FINANCE helps us to allocate resources efficiently. It also helps us to manage risks. That’s why we need to reform Tanzania’s financial system in order for our country to attain robust middle class income status by 2025.
Tanzania’s Micro Finances may be
classified into two categories: The first was made up of not-for profit
organisations and social enterprises designed to provide small loans
together with skills training to small and micro entrepreneurs.
At the beginning microcredit seemed to
offer credible hope to poor people who have been excluded from
mainstream financial services. Thus, these early MFI’s received
substantial funding from donors and ethical investors while remaining
capital came from small profits MFIs’ earned from their businesses.
But with such dependency on donor
funding which was dwindling steadily, questions remained on how they
were going to sustain growth. The second category was made up of
individuals who worked as informal lenders prior to regulatory changes.
These people created microcredit
companies often named after their founders or other fancy brand names
which entered into microfinance business after regulatory changes of the
early 2000’s.
Since 2000 microfinance became lucrative
business you did not want to miss. Microcredit successes from other
countries may have also aroused the appetite among investors for the
business.
For instance Indian SKS microfinance
launched with seed capital of $52,000 grew to be worth billion dollars
in just eight years. Therefore there was smart money to be made by
betting on microfinance.
Conventionally, when chasing money
nobody likes a bodaboda ride; that’s wastage of time. You want to have a
seat in the rocket if you can afford, and back then, microlending was
the rocket to riches.
Now, former loan sharks had seed capital
both tangible assets i.e. money and intangible assets i.e. political
connections and expertise (secret code of credit fraud) jumped into the
bandwagon with dreams of not reducing poverty but getting windfalls.
That was the chemistry of the early
MFIs; you had MFIs found by non-government organizations starving of
capital and former loan sharks seeking windfalls yet promising to do
very risky business which requires patience and moral purpose to pay
off.
Do you know what happened? MFIs started
pursuing aggressive capital raising strategies: Firstly, some
microfinance firms started getting loans from commercial banks with the
interest rate of up to 14 per cent when added to administrative costs;
they started providing expensive loans to their customers by charging
exorbitant interest rates.
Secondly, some microfinance institution
decided to go public. Yetu Microfinance is a good example of this; in
March, 2016 the enterprise offered shares to the public through DSE’s
Enterprise Growth Market.
Although it had promised lower interest
rates loans to their customers as attributed to huge capital pool they
now have, the real question is: will Yetu Microfinance manage to serve
two masters?
One being the investor who wants growth;
honey and milk, and the other being their customers who want affordable
credit and patience. It’s the paradox which has never been solved by
its peers; It’s the challenge if not addressed it’s going to have
worrying implications to the poor.
Critics believe that such moves show
that microfinance had gone overboard to become the lender but never to
fight him. Some might have discovered Promised Land for the poor but his
disciples want it for the rich.
Thirdly, MFI’s had to entice depositors
in order to get capital. For instance two years ago a local MFI prom
ised to offer 14 per cent of interest rate for customers investing one
hundred million in savings account.
With such moves the agenda for
microfinance institutions has become growth in order to compete
effective ly with the lender but never transformation of the client. The
results are obvious:
firstly, poverty reduction agenda has been jettisoned.
Secondly, skills training initiatives have been thrown out of the window.
Thirdly, aggressive loan selling
strategy; unfortunately after exhausting small and micro-entrepreneurs
particularly women the vampire turned to low cadre workers who continue
to be ripped off through MFI’s predatory lending.
Finally, you got over-indebted clients
forced to pay loans regardless of the fact that they are obviously
bankrupt, in real sense by doing so you are forcing the poor to forgo
necessary needs such as food, sending kids to school etc. in order to
pay the junk loan.
That is how the machine invented to put
“poverty in the museum” ended up doing nothing short of Judas kiss to
the bottom of the pyramid; tying poor people’s hands forever.
Microcredit failure can be partly
explained by consumer greed and moral failure. Human beings are very
complex creatures, we want more stuff for ourselves; it’s a hardwired
human psyche.
Unfortunately, we want them now but not
in the future simply because the future has got a lot of uncertainties.
This unrestrained desire for getting more stuff sometimes generates
unbearable long-term costs.
I think financial mismanagement sometime
reveals how irrational human beings are; we make a lot of stupid
mistakes which some folks out there like to take advantage of.
Think of someone taking a loan for
wedding or just for indulgence in drunkenness and wild parties. During
my undergraduate studies I roomed with three alcoholic fellows, at some
point our room looked like a liquor store filled with spirit and liquor
bottles everywhere.
My roommates had Ben Franklin quote
posted on the wall, saying that “Beer is living proof that God loves us
and wants us to be happy.” Yes, God wants us to be happy but he too does
not want our endeavor for happiness to sabotage our service for the
wellbeing of ourselves, our families and our nation. So what happened to
my alcoholic roommates was self sabotaging or stripping of dignity.
This became apparent when one of them
had to be discontinued from college for failing to pay 500,000 tuition
fees which could be paid fully using accommodation loan we were
receiving from the HESLB.
That’s the classic example of high price
we often pay for a bit fun. As consumers we need to cultivate culture
of frugality otherwise even if the government tries to strictly regulate
microfinance, informal credit system will continue dragging people to
hell.
However consumer greed or moral failures
is very minor factor in microfinance failure to deliver on its promise
to the poor. In the current funding structure of the microfinance and
financial regulatory environment, it’s very unlikely that MFIs will
provide cure for poverty.
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