Contributing authors: Juliana Mutagaywa and Samora Lupalla
To cope with the wide range of financial needs, rural households especially women and youth, have had to adapt using various financial and non-financial tools. A very common financial tool that is used among rural households, particularly for savings and loans, is the Community Microfinance Group (CMG). Finscope Tanzania 2017 survey shows that 17% and 18% of Tanzanian households use CMGs for savings and borrowing, respectively.
Zuhura is a 48-year-old widowed mother of 4. She lives in the village, and her education level is primary school (Grade 7). She earns a living by selling farming products. Among the challenges she faces in raising her 4 children is having enough income to meet her household expenses i.e., food, clothing, education, and health. She does not use formal financial services because she thinks that she does not qualify for such services.
Zuhura also thinks that financial institutions such as banks exist to serve the rich and wealthy, and for this reason she has never been to a bank. Instead, she borrows money from friends and family, as well as informal money lenders. Zuhura then stores and saves the money she’s able to save, at home.
Zuhura’s challenges are a commonplace among rural households in Tanzania. On Zuhura’s side, lack of enough income, proper identification and collateral, combined with the proximity of these financial services locations make it difficult for her to engage with these services; while on the financial service providers side, they still lack appropriate financial products to meet Zuhura’s financial needs. This leaves a majority of people like Zuhura and her household excluded from using and benefiting from formal financial services.
Therefore, Community Microfinance Groups emerged to address these challenges and gaps in the formal financial sector. Through Mapendano Community Microfinance Group, Zuhura has been able to take her children to school, provide basic needs for her family, start a chicken farm and help others in her community.
However, as much as Mapendano Group is able to meet Zuhura’s needs, the group has gone through a number of challenges over the years, including having to change multiple Treasurers due to theft as their contributions and savings were stored at the Treasurers’ homes; but also lacking a strong constitution to guide their operations left the group very vulnerable to loan defaulters.
Early 2020, Mapendano Group heard through their Local Government office that there was a new law that required them to get registered. As a result, Zuhura and her group began speculating on the purpose of this new law and whether it is beneficial to their CMG. Among the concerns that they had was the law being another tactic by the Government to collect tax, even from CMGs.
These gaps in awareness leave room for the public to speculate and develop anxiety against the new law. The speculations and resulting anxieties can have a negative impact on the reception of the Microfinance Act and its regulations.
The National Microfinance Policy (NMP 2017) and Microfinance Act 2018 were designed, with the overarching purpose of protecting the providers and users of formal and informal financial services in Tanzania. The Act aims to increase public confidence in the financial sector by acknowledging that microfinance services are the mainstream financial services used by many Tanzanians, particularly the rural and low-income, like Zuhura.
The policy is comprehensive in covering the microfinance sub-sector as it recognizes the different classes of microfinance services (i.e. Commercial/Community/Microfinance Banks, Credit Only Microfinance Institutions and Money Lenders, SACCOS, and CMGs) and formulates policy responses that work for those different classes.
The Microfinance Act will change the landscape for service providers of rural households and has the potential to facilitate the emergence of products, services, and solutions that can be effective at poverty reduction or in providing pathways out of poverty.
Compliance to the Microfinance Act 2018 can be very beneficial to Community Microfinance Groups due to a number of reasons, including; a group being recognized as a legal entity, which can acquire assets, and have legal protection; easy linkages with formal financial service providers for a wider range of affordable financial services for the group members; security of members contributions as groups save members’ contributions using banks; and registered groups will benefit from various Government programs focusing on strengthening CMGs.
Amongst the key benefits of this Act to CMGs is that now their members’ information and credit history (i.e. contributions, loan repayments, defaults on repayments) will be available on credit reference bureaus. This will help in informing CMGs about prospective members and their trustworthiness prior to joining groups.
With regards to the structure and organization, the Microfinance Act and regulations stipulate that a Community Microfinance Group may be formed by 10 to 50 people, who have a common bond/goal. Members must meet to agree on the group’s formation, objectives, constitution, and a committee that will facilitate the formation of the group.
The regulations also require Community Microfinance Groups to submit an application of registration to the respective Local Government Authority in the prescribed form that will be provided. The PO- RALG has been delegated by the Bank of Tanzania (BoT) to supervise CMGs in Tanzania.
The application shall be accompanied by the following: two copies of the constitutions duly signed by all members; one copy of the minutes of initial group formation meeting duly signed by all initial meeting members; members’ resolutions to form and register a community microfinance group; proposed organizational structure and names of proposed leaders endorsed by members at the group formation meeting; list of members, provided that the number of members is five to fifty as per the regulations; evidence of initial group members contributions deposited in the group’s Account; a letter of reference from the ward or village authority introducing the group; and any other relevant documents or information.
The Microfinance Act is expected to strengthen Community Microfinance Groups. Prior to the implementation of this law, the Microfinance sub-sector was operating unregulated, leaving room for many malpractices, loses, and fraud among players within this sub-sector. Through the Act, consumers of microfinance services will be protected by law against any of these malpractices, bringing better structure and organization within the sub-sector. This will pave the way for more sustainable CMGs and enable these services to bring more value to the members.