Desperation is the word. Everyone out there has perhaps walked into situations where they need money badly, either due to emergencies or to driving a business. Such situations would make you borrow Tshs 300,000 from a money lender at an interest rate of say, 30 percent per month.
These are real stories we have heard, and a majority in these traps are the poor; including small formal and informal business owners, as well as farmers. For various reasons, many of these stories don’t have a good ending as borrowers attest here.
One of these loan borrowers is Hanifa Ahmed, a 42 year old tomato farmer in Mapinga, Bagamoyo district, also a mother of 4. Hanifa did not find it easy dealing with a money lender when her crops failed. As a result, she defaulted on the Tshs 600,000 loan she had received, and found herself at the mercy of the unscrupulous moneylender.As a result, the money lender treated himself to Hanifa’s household items like furniture and Television to sell as compensation for the loan.
Stories vary from farmers in rural areas to small business owners in the major cities.Zawadi Godfrey has a clothing store operating in Kariakoo, Dar es Salaam. She says money lenders had aided her breakthrough in business, especially when she needed to solve urgent problems.
The money lender system was friendly to Zawadi at first because she could sign an agreement with the lender, submit collateral, and in just a few minutes she would receive the money she wanted, and her business flourished.“It was cheap for me to obtain a loan from a money lender who was a friend, since trying to get a loan from banks required title deeds which I did not have”she says.
But things only worked well the two times she took out loans, perhaps because the lender was a friend and her business was doing well in Kariakoo at the time.
When the clothes’ seller tried to take a loan from another money lender the third time, business had generally slowed down. The lender demanded her legal documents for a piece of land she owns in her village.
“When I failed to repay the loan on time, this money lender sold my land, and even worse, at below market price”she says.
Loans from a SACOSS have worked well four times for Mcharo Abraham, a 34-year-old business man at Karume market in Dar es salaam.This dealer in electronic equipment has seen his business grow progressively since 2013.
But only recently, when he took a loan from a well-known microfinance institution, he regretted having taking out a loan for the fifth time after success dealing with money lenders. He has been struggling to meet monthly payments, and the fact that business has not been good since May this year, it has put him on a collision course with the microfinance institution.
“Iam worried that they may sell my land. I never fully understood their loan policies as I was applying for the loan. I feel like there were key things about repayment thatI was not informed. ” says the business man.
The frequency of such situations shows some loopholes in institutional finance. The problem becomes more amplified as only 3 percent of the country has land titles, with small business owners and farmers in the villagesbeing on the unfavourable side of this reality.
Forces completely beyond the control of small business owners and farmers combine to create vicious debt cycles for people across the country.
Official analysis shows that the microfinance subsector in Tanzania has been dominated by a number of players ranging from Banks, Microfinance institutions, Money landers, SACCOS and Informal financial groups.
The targeted clients for the microfinance subsector are mainly poor men, women and youth, residing both in urban and rural areas of Tanzania who are the owners ofsmall businesses and enterprises and smallholder farmers.
Despite the existence of the large number of microfinance sector players,majority of Tanzania are still poor as estimated by FinScope 2017 that 58 percent and 43 percent of Tanzanian adults are saving their monies at home.
Tanzania poor people have experienced a number of challenges in using the microfinance sub sector services.
They face over-indebtedness – people have been subjected to over borrowing due to their unmet need caused by the deficits in their cash flows. Many Microfinance providers extend loans to same clients as they don’t have ways of sharing their credit information causing burdens to borrowers and loss to the lenders on the other side.
There is loss of poor peoples’ assets and businesses as many borrowers have lost their houses, furniture and businesses, as lendersseize them to recover their loans. The seizure of assets from borrowers have been illegally done as they have been sold at very low prices compared the market prices. This has scared people from using microfinance services.
There is unrealistic cost of borrowing charged on loans – Lenders are charging higher interest rates on loans. This has contributed to many poor business men and women remaining poor as they end up paying large amounts of their earnings as interest to the loans borrowed.
Moreso,there has been no protection of microfinance services consumers, no specific conflict resolution mechanism among borrowers and lenders which have caused a number of complexities in the sector.
Therefore, there is a need for an arrangement that would help Tanzanian poor men and women.
The arrangement should provide guidelines for establishment of proper conflict resolution where if borrowers default on their loans, proper procedures of seizing and selling assets will be established. This will improve consumer protection and encourage more people to borrow.
This arrangement should establish mechanisms to share credit information among lenders and borrowers to ensure that borrowers have the right information about the lenders and vice versa.
There should also be financial education to improve borrowers knowledge, which in turn will increase uptake and usage of the financial services by a majority of Tanzanians, as people will be able to make the right decision on the service they need.
There should also be standardisation of the service provisionwhere borrowers/users of microfinance services will be able to access standard services across the country.
This can promote business growth for the poor people andthe country’s economic growth at large.