). The study is funded by the IFC’s Netherlands Technical Assistance Trust Fund. The report presented below covers the key areas outlined in the TOR viz: an overview of the MSME sector structure; an assessment of the SME credit demand and supply; an assessment of the micro-finance demand and supply; an overview of other capacity building programmes in Tanzania and an assessment of the scope for expanding commercial bank MSME finance operations.


2.0 Structure of the MSME Sector | 4

2.0 The Structure of the MSME Sector 2.1 Overview While there is significant discussion both in government and non-governmental circles about the importance of the sector, our review identified that there is very little statistical data on the size and distribution of enterprises in the Tanzanian economy. Evidence available indicates that there has been no comprehensive National Baseline Survey of MSEs in Tanzania. Several smaller regional surveys have been done such as the Dar-es-Salaam Informal sector survey of 1995 and the K-Rep “Demand for Rural Financial Services” in 1997. While these and other studies have been useful, they do not provide representative national data of the contribution of MSMEs to employment and economic development in Tanzania. The most representative study undertaken thus far is the K-Rep Advisory Services/Swiss Contact Baseline Survey of Micro and Small Enterprises (MSEs) and Micro and Small Farms (MSFs) within the Uhuru Corridor of Tanzania in 2003. The study covered five regions in Tanzania – Dar es Salaam, Pwani, Morogoro, Mbeya and Iringa – which encompass about eleven million people, or a third of the country’s population. Over 4000 households were interviewed using appropriate sampling techniques. The findings of this study provide a good basis for interpretations and estimations about the size and characteristics of micro and small enterprises in Tanzania.1 This assessment has relied heavily on this study for interpretations on the MSE sector. While no data exists on medium enterprises, some of the findings would also apply to medium enterprises as well. 2.2 Key Characteristics of MSEs 2.2.1 Number of MSEs The KAS/Swiss Contact survey identified a total of 781,687 MSEs in the Uhuru Corridor. Out of these almost half (47%) of these enterprises were located in Dar es Salaam. Extrapolating these figures nationally assuming a population of 37 million in Tanzania, there are approximately 2.7 million MSEs in the country. 2.22 Regional Distribution The study found that 68% of the MSEs are found in urban areas. This is different from findings in Kenya for example where 71.4% of MSEs are located in the rural areas and small rural towns. 2.23 Sectoral Distribution

The table below highlights the key activities of MSEs. The bulk of these enterprises (54.2%) are in trade, followed by services (35%). Only about 11% of MSEs are engaged in manufacturing activities. A detailed analysis of the manufacturing sector reveals that wood, textile and metal products are very common among the MSE operators. In the trade sector, activities that are prominent include trade in agricultural produce (13.9%) and general retail trade (19.1%). The services sector is dominated by food and restaurants, both accounting for 30% of all the MSE activities in the Uhuru Corridor. 1 The study used employment as the basis for its definition – micro being 1-5 employees, and small being 6-49 employees.



Table2.1: Type of MSE Activities in the Uhuru Corridor Sub-sector Percent

Manufacturing Grain mill products Malt, liquor and beer brewing Knitting and crocheting Manufacture of textiles Manufacture of wearing apparel, except footwear Sawmills, planning and other wood mills Charcoal production Manufacture of wood and cork products Manufacture of furniture and fixtures, except metal or plastic Brick/block making Manufacture of fabricated metal products except machines & equipment Jewelry production Electric contractors Painters, roof-tillers and minor repairs Construction/partitioning of buildings Other manufacturing & construction works

10.9 0.8 0.2 0.9 0.5 2.4 0.2 0.7 0.1 2.9 0.5 0.5 0.2 0.3 0.1 0.6

Trade Food drink and tobacco Agricultural produce Live animals Butcheries Textiles, soft furnishings, clothing & shoes General retail trade Paraffin and charcoal Garments – ready-made and second hand Shoes and leather goods Art and artifacts Stationary and bookstores Photo and pharmaceuticals Other

54.2 4.1

13.9 1.0 1.9 3.2

19.1 3.3 5.5 0.5 0.5 0.6 0.3 0.7

Services Restaurants, cafes and bars Food kiosks, other catering and drinking places Hotels, rooming houses, camps & other lodging places Barber and beauty shops Repair of bicycles Repair of footwear and other leather goods Medical and other health services Laundries, dry-cleaning and other cleaning services Transportation services – buses & others Accounting, auditing & bookkeeping services Business services except machinery and equipment rentals Other

34.9 5.5

24.4 1.0 1.2 0.5 0.3 0.3 0.3 1.0 0.2 0.1

Total 100



2.24 Age of MSEs

Most of the MSEs in the Uhuru corridor are very young, with over half of them (54.6%) having been in operation for up to three years. This is an age category when start-up and operational constraints force many MSEs to close. Table 2.2 shows that the mean age of MSEs in the Uhuru corridor is 5.4.years which means that they are past the critical age and may therefore survive. Table 2.2: Distribution of MSEs by Age Number of members of household Number Percent Up to 1 year 2 – 3 yrs 4 - 5yrs 6 – 10 yrs 11 – 20 yrs 21 + yrs

243,064 183,487 105,168 125,992 80,369 43,607

31.1 23.5 13.5 16.1 10.3

5.6 Total Mean (years)

781,687 5.72

100.0

Source: KAS Uhuru Corridor Baseline Survey of MSEs, Nov/Dec 2002 The study identified that nearly one third of all MSEs are below one year old and over 60% of them are under five years old. Less than 20% of MSEs in all the regions have been in existence for more than 10 years. This may be attributed to the fact that until 1986, Tanzania followed a socialist economic model which discouraged private sector participation. As a result, Tanzanian MSEs are the youngest in the region. This is an important finding as it affects their ability to access capital from formal markets. 2.25 Ownership The study identified that there is only a slight difference in ownership between men and women. Men own 48 % of businesses and women own 42.9%, while about 8% are jointly owned between husband and wife.



2.26 Size of Enterprises The table below highlights size of enterprise by employment extrapolated from the Uhuru Corridor study. Table 2.3: Employment Size of Enterprises Number of workers Number Percent 1 worker 2 workers 3 – 5 workers 6 – 10 workers 11 – 20 workers 21 – 50 workers 51 + workers

1,787,586 565,914 289,593 36,245 17,481

- -

66.7 21.2 10.8

1.4 0.7

- -

Total 2,700,000 100.0 Source: Ibid, extrapolated for the national population

Two thirds (66.7%) of MSEs are very small, with only one worker. On the whole 98% of MSEs in the region fall in the size category termed as micro comprising of 1 to 5 workers. Only a minute 0.7% of enterprises have more than 10 workers, which would qualify them to be termed as small enterprises under this definition. These findings correlate well with earlier findings of age of enterprises. The findings are also important for government, donors and others targeting this sector for assistance – the bulk of enterprises requiring assistance are micro/informal sector enterprises; there are very few small and almost no medium sized enterprises! 2.27 Turnover of Enterprises

The annual sales turnover represents the estimated gross amount of sales generated over a period of one year. The table 2.4 shows the distribution of gross annual sales among MSEs. Majority of MSEs (over 70%) according to the table, have a gross annual sales ranging from Tshs. 200,000 to 5 million. There are also a significant number of MSEs (13.2%) with a gross turnover below Tshs. 200,000. With such a low sales turnover, these MSEs are operating below the poverty line and are therefore not able to meet their basic household needs. Very few MSEs (11.3%) with a gross sales turnover above Tshs. 5 million can be said to be making a decent living from their small businesses. For others, if they did get another opportunity for higher income in employment they would most likely take it. This is corroborated by data in the same report that found that about 50% of the businesses started because there were too few wage opportunities and another 30% were started to supplement existing incomes. Only 11% were started because the proprietors identified profitable opportunities.



Table 2.4: Distribution of Gross Annual Sales among Enterprises Range of gross annual sales Number Percent

Up to Tshs 100,000 Tshs 100,001 – 200,000 Tshs 200,001 – 500,000 Tshs 500,001 – 1,000,000 Tshs 1,000,001 – 2,000,000 Tshs 2,000,001 – 5,000,000 Tshs 5,000,001 – 10,000,000 Tshs 10,000,0001 +

162,198 193,224 437,542 473,512 564,513 561,736 199,756 104,335

6.0 7.2

16.2 17.6 20.9 20.8

7.4 3.9

Total 2,700,000 100.0 These findings have implications for the actual effective demand for finance and other services from MSEs, as only a small number are economically viable entities. 2.3 Definition of MSME Loan The consultant did not identify any consistent definition for an MSME either in the literature or in discussions with various parties including several financial institutions. For some large multinational banks, an MSME is any enterprise that is not a “multinational” and loans extended from Tshs. 10 million to Tshs. 2.5 billion. For other small local banks, loans from Tshs. 10 million to 50 million were identified as MSME loans. For purposes of this study, we have defined MSMEs by employment: enterprises with employees between 1 –5 (micro), 6-49 (small) and 50-99 (medium). An MSME loan is any loan up to a maximum of Tshs. 250 million. A Micro loan is defined to be up to Tshs. 1 million; a small enterprise loan is defined to be between 1 million and twenty million and a medium enterprise loan is between twenty million and 250 million.


3.0 Overview of the Banking Sector | 9

3.0 Overview of the Banking Sector 3.1 Financial Sector Reforms The economic and financial sector in Tanzania has undergone unprecedented changes (for the better) since the country began implementing Economic Recovery Program during the financial year 1984/5. The program—whose major objectives were restoration of internal and external balances-was followed by the financial sector reforms which began during 1991 with the enactment of the Banking and Financial Institutions Act (BFIA of 1991)2. The Banking and Financial Institutions Act allowed private sector entry, ownership and control of banking and financial institutions, which was under state ownership, control and direction since 1967. Other important aspects of the new law were: -

The initiation of measures for restructuring of the state owned banks–which were technically insolvent.

The formation of a special purposes vehicle for management and collection of non-performing loans of the banking and financial sector.

The introduction of the Basle-based prudential guidelines of management of risk assets and introduction of modern corporate management in the sector.

The Central Bank, Bank of Tanzania, was given the overall responsibility of banks supervision in country and

The setting up of deposit insurance protection, an institution to protect unsophisticated small depositors in the event of collapse of private owned banks and financial institutions.

Pursuant to the enactment of the BFIA of 1991 other enabling acts and regulations were put in place in order to provide the supportive environment for a smooth, competitive and healthy financial sector. Some of the important measures enacted since 1991 in this regard were: -

The Foreign Exchange Act of 1992-which liberalized holding of foreign exchange for

Tanzanian nationals, led to establishment of bureaux de changes and freely market determined exchange rates, which culminated in the unification of the exchange regime via the Interbank Foreign Exchange Market during 1994;

The establishment of Capital Markets and Securities Act during 1994 which led to the establishment of the Dar Es Salaam Stock Exchange (DSE) in March 1998;

The enactment of the Insurance Act during 1998, which introduced competition in the erstwhile monopoly sector;

The split of the giant and monopolistic National Bank of Commerce into two banks: NBC Ltd and National Micro-finance Bank (NMB) during 1997;

2 The National Investment and Protection Act of 1991 complimented this.



The reduction of minimum core capital for establishment of Regional and Community unit banks during 1994;

The enactment of the National Micro-finance Policy during February 2003, with aimed at ensuring best industry practice by the players in the industry;

Amendments to the Banking and Financial Act 2003, which extended regulatory powers of the Central Bank to include micro finance companies as well as large savings cooperative societies.

Partly as a result of the changes above the banking sector is now more competitive and multi-national banks have established their own fully owned banks in the country, such as, the Standard Chartered Bank and Barclays (both of UK); Citibank of USA; Absa (which owns substantial shares of NBC) and Stanbic (both of South Africa). Also, Tanzania nationals (in joint ventures with foreigners) have formed banks and financial institutions (for example: Akiba Commercial Bank, Exim Bank, Savings And Finance Commercial Bank etc. Many micro finance institutions—though not formally regulated by the Bank of Tanzania—have also been incorporated and operating in the country (for example PRIDE, FINCA etc). The liberalization measures also resulted in failures of banks such as, Meridian BIAO, Greenland, First Adili, Trust Bank and Tanzania Housing Bank. These failures were due to weak supervisory structures within the central bank, lack of strong board oversight, insider lending, weak management structures and dishonesty among the shareholders. 3.2 Industry Structure The financial landscape in Tanzania includes both formal and informal (or regulated and unregulated) institutions. Formal or regulated institutions are those licensed by the Bank of Tanzania to operate under the terms and conditions of the Banking and Financial Institutions Act either as a bank, non-bank financial institution or community (or regional) bank. The recent amendments to BFIA of 2003 gives the Central Bank powers to license microfinance institutions as non bank financial institutions as well as regulate the activities of savings cooperatives societies (SACCOS) if they attain certain size. (These regulations were issued during 2004/5 financial year). The unregulated institutions include those, which are formal (licensed by some government body)—for example micro finance institutions such as PRIDE and FINCA. The formal regulated and licensed institutions can be divided into two groups: - banks and non-bank financial institutions. A bank is a financial institution authorized to receive money on current account subject to withdrawal by cheque, while a non-bank financial institution is any person authorized by the Central Bank to engage in banking business not involving the receipt of money on current account subject to withdrawal by cheque. Due to the economic and financial reforms enacted since early 1990’s, the number of financial institutions has increased rapidly. As at end of December 2004 there were 32 licensed institutions: 20 commercial banks; 6 financial institutions and 6 community or regional banks. Total number of branches (including head offices) of these institutions is 272 branches (210 for banks, 56 non-bank financial institutions and 6 for community banks).



Over 80% of the assets are held by 7 main Banks, which include National Micro Finance Bank, NBC Limited, CRDB Bank, Standard Chartered Bank Tanzania Limited Citi Bank, Barclays bank and Stanbic Bank Tanzania Limited. Similarly the same banks dominate liabilities. These banks also:

Account for 66% of advances of the sector Share of profit after tax of the entire industry is over 90%

The banking industry can be divided into 3 tiers as shown in the table below. Table 3.1 Banking Industry Structure, December 2004

No. of Banks

Deposits (bn. TShs)

Loans (bn. Shs)

Shareholders equity (bn. TShs.)

Net profit after tax (bn. TShs)

Upper Tier banks 7 2,027.1 891.8 209.6 49.7

Middle Tier Banks 8 763.3 350.2 87.3 8.02

Lower Tier Banks 10 130.5 96.9 31.4 5

Total 23 2, 920.9 1,338.9 328.3 62.7

Source: Published Annual Returns Reports The table below shows the size of the 23 banking institutions in terms of total assets as at end of December 2004. Table 3.2 Banking Industry by Assets (billion shs.), December 2004 Upper Tier Assets Middle Tier Assets Lower Tier Assets

1.NBC 459.5 1.FBME 623.9 1. Bank of Malaysia 17.6

2. NMB 570.9 2.EXIM 155.3 2.Savings & Finance 23.6

3. CRDB 486.7 3. Postal Bank 56.3 3. Azania Bancorp 28.4

4. Stanchart 375.2 4. TIB 45.3 4. Akiba Commercial Bank 26.7

5. Citibank 229.1 5.PBZ 55.23 5. Habib Bank 20.9

6. Stanbic 251.6 6. Diamond Trust 43.6 6. Kenya Commercial Bank 19.4

7. Barclays 191.8 7. Eurafrican Bank 31.54 7. National Bureau de Change (now Twiga Bancorp) 16.8

8. Capital Finance (now part of African Banking Corp)

38.5 8. CF Union Bank 15.8

Totals 2,564.8 1049.6 181.3Source: Published Annual Returns Reports

3 Estimate 4 Estimate



Middle Tier—eight medium sized institutions account for 28% of industry assets. Lower Tier—consisting of nine institutions each with total assets of less than 30 billion.

Total assets of this group are 5% of industry total.

An interesting point to note is that the total assets of the lower tier banks are smaller than total assets of the smallest upper tier bank. 3.3 Balance Sheet Structures The Table below presents some salient bank statistics for the large, medium and small sized banking institutions in Tanzania as at the end of December 2004 Some of the pertinent balance sheet structures are as summarized below: - Table 3.3 Balance Sheet Structures- December 2004 Item Upper Tier Middle Tier Lower Tier

Loans to total assets ratio 35% 33% 54%

Deposits to total assets ratio 79% 73% 72%

Shareholders equity to total assets 8% 8.2% 17.2%

Loans to deposits ratio 44% 46% 74% Source: Published Annual Returns Reports Large banks are very cautious in their lending operations compared to the lower tier banks. On average, the latter lend 77% of their public deposits whereas the former lend only 42%. The large banks often complain of lack of creditworthy borrowers, lack of credit culture and improper or bureaucratic legal system. The smaller banks are more aggressive in their lending operations as they are, on average, close to the statutory lending ratio of 80% of their customer deposits.


4.0 SME Credit Demand and Supply | 13

4.0 SME Credit Demand and Supply This section deals with demand and supply issues for Small and Medium Enterprises. A subsequent section will analyse these issues for micro enterprises. 4.1 Demand 4.11 Overview The Uhuru Corridor study of MSEs identified the current sources of capital for these firms as outlined in the table below. Table: 4.1 Major Sources of Credit for Business Source Number Percent

None Loan from family/friends Micro-finance institutions Savings Clubs Informal moneylenders (shylocks) Commercial banks Supplier credit Other

2,287,995 148,626 127,029 35,897 43,422 26,910 9,842 17,098

84.9 5.5 4.7 1.3 1.6 1.0 0.4 0.6

Total 2,700,000 100 Source: KAS/SwissContact Baseline Survey Dec. 2002 extrapolated nationally Based on the study data, the bulk of MSMEs (85%) have not accessed credit from commercial sources. Only 5.7% of the total have accessed credit from either a micro-finance institution or a commercial bank. Since then the numbers are likely to have gone up, particularly due to the expansion in lending by NMB that now has about 140,000 loan clients compared to less than 20,000 three years ago. Even with this expansion, the majority of enterprises still do not have access to formal credit. 4.12 Effective Demand While large numbers of MSMEs have not accessed credit, a key ingredient to accessing credit is the “ability to repay” which is reflected in the turnover of the business. Based on our earlier definitions, an SME loan is considered as one between Tshs. 1 million and 20 million. Assuming a leverage of not more than 20% amongst firms, annual turnover for SMEs should be more than Tshs. 5 million. Table 2.5 above determined that there are approximately 304,000 enterprises with a turnover above Tshs. 5 million in Tanzania. These constitute the effective potential customer base for lending to SMEs. Based on existing data, commercial banks (excluding community banks and NMB5) are serving less than 40,000 commercial SME clients so there is significant room for their expansion in this market if they are able to tailor appropriate products and services to this clientele. 5 It is assumed that the bulk of their clients are micro enterprises.



4.2 Supply 4.21 Overview of SME Credit and Savings Portfolios The table in Annex 5 highlights lending by commercial banks by size of loan. Annex 3 also highlights the estimated ratio of SME lending to total lending for commercial banks and NBFIs. Although there is significant lending below Tshs. 250 million, the bulk of this lending is to retail clients (up to seventy to eighty percent). Standard Chartered for example, lent Tshs. 35 billion in 2004 to clients requiring Tshs. 1-250 million. Out of this only Tshs. 3 billion (about 8%) was lent to SME.6 Azania Bank, a smaller bank lent approximately Tshs. 20 billion in this category and out of this about Tshs. 4 billion (20%) was lent to SMEs. CRDB also estimates that SMEs constitute about 20% of its total portfolio of about Tshs. 120 billion. While there is much talk about SME, careful scrutiny of portfolios reveals that there is minimal (albeit growing) lending to them. Most banks target established firms and there is stiff competition for these clients. Large businesses constitute either government parastatals or multinational companies. There are only a handful of large local companies. There are also very few medium sized enterprises as evidenced by earlier data presented. Although no quantitative data exists our analysis and discussions with several banks would confirm that most medium sized businesses (staff size of more than 50) do not have major problems accessing credit and constitute the bulk of existing SME clients for commercial banks7. The more established and formalized small firms are also able to access credit although the bulk still faces constraints. Key constraints to accessing credit include: restrictive policies and procedures for lending, high transaction costs for banks, a poor legal and regulatory environment, limited access to information on borrowers, informality of business, and weak management structures amongst SMEs.

Notwithstanding the problems listed above, a number of banks are now looking to the SME market for new clients while others because of their small capital base, almost by default, serve the SME (and especially medium) market. These banks include:

CRDB bank with a special scheme for MSEs. They have in fact incorporated a subsidiary to serve the MSE sector ;

Barclays bank has also introduced their ‘Business Boost’ initiative targeting SMEs; Akiba commercial bank is almost exclusively an MSME bank; Azania Bancorp; Kenya Commercial bank; Savings and Finance; Postal bank

Banks are also now being more open to SMEs due to declining rates in Treasury Bills and lower deposits but a mechanism is still required to accelerate their involvement in SME credit.

6 SME department 7 Our assessment would therefore not recommend significant attention to Medium sized enterprises as they are already likely to be receiving adequate assistance from commercial banks.



Another source of credit for SMEs, though not a bank, is the Small Industries Development Organization (SIDO) which targets medium scale industries and provides financial and non-financial services. 4.2.2 Loan Products A recent review of access to formal credit8 noted that most banks offer similar products although their packaging and presentation to customers may differ. Key products identified include the following:

Short term loans (Overdraft) for financing operations; Development loans for acquisition of fixed assets; Packing credit for exporters to facilitate their export business if one comes with letter of

credit in ones favour; Letter of credit facility for financing importation of goods; Bill discounting; Promissory note discounting; Issue of bid bonds/guarantee; Preference bonds; Long term loans; Leasing of equipment and transport facilities; Insurance premium financing;

In addition to these products, some banks also provide mortgage facilities, although there are very few at present.

4.2.3 Borrower Attributes Banks do not generally keep detailed information on their borrower attributes. However, as mentioned, current SME clients of banks are likely to be formally registered businesses with a turnover above Tshs. 5 million annually. SME clients for multinational banks such as Standard Chartered are likely to be mainly medium sized enterprises with more than 50 employees. Clients will come from a wide range of sectors including agriculture, mining, manufacturing, building and construction, transportation, and tourism among others. 4.2.4 Loan Terms and Conditions Loan terms and conditions are generally quite stringent for most banks. Key requirements include the following:

a) Establishing Customer Bank Relationship by borrower opening a Bank Account. Some banks insist the account mush have been operational for between 3-6 months, but it can always be negotiated;

8 Report on Access to Formal Credit, Intermaecos Ltd., Presidents Office, GOT, March 2005



b) Letter of application for loan stating purpose, amount of loan being applied, security being offered and proposed repayment period. The letter must be accompanied by the following attachments:

Business profile/plan; If company full names of Directors, Management, Board Resolution to borrow and

issuing of security; If ongoing business, audited accounts and financial statements. Cash flow projection for

12 months, orders on hand, list of stocks for ongoing business, list of debtors and creditors;

Security being proposed. If it is a personal house – copy of Title deed accompanied by current land rent receipt payment. Property must be valued by a bank approved/appointed value at the cost of the customer. If it is a new business proposal a feasibility study must be submitted; and

If company Annual Returns to Registrar of Companies for the last 3 years and Memorandum and Articles of association.

In order to attract more SMEs some banks are beginning to relax their requirements. CRDB for example, in their new pilot SME initiative do not require formal valuations to be done, but conduct them internally at lower cost to the borrower; if the borrower does not have audited accounts, CRDB staff have been trained to conduct their own analysis/appraisal of the prospective clients business. In general, though most banks maintain the same stringent requirements. The challenge with these requirements is that as identified earlier many businesses are either newly formed, or are not formally registered. 4.2.5 Portfolio Quality Presented in Annex 6 are key performance indicators for banks from 2002-2004. From the data, the average ratio of non-performing loans to total advances in 2004 is about 7.5% similar to the previous year. Some banks with high ratios include Barclays Bank (T) Ltd (8%), Tanzania Postal Bank (17.9%), International Commercial Bank (47%), Azania Bancorp (11.9%), Kagera Farmers Co-operative Bank (7.8%) and Mufindi Community Bank (14.9%). SME Portfolio Quality: Apart from banks which have a specific MSME programme, most banks reported that they do not keep separate statistics. They did not however believe that the SME portfolio performance was worse than the other market segment performance in respect to loan repayments.



4.2.5 Financing In addition to core capital, banks main source of funding is deposits. Presented in the table below is summary of the main funding sources for commercial banks in Tanzania.

Commercial banks maintain three main types of deposits from institutions and the general public namely:

Demand deposits - these are paid to depositors on demand, though may differ on the regulation of one particular bank on the frequency on one particular day. These normally do attract interest.

Time deposits - these are held without being withdrawn for an agreed specific time period and interest may be a week, 30 days, and 60 – 180 days. However the contract can be terminated if a depositor decides so and looses the interest agreed;

Savings deposits - whereby depositors save money with the Banks and earn interest on it and withdrawal is restricted to once in a week depending on the Bank.

The deposits are held by the Central Government, Local Government, Central Government institutions, Parastatal organizations, and the private sector including the general public as presented in the table below:

Table 4.2: Consolidated Commercial Bank's Deposits 2000-2004 (Shs. Million) Deposits broken down into

Year

Central Govt.

Local Govt.

Central Govt.

Institutions

Parastatals

Other

Domestic

Foreign

Total Demand Time Savings

2000 26,086 28,612 23,110 35,545 918,016 107 1,031,477 321,537 171,671 228,552

2001 29,320 23,285 38,112 13,404 1,150,290 34 1,254,446 382,368 208,101 259,545

2002 30,819 56,040 46,286 243 1,449,666 0 1,583,057 492,867 223,898 324,701

2003 81,833 73,531 31,377 0.2 {186,741} 0 0 635.774.3 231,417 376,771

2004 June 91,028 61,229 33,869 0.3 1,917,395 0 2,103,522 680,233 271,733 40,130

Total 259,086 242,697 172,754 49,192 5,248,626 141 5,972,496 2,512,779 1,106,820 1,229,699

Source: Bank of Tanzania, Economic Bulletin 30th June 2004; Taken from the Report on Access to Formal Credit, 2005. All the departments are designated in Tshillings



Based on the table, the following can be concluded: a) About 88 % of the deposits are held by small depositors grouped as ‘other domestic’

followed by Local Government and Central Government institutions; b) About 12% of the deposits are held by Government related institutions which include the

Central Government, Local Government, Parastatal organizations and Central Government departments such as schools, hospitals etc;

c) About 88% of the deposits is held by the private sector in form of corporate organizations and the general public;

d) Deposits by foreign organizations have been declining; in 2002 and 2003 there was nil foreign deposits; and

e) A large proportion of deposits are held as demand deposits followed by savings, time deposits and others of different types.

4.3 Non-Bank Financial Institutions The main non-bank financial institutions are presented in the table below. Performance data on these institutions is presented in Annex 6. It should be noted that these institutions, have limited outreach in terms of loan clients. Portfolio quality is also not up to international standards and the profit performance of these institutions has been poor. Table 4.4: Registered Non Bank Financial Institutions - Ownership & Distribution

Type or Ownership

Regional Distribution

Number of branches

S/N Name of Institution

Type of service Public Private Local Foreign District Regional Branches

1 Tanzania Investment Bank

Banking without involving current account

1

2 Tanzania Postal Bank


4

3 Twiga Bancorp Ltd


4

4 Capital Finance Ltd


1

5 Mufindi Community Bank


1

6 Mwanga Community Bank


1

Source: Bank of Tanzania; Taken from the Report on Access to Formal Credit, Office of the President, 2005


5.0 Microfinance Demand and Supply | 19

5.0 Microfinance Demand and Supply Demand As outlined in table 4.1, approximately 85% of MSMEs (2.3 million) have not accessed any form of credit. Only 5% or 127,000 firms have accessed credit from micro-finance institutions. The potential demand therefore for micro-finance services is large and untapped. The challenge still remaining is the low income thresholds of most MSMEs so loan sizes will need to be small to cater for most enterprises (see table 2.4 above). Supply 5.2.1 The Microfinance Industry in Tanzania Like the country as a whole, Tanzania’s microfinance industry is relatively young. Individual entities have been trying to deliver financial services to low income communities for decades, but their efforts have been thwarted by unstable economic conditions, inappropriate methodologies and supply led public policies that restricted financial service operations. Many institutions have failed a few have achieved significant outreach. It is only in the last ten years that the enabling environment has improved significantly enough, and microfinance technology has advanced sufficiently enough, for large scale development of the industry to become possible. Today, no less than 800 institutions are registered and are providing some kind of financial services to low income groups in Tanzania. Unfortunately, very little information is available on the number of clients these institutions are serving, the nature of the services they are providing, or the sustainability of the structure through which the services are being provided. This lack of information is a major and well recognized weakness of the industry and it limits the sector’s support and development. According to Tanzania Micro-finance Institutions Directory compiled by Bank of Tanzania as at 2003, there are 665 MFIs, which includes 8 banks, 29 Non Governmental Organizations, 617 Savings and Credit Cooperative Societies and 11 savings and credit Associations. This may have since changed as a result of new entrants in the market. The purpose of the directory of Micro-finance Institutions was to provide the micro-finance stakeholders and the general public with basic information on microfinance practitioners namely Commercial Banks, Financial Institutions, NGOs, Savings and Credit Cooperative Societies (SACCOS) and SACAs.



5.2.2 Microfinance Service Providers One can make some general observations about the composition of the industry, however, by dividing its microfinance service providers into three categories (i) banks, (ii) SACCOS, NGO’s and SACAs and (iii) non-institutional actors. 5.2.2.1 Banks The first category consists of institutions that are subject to licensing, regulation and supervision by the bank of Tanzania. Approximately eleven institutions fall into this category, including National Microfinance Bank (NMB) It is state owned and currently under privatization. It has the largest network of service outlets (108) in every region in the country, through which it makes various financial services.

Market The primary market of NMB is micro enterprise poor households, salaried workers and whole sale lending to MFIs in microfinance business.

Geographical areas

It is both rural and urban with a countrywide net work

Products - Credit to employees - MFI loans to NGOs - Current accounts - Money transfer - Forex

Methodology

- Individual lending Loan size is up to 2 Million for employees - For MFIs it depends on the capability and sometimes collateral which is normally the

clients’ portfolio - Loan term is normally for a period of one to two years - Interest varies from 15% to 21% depending on the amount and security on reducing

balances - The bank does not take compulsory savings from customers



CRDB The bank has been restructured and recapitalized from the former Cooperative and Rural Development Bank. Its microfinance operations are carried out through a specialized, Microfinance Department which is funded by Danida and supported with technical assistance. It is best known for its whole sale banking relationships through which it serves down market MFIs such as SACCOS.

Market The primary markets of CRDB are micro enterprise poor households, Cooperatives and whole sale lending to MFIs in microfinance business.

Geographical areas

It is both rural and urban with a country wide network Products

- Credit to the Micro-enterprise poor - MFI loans to NGOs - Loans to SACCOS - Current accounts - Savings accounts - Forex

Methodology

- Individual lending - Loan size is relatively large depending on the client - For MFIs and SACCO’s depends on the capability and sometimes collateral which is

normally the clients’ portfolio. - Loan term is normally for a period of one to three years. - Interest varies from 12% to 21% depending on the amount and security on reducing

balances - The bank does not take compulsory savings from customers

Akiba Commercial Bank The bank is relatively new beginning its operations in 1997 and is owned by domestic private investors, public institutions and foreign investors. It has been focusing its services on micro and small businesses since August 1999 and offers group loans, individual loans, small business loans and SACCO loans.

Market The primary markets of Akiba are micro enterprise poor households, Cooperatives and MFIs in microfinance business.

Geographical areas

It is basically urban with a limited network in DSM, Arusha and Moshi.



Products - Group lending - Individual lending - MFI loans to NGOs - Loans to SACCOS - Education loans - Current accounts - Savings accounts

Methodology

- Individual lending - Group guarantee - Loan size is from 50,000 for groups and above 500,000 for individuals. - For MFIs and SACCOS depends on the capability to repay and sometimes collateral

which is normally the clients’ portfolio. - Loan term is normally for a period of one to three years. - Interest varies from 19 to 21% depending on the amount and security on reducing

balances for individual lending. - For group lending the rate is calculated on flat basis of 1% per week - The bank does take compulsory savings from customers as a form of security for

group lending and MFIs. Postal Bank Tanzania postal bank is state owned non bank financial institution that provides savings deposit services in all post offices throughout the country. It also offers transfers and remittance services and is now experimenting in a few selected locations with micro credit. Community Banks These are banks licensed to operate as non-bank financial institutions either at regional or district level. Currently there are 2 Cooperative banks in Kilimanjaro and Kagera, 4 community banks namely Mwanga in Kilimanjaro, Mucoba in Mufindi, Mbinga in Songea and Dar-es-Salaam Community Bank (DCM) in Dar es Salaam. Except for DCM which operates current accounts, the rest do not. Community Bank products have the following features:

Group lending Individual lending Flat interest rates Wholesale banking Compulsory savings Character based



5.2.2.2 SACCOS/Cooperatives/SACAs/ NGOS

The second category of microfinance providers in Tanzania consists of institutions that are not subject to prudential regulations by the Central Bank. This includes approximately 100 financial NGOs, an unknown number of SACAs and approximately 1500 SACCOS of which majority are based in the rural areas.

According to the Ministry of Cooperatives and Marketing there are approximately 133,000 SACCOS operating in the country. Total member shares are equivalent to Tshs 13 billion and deposits of 3.2 Billion. They have mobilized total savings to the tune of Tshs.12billion. Outstanding loans are Tshs 19 billion having issued loans worth 30.6billion during the same period.

According to the micro-finance directory of Micro-finance institutions in Tanzania (2003), there are 617 Savings and Credit Cooperative Societies and 11 SACAs operating in the twenty five regions of Tanzania. They normally target employees in case of most urban SACCOS and primary producers in various sectors of the economy, such as agriculture, trade and service industries. Key characteristics of Sacco’s include9:

Portfolio size: 47.5% of SACCOS have portfolio sizes of less than 100 million Tshs. Savings: 85% of SACCOS have savings less than Tshs. 150 million; only 15% have

savings of over Tshs.500 million. The bulk of the smaller SACCOS are rural based; the larger ones are employee based.

Portfolio Quality: most SACCOS are not able to correctly calculate the portfolio at risk. None of the SACCOS in the study had a proper ageing analysis or a bad debts provisioning policy. A significant number of employee based SACCOS had high delinquency rates.

Products: most rural SACCOS visited have only two types of loan products: normal development loans and emergency loans. A few SACCOS have developed specialized products that meet specific needs of their members. The table below highlights distribution of products among the SACCOS visited:

Table 5.1 Type of Product No. of SACCOS offering this product Normal development loans 40 Emergency loans 40 Education loans 8 Salary advances 4 Tembo card 4 Consumer loans 1 Agricultural loans 1 Mobile phone loans 1 FOSA10 4

Source: K-Rep/GOT Survey of SACCO’s 2004

9 Most of this data is taken from a recent GOT random survey of 40 SACCO’s in Tanzania undertaken by K-Rep Advisory Services Ltd. (2004) 10 Most of the SACCOS that are offering front office services are the ones supported by CRDB Bank, DID and RFSP and SCCULT.



Interest Rates: interest rates charged by SACCOS show great variability ranging from

0.58% to 3% per month calculated either by flat rate or reducing balance method. Close to 50% of SACCOS charge less than 1.5% per month, rates that are largely unsuitable for running the institution given their small sizes.

Outreach: SACCOS appear to have limited outreach in terms of membership in Tanzania. The table below highlights the fact that there are very few SACCOS with more than 2000 members.

Table 5.2 Total membership Number of SACCOs

Less than 100 8

101-200 9

201-300 6

301-500 4

500-1000 4

1001-2000 7

2001-3000 0

3001-4000 2

4001-5000 0

Over 5000 0

40 Source: K-Rep BOT Survey of SACCO’s 2004 SACAs These are village Savings and credit Associations. They operate in rural areas and are registered under the societies Act by the Ministry of Home Affairs. They provide group based loans using internally generated funds as well as savings. They are financed primarily by donors.

NGOs Financial NGOs operate mainly in urban and semi urban areas, but some have a presence in selected rural areas as well. Most NGOs provide a group based loan product. Some provide an individual loan product, and a handful of institutions provide both. Savings services are offered only as a part of the loan product methodology, akin to collateral.

Of the approximately 100 NGOs operating in Tanzania, only a few have achieved significant outreach or sustainability. None has yet to transform into a regulated financial institution, although several institutions are considering it.



Presidential Trust Fund (PTF). It operates in Dar, Morogoro and Coast regions. It reaches more than 30,000 clients providing the following services: Group loans, salaried loans and compulsory savings.

FINCA: It is in more than 8 regions, namely Mwanza, Coast, Dar, Mara, Kagera,

Morogoro, Shinyanga and Iringa. Besides the normal Micro-finance products it also does leasing. The insitution has more than 40,000 clients.

PRIDE: It is one of the largest NGO operating throughout the country mainly in urban

area/semi urban areas. Currently it has a client base of approximately 82,000 with a portfolio of 4 Billion. It is currently negotiating to start a money transfer system besides the normal products offered.

SIDO: This is a government program operating throughout the country. It provides loans

to support small scale industries in form of material and cash.



The table below provides an overview of the operations of these micro-finance institutions. Table 5.3: Analytical Summary of Key Government Agencies and Microfinance Institutions Supporting SME

Savings Name of

MFI Products Area of Operarion Active loan

Clients O/s Loan

Bal Voluntary Compulsory

Total No of

Clients

NGOs

PRIDE TANZANIA

Group Loans, Compulsory Savings

All Regions 62,423 12,304,812,577 0 7,075,109,700 63,000

FINCA Individual, Group Loans

DSM, Morogoro, Mwanza, Kagera, Mara

27,449 1,882,697,550 0 0 27,449

SEDA Group Loans, Compulsory Savings

Arusha, Kilimanjaro, Tanga, Mwanza, Shinyanga, Dodoma, Morogoro

16,264 1,628,178,000 0 10,807,000 16,501

PTF Group Loans, Compulsory Savings

DSM, Morogoro, Pwani, Iringa

9,070 1,085,930,031 0 371,421,282 9,070

YOSEFO Individual, Group Loans, Compulsory Savings

Dsm 2,580 438,715,194 161,014,311 2,580

COMM

MUCOBA Individual Loans, Savings

MUFINDI 1,108 1,047,493,549 1,418,014,767 0 5,086

MWANGA Individual Loans, Savings

MWANGA 753 231,700,000 365,100,000 0 3,528

DSM Group Loans, Ind Loans, Savings

DSM 14,025 3,625,400,000 5,319,600,000 0 35,535

Note: The number of clients for PTF of 9070 are the active clients who take Loans regularly while Figure 10432 are the total clients. Source: Author, 2005


6.0 Capacity Buillding Programmes | 27

6 Capacity Building Programmes There are a number of initiatives in the country targeting the MSME sector including commercial banks and micro-finance institutions. The table below provides brief descriptions of some of the major initiatives. In addition to capacity building, policy initiatives are also highlighted. Table 6.1: MSME Activities

Activities Supported Major Donors

Policy related research in the MSE sector and informal economy

ILO, USAID

Market linkages for rural economic activities

SNV, USAID

Support to Micro-Finance Institutions NORAD, Sida, ADB, UNDP, ADF

Policy/regulatory reforms in Micro-Finance World Bank

SME Policy development DFID, UNIDO, USAID, ComSec

Technical training for MSE operators GTZ, UNIDO

Capacity building in MSE operators’ associations

ILO, UNIDO, Sida

Training in business and entrepreneurship skills

UNIDO, ILO, GTZ, British Council

Technology development and transfer GTZ

Financial Sector Deepening Trust; focusing on initiatives to increase capacity of financial sector to broaden outreach to the poor

DFID, CIDA, SIDA, RNE, Danida

Technical Support to co-operatives World Bank/Ministry of Co-operatives

Capacity building of grassroots SACCO’s; strengthening of service providers

IFAD

Wholesale lending facility for SACCO’s and micro-finance institutions

Office of the Vice President/African Development Bank

Of all the initiatives mentioned above, the most relevant is the Financial Sector Deepening Trust and those targeting capacity building for SACCOS. Any new initiative to expand financial sector outreach would need to ensure that there is no duplication of efforts in this regard.


7.0 Expanding Commercial Bank MSME Finance Operations | 28

7.0 Expanding Commercial Bank MSME Finance Operations As outlined in the terms of reference, this section provides more detailed information on the needs and requirements of two commercial banks interested in increasing their operations with MSMEs. The two commercial banks selected for this assessment were, CRDB and Azania Bank. Both are nationally owned banks with a commitment to expanding their reach to the sector. One is a large bank with an extensive branch network while the other is a small bank looking to expand. Having both kinds of institutions represented provides useful benchmarks for the kind of assistance required in the project11. The table below provides the summary assessment of each institution.

Table 7.1: Institutional Assessment

CRDB AZANIA Bank 1. Institutional Profile The bank is one of the largest banks in Tanzania with an

asset base of over Tshs. 120 billion and 32 branches. Banks strategy is to expand its SME portfolio from about

20% currently to 50% in the next five years. Bank has established as separate SME department and is

piloting the initiative in two branches. Key strengths are its branch network, strong positioning as

a good local bank, and its financial strength. Major weakness is the banks cultural orientation to larger corporate clients. Adjusting the culture and orientation of the bank will require a major transformation.

Small bank, fully owned by Tanzanians (including some institutional pension funds) recently re-capitalised and under new management and governance after a difficult period.

Past three years since recapitalisation, bank has grown and posted a profit for first time last year. Total assets now at 19 billion Tshs; capital is about Tshs. 8 billion.

Major bank focus has been consumer lending, particularly salaried loans to staff in govt. institutions. Bank now has a customer base of over 35,000 all over the country even though it only has one branch.

SME portfolio is about 20% although there is also significant leakage through the consumer loans to SMEs.

The bank would want to build on its existing customer base to expand SME lending.

2. Willingness of the bank to contribute its own resources; scale of capacity building and TA required

The bank is already committing its own resources. It is also receiving some funds from Danida.

The bank has already received some TA to assist in product refinement for SME lending and exposure visits to Kenya and India; its major need will be to assist with resources to train and reorient staff as pilot is launched throughout its 32 branches. Most training will be done through TOT’s in-house with the help of one/two outside consultants. In the future some help in refining their MIS system may be required.

The bank is willing to contribute its own funds. Assistance required would include: Product development assistance; Training of staff in appraisal techniques; Best practice exposure; IT /systems development

3. Assess capacity building business model options and recommend ideal options

Bank does not require extensive capacity building as outlined above. Funds to help it source relevant TA (local and international) to train staff would be sufficient.

Best model would be a facility that would allow bank to source relevant TA to assist it to develop pilot SME rollout programme. Potentially some long term TA would also be required to assist in initial stages.

4. Local Resources available

There are limited local resources available. However there are regional consultants that could be sourced to work with the Bank (they are already doing this).

There is limited local knowledge of SME best practice. Would need to source international and regional expertise.

5. Cost estimates For training estimated cost would be about $100,000 maximum;

Difficult to estimate MIS requirements at this stage.

TA would cost approximately $100-$200, 000. Exposure visits and training would cost another $50-

$75,000.

11 The TOR suggested discussions with both CRDB and NMB however it was felt that NMB is currently going through a major transition and it might be difficult to get clarity on its future strategies as it is about to change ownership.


Annex 7: Terms of Reference | 29

8.0 Conclusions/Recommendations Based on the findings above, a number of conclusions can be made: While there are a large number of micro and small enterprises that have not yet

received access to financial services, their characteristics, purchasing power, informality etc, coupled with most banks own rigid requirements, make it difficult for commercial banks to provide them with financial services.

Due to the largely survival nature of almost 50% of MSMEs, any new program will need to take into account that the effective demand is much lower than the number of MSMEs in the economy. Efforts to expand and improve the performance of micro enterprises (e.g. BDS) might be more successful at this stage than finance for most enterprises.

Evidence suggests that there are very few medium sized enterprises in the economy and most banks are fighting to get their business; it is recommended that any new programme focus on micro and small enterprises as these are less well attended to.

Trends in the banking sector indicate that the sector has grown and developed tremendously over the past ten years. The number of banks has increased dramatically and competitive pressures are beginning to emerge. Some banks are voluntarily beginning to move downmarket. Any new programme will need to be designed to ensure that these competitive pressures are maintained in the economy and distortions are avoided. It would appear that subsidies are most warranted in the micro and possibly the small enterprise sector to achieve much larger scale.

A programme geared towards increasing access to finance for the poor already exists in Tanzania and is well funded; any new program will need to co-ordinate carefully with this to ensure no duplication occurs.

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