Micro finance regulation in Tanzania: implications for development and performance of the industry

Microfinance Regulation in Tanzania: Implications for Development and Performance of the Industry Africa Region Working Paper Series No. 51 June 2003 Abstract T his study of microfinance in Tanzania looks at how the non-bank financial institutions, and a 17.5% degree of overall regulatory framework affects the ability of monetization. Most bank branches are concentrated in Dar es microfinance institutions (MFIs) to become more market- Salaam, and only a few have a countrywide network that could oriented and integrated with the formal financial system, be linked to the provision of microfinance services. Three and the set of incentives (or disincentives) for licensed commercial banks have entered into microfinance. The financial intermediaries to move down market to provide limited-license regional and rural banks are the only banks with financial services for the poor. The study identifies global head offices located outside Dar es Salaam, but none of these best practices which might be adapted to the local context, have branch offices and thus have limited outreach to and incorporated in operational support programs to microfinance clients in spite of the lower minimum institutional providers of microfinance services such that capitalization required for the banking tier. they are better able to provide their clients expanded access to financial services. Thus, the principal providers of microfinance services are Savings and Credit Cooperatives (SACCOs) and several The financial sector reforms set in motion a decade ago foreign donor-assisted NGOs. They have preceded the included liberalizing interest rates, eliminating establishment of a microfinance-specific regulatory framework, administrative credit allocation, strengthening Bank of operating in spite of significant difficulties in several key areas Tanzania's role in regulating and supervising financial of limited access to external funds and the lack of skilled institutions, restructuring state-owned financial institutions, manpower with banking and financial competence. The and allowing entry of private banks into the market. regulatory frameworks for microfinance institutions (MFIs) and Despite progress in the financial reforms, access by large cooperative financial institutions (CFIs) are still in process of segments of the rural and urban population to financial being enacted into pertinent laws and corresponding services has remained stunted. Government, in implementing regulations. There is need for a clearly defined collaboration with the donor community, acted to facilitate strategy on how to integrate SACCOs and NGOs into the microfinance development -- initiating a microfinance emerging microfinance regulatory framework, and what policy policy formulation process in 1996 with a nation-wide environment, resource and capacity requirements will be demand study, and the drafting of a National Microfinance required not only by the institutions but also by the regulatory Policy document. The Policy was discussed at a bodies. The gap between requirements for and the supply of stakeholder meeting in May 1999, and gained approval in manpower with financial skills for banking and microfinance February 2001. The Policy articulates the vision and operations is becoming increasingly more apparent as a major strategy for the development of a sustainable microfinance constraint to development of sustainable microfinance. industry as an integral part of the financial sector, Capacity constraints are a major issue, not only for providers of specifying the respective roles of the key stakeholders