Getting Credit
The ability of entrepreneurs to borrow money at reasonable interest rates and for appropriate durations depends on a number of factors that collectively affect the risks associated with lending. These include a mix of policies, laws, and regulations; property rights; processes and standards for loan approval; the quality of registration systems; and enforcement mechanisms. In jurisdictions where these and other factors do not work to protect lenders (or borrowers), the risk of default is typically high, and this risk is reflected in the increased cost and, in many cases, decreased availability of credit. Further, certain types of borrowers are perceived as raising additional risks due to their limited capital, entrepreneurial history, or precarious social situation. As a result, small and medium-sized enterprises (SMEs), women, rural borrowers, and other less secure groups typically face significant obstacles in securing credit.
In Tanzania, a key component to the national strategies for supporting the reduction of poverty, economic expansion, and the country’s general well-being is to increase access to financial services, including savings facilities, business and personal credit, insurance, and payment systems. Access to credit remains one of the greatest barriers to Tanzania’s economic development. While it is difficult to obtain reliable, detailed information, a recent survey of 5,000 Tanzanians indicated that only nine percent have access to formal sector financial services and only four percent have a personal loan from a bank. Another study estimates that 85 percent of micro and small businesses do not have access to credit.
This chapter examines the risk factors that affect access to credit in Tanzania and makes realistic, practical recommendations on how they can be modified to improve the current lending climate. This chapter details nine general areas:
The lending environment. Although the legal and regulatory framework governing the formal financial sector (commercial banks and financial institutions) has improved with the implementation of Government’s financial sector reforms, Tanzania’s businesses and households’ huge demand for credit continues to go unmet. Some commercial banks invest large amounts in government bonds and liquid assets instead of lending to their full potential. But lending in Tanzania is fraught with uncertainties at almost every stage. Major risks include the difficulty in identifying applicants (there is no national ID system), lack of credit information, poor systems of collateralization, and ineffective enforcement mechanisms.
The semi-formal lending sector, including Savings and Credit Cooperative Organizations (SACCOs) and financial non-governmental organizations (NGOs), suffers from different but equally serious concerns. Although they are expected to play a major role in the government’s poverty alleviation strategies, these entities are subject to minimal oversight by ministries that readily acknowledge their lack of capacity, both in terms of staff and technology. Further, many of the SACCOs lack the capacity necessary to manage the administrative tasks needed to operate. It also appears that borrowers need more support in using credit to build viable enterprises – they specifically need better access to training in business skills, marketing, and quantitative literacy.
Credit reference bureaus. The risks involved in lending can be mitigated to some extent if lenders have access to information on applicants’ past experiences in managing credit. Credit reference bureaus are entities that collect and compile credit and other types of information for resale to banks and other providers of credit. Currently, the Tanzania Banking Association operates a limited credit reference bureau for its members use. The Bank of Tanzania is moving forward with the implementation of a broader credit reference system that promises to contain more complete information and to be widely accessible.
Secured transactions. The use of property, whether immovable or moveable, to secure loans dramatically increases the probability of repayment and satisfaction of the debt in the event of default. In turn, the decreased risk of lending leads to lower interest rates and other more favorable terms for borrowers. The laws and procedures governing secured transactions schemes in Tanzania are in different stages of reform. While the rules governing the mortgage of immovables (land and buildings) have been subject to much analysis and amendment, the laws governing “charges” on moveable property remain woefully out of date. A modern secured transactions regime, coupled with efficient registries, could be instrumental in adding certainty to the lending process, thereby improving the lending environment. As these reforms could provide certain desired results of long-term reform efforts, it is critical that they become a priority for the government.
Warehouse receipts.
In an effective warehouse receipts system, a participating farmer delivers his or her product to an accredited warehouse and receives a warehouse receipt. Under the law, the receipt is deemed to be a negotiable instrument, and as such may be freely exchanged, traded, or sold. As a result, the farmer is not forced to sell the product at unattractive seasonable prices in order to ease cash constraints.
A system of warehouse receipts is being promoted in Tanzania as a means of helping farmers better manage their cash flow and financial needs. The system is in the nascent stage, but is proving particularly successful in the coffee industry. The usefulness of warehouse receipts could be dramatically improved by the construction of more warehouses in rural areas and through the provision of training on how to organize and manage individual warehouses.
Leasing. Leasing is a convenient alternative to traditional lending, particularly in jurisdictions with poor property rights and enforcement mechanisms. The enactment of a modern secured transactions system, as previously recommended, would also support the development of the leasing industry with the establishment of a modern registry.
Guarantees. The state has sponsored a number of “guarantee-based” incentive programs as a means of facilitating credit, with varying degrees of success. The types of guarantee programs offered have included short-, medium-, and long-term lending, and generally target specific sectors such as agriculture. There are, as discussed later in this chapter, significant complaints about the operation and design of these programs. Nonetheless, lenders agree that additional incentives could be helpful in supporting the facilitation of certain types of credit, provided steps are taken to limit documentation requirements, streamline approval process, and make the process more responsive to lenders and quicker to make payment. As a separate but related matter, increased use of guarantees could bolster the current level of funding by banks to microfinance lenders.
Insurance. Steps were taken in the mid-1990s to liberalize Tanzania’s insurance industry. Currently, there are 12 registered insurance providers that provide casualty and loss insurance on property that serves as loan collateral. However, the industry has not taken a lead role in providing long-term financing to banks and other financial institutions. An in-depth evaluation of this matter may be in order, but is beyond the scope of this diagnostic.
Enforcement. The risks associated with lending, specifically the risk of default, can be mitigated by systems that provide for the effective and efficient enforcement of credit agreements. In order for an enforcement regime to be effective in reducing risks, the benefits (e.g., the realistic potential of recovery) must be greater than the financial and administrative costs of the process. Every lender interviewed cited contact enforcement as a key restraint in extending credit. The various reforms currently underway in the courts are critical to the long-term interests of the credit community in Tanzania.
Bankruptcy. An effective bankruptcy regime provides certainty with respect to the disposition of assets and settlement of debts in the case of the borrower’s insolvency. A modern bankruptcy regime would support the reforms in enforcement by granting additional certainty to lenders.
