The Role of Non-Deposit Taking Microfinance Providers in Expanding Access to Credit and The Draft Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2024  IN TANZANIA

16 Feb 2024

How many of us in Tanzania know “informal” lenders who are lending millions per day to entrepreneurs? I certainly know a number of people in that business informally and they all say one thing – it is very lucrative! As much as this is a growing area in Tanzania, the reality is that officially registered and licensed Micro Finance Institutes service only a total of 500,000 clients, that is 5% of the country’s borrowing real needs. Furthermore, only 10 MFIs account for more than 80% of the clients’ base totaling a loan portfolio of TZS 275.7 billion or USD 130 million according to MF Transparency. The World Bank states that Tanzania holds one of the lowest rates of adult population with access to any type of financial product at 17% or 22% if unregulated sources are taken into account, below Kenya with 42% and Rwanda with 33% as the top performers. What does this mean? Well, the financial landscape is evolving, and at its forefront are non-deposit taking microfinance service providers like money lenders. These entities are pivotal in extending the reach of financial services to corners of the society where traditional banking has not set foot. But why are they so crucial, and what makes them a compelling part of the economic ecosystem? Non-deposit taking MFIs, unlike banks, do not accept savings from the public. They solely focus on providing credit and other financial services. These entities include a wide array of organizations like money lenders, microcredit companies, and sometimes, non-government organizations (NGOs) that offer microloans. First of all, many individuals and small businesses find themselves trapped in a credit gap where standard financial institutions deem them unbankable. This gap is most often due to the lack of traditional employment, collateral, or credit history. Here, non-deposit taking MFIs shine by offering loans based on alternative credit assessments, which usually involve evaluating the borrower’s cash flow and business potential rather than collateral. Additionally, financial inclusion is not just about owning a bank account; it is about access to a range of financial services. Non-deposit taking MFIs extend their services to the unbanked and underbanked population, often operating in rural or underdeveloped areas where traditional banks are absent. In doing so, they play an indispensable role in promoting inclusivity. Thirdly, one size does not fit all when it comes to financial services. Non-deposit taking MFIs excel in customizing their products to suit the unique needs of their clients. Whether it is through flexible repayment schedules aligned with the clients’ cash flow or smaller loan sizes, these MFIs make credit, and thus business development, more attainable. The impact of non-deposit MFIs on entrepreneurs is huge and impactful. Where banks in Tanzania stay away from entrepreneurs and start ups and offer little to assistance when it comes to access to credit, non-deposit MFIs provide access to credit  to them which is a catalyst for entrepreneurial ventures. By providing credit, these MFIs empower people to start or expand businesses, fostering innovation, employment, and overall economic growth. Many non-deposit taking MFIs operate at the intersection of formal and informal financial sectors. They can reach individuals who operate small businesses unofficially, helping them grow until they can integrate into the formal economy. This bridge is vital for economies to harness the full potential of their populace. Finally, without the need to manage deposits, non-deposit taking MFIs often boast less red tape and a faster turnaround time for loan approvals. This speed and convenience can be crucial for clients who need quick funds to capitalize on business opportunities. Many MFIs do not just lend; they educate. Financial literacy is often a part of their service, teaching clients about responsible borrowing, managing finances, and even assisting in business planning. Non-deposit taking microfinance service providers bring a wealth of advantages to the financial table. By being agile, innovative, and customer-centric, these entities are not just lenders; they are partners in progress, fueling dreams and real economic change. They demonstrate that the essence of finance lies not in its complexity, but in its ability to be a simple, yet powerful tool for empowerment and advancement. In the light of the above, the proposed regulation has the aim of protecting consumers but also fostering a good business climate to stimulate the much needed growth in this sector. Let us see what the draft regulations have in store for money lenders. The Salient Features of the Draft Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2024:

1. Tier 2 refers to a category of non-deposit taking microfinance service providers, which includes credit companies, financial organizations, housing microfinance companies, individual money lenders, and digital microfinance lenders.
2. The regulation covers the licensing process whereby Tier 2 microfinance service providers must now obtain a license from the Bank of Tanzania in order to operate legally.
3. Licensing requirements specify that entities must be formally established under the Companies Act or registered as sole proprietors. Additionally, microfinance service providers under Tier 2 must incorporate specific terms in their business names clearly distinguishing them as microfinance service providers.
4. Requirement of a minimum share capital of TZS 20 million
5. The regulation also cover the issue of integrity and financial evaluations, where the Central Bank evaluates the integrity of shareholders, proprietors, partners, or trustees through credit reports and financial capacity through capital assessment.
6. The regulation provides for requirements for a place of business, assessments of character and experience of key persons such as CEO, approval procedures for appointments of the CEO and governing body members which have to be approved by the Central Bank.
7. A license is not transferrable
8. The Governing body of the MFI service provider shall have at least 2 Tanzania nationals
9. Change of ownership of the MFI Service provider shall be subject to the approval of the BOT whereby proof of funds needs to be submitted and proof that the funds do not derive from criminal proceeds
10. There are limitations in terms of employment of Tanzanians namely that there cannot be more than 5 non-Tanzanian nationals employed at a time and the employment shall be subject to the approval of the Central Bank of Tanzania
11. Cash collateral and guarantee including insurance guarantee or compulsory savings must be held by the MFI service provider in a separate account specific for holding collateral and guarantees
12. Obligation to keep accounting and financial records
13. There is an obligation to have an internal and external auditor
14. Obligation to obtain a consent to disclose information to Credit Reference Bureaux from borrowers, and obligation to report to Credit Reference Bureaux detailed information about the credit facility provided to the borrower
15. MFI service providers must have lending policy and loan agreements in line with the lending policy. The lending policy should have recovery procedures outlined
16. MFI service provider must maintain liquidity of not less than 1% of the gross outstanding loans
17. MFI service provider can charge any interest rate they want to as this is not regulated by the Central Bank.

The Draft Regulation is currently being negotiated. Stakeholders were invited to submit their comments. It should come in force in the coming months. It is a positive move as it will allow for consumers to be protected and open opportunities for investment in a fast growing sector in Tanzania.