MICRO-FINANCE FOR

COMMUNITY
DEVELOPMENT (CDT
05215)
At the end of the course you wil be able to
• Demonstrate understanding of Micro-finance in community economic strengthening practices
• Apply knowledge of legal frameworks for managing micro-finance operations
• Use micro-finance services to promote socio-economic group practices
"What is microfinance?" in simple terms, it is a financial service that many
financial
. institutions provide to an individual or a group of individuals who get
excluded from traditional banking services. Many micro-financing bodies offer
small portions of working capital loans as credits. The small portions of capital
loans are called microloans or microcredits.
There are many microfinance institutions providing individuals with direct
money transfers, insurances and savings accounts. The major focus of these
institutions is to provide financial services to women and the poor in rural
areas so that they can grow their businesses. Microfinance can help small
businesses, entrepreneurs and individuals by providing savings accounts with
zero minimum balance and insurance at lower rates and premiums.
Features of microfinance
Here are some features of microfinance that can help you gain a better
understanding of this topic:
Collateral requirement: The major feature of the lines of credit and loans
under microfinance is that collateral is rarely required. Many micro-financing
institutions offer collateral-free financial services to businesses and
individuals.
Economic status of borrowers: Generally, the borrowers in microfinance
are small businesses or individuals with low income. The purpose is to
provide financial assistance to people who do not have access to easy
banking solutions and small businessmen or entrepreneurs.
Amount of loans: Micro-financing institutions usually provide lines of credit
and loans in smaller amounts. The amount may vary depending on factors
like the type of business and the location.
Loan tenure: The tenure of the loans under microfinance is usually short as
an individual can repay the amount in smaller instalments. The borrowers
repay the amount of the loan within the time period that micro-financing
institutions decide.
Purpose: Microfinance loans are for small businesses and low income group
individuals. So the main objective of micro-financing institutions is to
generate income for the businesses in undeveloped parts of the country
Benefits of microfinance
Microfinance can help small businesses and individuals in both financial and
social ways. They create self-dependency and sustainability in the economic
aspects of their business. Microfinance motivates entrepreneurs and gives
With the help of microfinance, small businesses and individuals can put their
ideas into reality. Microfinance provides security, economic growth and
business opportunities.
Here are the benefits of microfinance:

Provides accessibility
Individuals with little or zero assets often fail to get loans from major banks.
Microfinance loans are easily available for small businesses that have less
income. Many entrepreneurs find it difficult to provide identification or
certification to the traditional banks for loans. Microfinance makes it easier for
them to get financial assistance.
Offers better loan repayment
Micro-finance helps businesses and individuals become financially empowered
so that they can repay their loans. Many micro-financing institutions offer
better loan repayment to women entrepreneurs. Providing more women with
the benefits of micro-financing can directly help in women empowerment
Provide education opportunities
Many small families in rural areas depend on farming for their income. This
can make it difficult for them to invest a lot of money in the education of
their children. Further, such families may require men at the farm, so their
children usually work with them. In such cases, microfinance can help
families to focus on providing better education to their children.
Opens possibilities for future investments
Sometimes in rural areas, due to lack of source of income, small
businesses compromise with their basic requirements. This can directly
affect the profits and revenue. Micro-financing helps such businesses to
meet their basic requirements, minimizing the financial hindrances and
helping them progress. When all the basic requirements of a small
business meeting, the possibilities of future investments may also
increase.
Creates job opportunities
Micro-financing often provides businesses with an opportunity to create
employment. Businesses can hire employees for different job roles. A
business properly funded through microfinance can create local job
Reduces financial burden
Micro-financing can help individuals and businesses in reducing monetary issues by providing
them with financial services that allow them to pay their monthly bills. Businesses funded through
microfinance gain motivation to focus more on offering better products and services to the target
audience. Microfinance can make entrepreneurial activities less stressful and allow other
community members to engage in such businesses.
Types of microfinance
Here are different types of microfinance:
Microcredit
Microcredit is a part of the larger microfinance industry which focuses on providing individuals
having low income with credit, savings, insurance and other possible financial services. The term
micro in microcredit indicates the small amount of money that the businesses borrow or save. The
institutions offering microcredit may ask for different interest rates than the traditional loan
providing institutions. The reason behind this can be the difference between the cost of providing
small loans in rural areas and the cost of providing large loans in developed urban areas.
Individuals with low income in rural areas may require a small amount of money through
microcredits. For example, a farmer may require small funds to buy seeds for the season. In this
case, the microcredit institutions can offer the farmer small lines of credit and small loans.
Microloans
Many entrepreneurs or individuals may require a small amount of loan to start their business.
Microloans are short-term loans in small amounts that micro-financing institutions offer to
individuals. Individuals who avail microloans can be self-employed, manufacturers, traders or
small retailers, women entrepreneurs and individuals with minimum wages or less. Microloans can
be helpful in various activities related to business, such as launching a new small business, paying
Micro-insurance
Micro-insurance targets individuals in the informal sector and is available for
people with low income. There can be some national programs that fulfils
local requirements and come under the category of micro-insurance. It is the
practice in which the institutions providing insurance can divide the
traditional insurance into much smaller terms. Micro-insurance can be helpful
in onetime events, such as a one-day trip or emergency health requirements.
Individuals and businesses with a few assets can benefit from micro-insurance
as it offers coverage to them. Many micro-insurance providers also cover
business risks, such as the loss of crops for an agricultural operation.
Micro savings
Micro savings are the savings accounts that allow individuals and businesses
to save money in smaller amounts or increments. Many individuals with low
income may find it difficult to save money. Micro savings allow them to
remove the difficulties they face in making savings. Interest in these types of
savings accounts may vary depending on different factors. Micro savings can
offer many benefits like zero service fees, absence of criteria for minimum
deposit and also allows flexible withdrawals. Many institutions offer micro
What do micro-financing institutions do?
•Micro-financing institutions are responsible for providing financial services
to businesses and entrepreneurs to remove poverty.
Here are some important functions of micro-financing institutions:
•Assist in the development of sustainable communities.
•Provide support to the lower sections and underdeveloped parts of the
society.
•Develop effective strategies to eliminate financial shortcomings of
individuals and businesses effectively.
•Offer self-employment opportunities for individuals with poor income.
•Provide training to rural entrepreneurs and individuals in different skills.
•Support self-help groups for economic development.
Challenges facing Microfinance

 1. Over-Indebtedness
The microfinance sector deals with marginalised sections of Indian
society intending to improve their standard of living, and thus over-
indebtedness poses a severe challenge to its growth. The growing trend
of multiple borrowing by clients and inefficient risk management are the
most significant factors that stress the microfinance industry in India.
The microfinance sector gives loans without collateral, which increases
the risk of bad debts. Fast-paced growth needs proper infrastructural
planning, in which the Indian microfinance sector evidently lacks.
2. Higher Interest Rates in Comparison to Mainstream Banks
The financial success of MFIs is limited when compared to commercial banks
in India. The centuries-old banking system has a strong foothold in Indian
grounds and is slowly evolving to meet the needs of the times. Most
Microfinance Institutions charge a very high rate of interest (12-30%) when
compared to commercial banks (8-12%). The regulatory authority RBI issued
guidelines to remove the upper limit of 26% interest on MFI loans.
3. Inadequate Investment Validation
Another problem faced by microfinance institutions in India is inadequate
investment validation. Investment valuation is a crucial capability for the
healthy functioning of an MFI. However, due to the developing nature of the
markets in which MFIs operate, market activity is often limited. This
limitation makes it difficult for MFIs to gain access to market data for
valuation purposes. The lack of consistent and reliable valuation procedures
hinders MFI management teams from obtaining the quality information they
need to make investment decisions effectively.
4. Lack of Enough Awareness of Financial Services in the Economy
A developing country in the making, India has a low literacy rate, which is
still more moderate in its rural areas. A large chunk of the Indian population
fails to understand the basic financial concepts. There is a severe lack of
awareness of financial services provided by the microfinance industry
among the masses. This lack of adequate knowledge is a significant factor
that keeps the rural population from accessing MFIs for easy credit to meet
their financial needs.
Add more points
TOPIC TWO:
LEGAL FRAMEWORK GOVERNING
MICRO-FINANCE IN TANZANIA
National microfinance Act of 2000

 The overall objective of this policy is, therefore, to establish a basis

for the evolution of an efficient and effective micro financial system in
the country that serves the low-Income segment of the society, and
thereby contribute to economic growth and reduction of poverty by:
Establishing a framework within which micro-finance operations will
develop; Laying out the principles that will guide operations of the
system; Serving as a guide for coordinated Intervention by the
respective participants in the system; and Describing the roles of the
Implementing agencies and the tools to be applied to facilitate
development. Access to financial services should be available to both
men and women. In order to achieve gender equity in the delivery of
services, it may be necessary to make special efforts to incorporate
features that make the services accessible to all.
The policy covers the provision of financial services to households, small
holder farmers, and small and micro enterprises in rural areas as well as in
the urban sector. It covers a range of financial services, including savings,
credit, payments, and other services. Clients use these services to support
their enterprises and economic activities as well as their household financial
management and consumption needs. Financing for all types of legal
economic activity is included, e.g. commerce, trade, manufacturing and
agriculture.
This policy is guided by a vision of achieving widespread access to micro-
finance throughout the country, made possible by institutions operating on
commercial principles. The system as a whole will provide financial
intermediation without necessarily relying on injections of external donor or
government funds. Subsidies will no longer be needed, except perhaps for
organizations pushing the frontiers of the system out to the most remote or
poorest clients. Most of the micro-finance institutions currently operating In
the country are small and/or new. A great deal of capacity building is
required to bring them to the level at which they can operate with large
outreach, quality services and profitable operations.
Institutions should have sound governing structures suitable to their institutional types. Governance
may occur through various corporate forms of organizations or through cooperative ownership.
Participation by clients may in some instances be a fundamental principle of the governance structure.
However, the Government and political interference in governance should be avoided.

THE MICROFINANCE ACT OF 2018

BOT's Notice
In December 2018 the Bank of Tanzania (BOT) issued a public notice (the
Notice) stating that it is preparing regulations for various categories of
microfinance service providers (MFIs) identified in the Microfinance Act 2018
(the Act), and for licensing purposes. Furthermore, the Notice required MFIs to
submit to BOT certain information regarding their business before 11th
January 2019. On 5th January 2019 BOT revised the Notice to extend the
deadline to submit information to 31st January 2019 and exempt Savings and
Credit Cooperative Societies (SACCOS) from complying with the Notice.
The following information must be submitted to BOT as guided by the
Notice:
[Link] of Incorporation
[Link] License issued by Business Registration and Licensing Agency
[Link] of business and contract details
[Link] of owners, Board of Directors, Chief Executive Officer and their
respective citizenship
[Link] types of microfinance service products offered
[Link] whether the business is audited annually or not
[Link] of accounting system and information and communication
technology in use
[Link] statement details on total assets, total liabilities and owners'
equity.
The Notice does not specify what measures will be taken by BOT if a
person operating microfinance business fails to submit to BOT the
information as required by the Notice.
Following our previous legal update in November 2018 on the
Microfinance Bill, the Act was passed into law on 16th November 2018
 This section provides that the Act shall apply to
Mainland Tanzania only. Notably, this is a departure
from other legislation in the financial sector which
ion 2: Scope of application apply across both Mainland Tanzania and Zanzibar.
Clarification may need to be sought from the BOT or
Ministry of Finance on whether there will be similar
legislation passed to regulate MFIs in Zanzibar.
This section provides a comprehensive definition for
the term microfinance business to include receiving
money by way of deposits or borrowing, providing
micro credit, micro savings and micro insurance
Section 4: Microfinance business services, as well as providing loans and credit
facilities to small enterprises and low income
households.
The aim is to capture all formal and informal micro
credit / finance service providers without exception.
The Act stipulates that there shall be four tiers of
MFIs:
•Tier 1 is comprised of deposit taking MFIs;
•Tier 2 is comprised of non-deposit taking MFIs such
as individual money lenders;
•Tier 3 is comprised of SACCOS; and
Section 5: Categorization of microfinance services
•Tier 4 is comprised of community microfinance
groups.
This categorisation allows BOT to regulate institutions
and/or individuals based on the nature of their
microfinance business and their respective financial
THE PROCEDURE TO START A MICROFINANCE BUSINESS AS AN INDIVIDUAL LENDER IN
TANZANIA INCLUDES THE FOLLOWING STEPS.
Prepare the minimum required capital of Tsh 20 million and deposit it into your account, obtaining a
bank statement as proof.
[Link] your business name as a sole proprietor at the Business Registrations and Licensing
Agency (BRELA) under the Business Names (Registration) Act. The business name must include either
“microfinance”, “finance”, “financial services”, “credit”, or “microcredit”.
[Link] for a premise and obtain a rental agreement for it.
[Link] for a Tax Identification Number (TIN) at the Tanzania Revenue Authority (TRA)
and obtain both a TIN certificate and a Tax Clearance Certificate.
[Link] the Tsh 300,000 application fee to the Bank of Tanzania (BOT) and keep the receipt as
proof of payment.
[Link] the necessary documents, including:
6.A letter of application in the prescribed form. ii. Proof of payment of the application fee.
iii. A certified copy of the business name registration certificate. iv. Proof of availability and source
of capital.
[Link] copies of academic and professional certificates of the CEO. vi. A copy of the latest audited
financial statements, a lending policy.
vii. A certified declaration that the funds have not been obtained criminally or
associated with any criminal activity. viii. Proof of citizenship of the CEO.
[Link]. A completed questionnaire for the CE
9.x. a credit report from a Credit Reference Bureau.
10.x Contact information for a designated contact person.
THE PROCEDURE TO START A MICROFINANCE BUSINESS AS A COMPANY IN TANZANIA,

Prepare the minimum required capital of Tsh 20 million and deposit it into your account, obtaining a
bank statement as proof.

[Link] your company at BRELA under the Companies Act. The company name must include either
“microfinance”, “finance”, “financial services”, “credit”, or “microcredit”.

[Link] for a premise and obtain a rental agreement for it.

iii. Register for a Tax Identification Number (TIN) at the Tanzania Revenue Authority (TRA)
and obtain both a TIN certificate and a Tax Clearance Certificate.

[Link] the Tsh 500,000 application fee to the Bank of Tanzania (BOT) and keep the receipt as proof of
payment.

[Link] the necessary documents, including a letter of application in the format prescribed in the
Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations,
2019, proof of payment of the application fee, proof of availability and source of capital, certified
copies of academic and professional certificates of the members of the board and CEO, a lending
policy, and a certified declaration that the funds have not been obtained criminally or associated with
any criminal activity.
TAMFI CODE OF CONDUCT
1. Interest rate/service cost disclosure
Leveling the playing field so that customers can compare the costs of similar
products between institutions helps to improve competition. MFIs can
therefore compete on product quality rather than hidden costs. Members will
be required to periodically disclose interest rate and other service costs
information. World of practice suggests that many borrowers may not
understand or value an annual percentage rate–type of calculation, but many
prefer that costs be disclosed as the total payment amount. TAMFI will work
to promote and ensure that its members uniformly disclose interest rates and
other service costs in ways that are most useful and transparent to
customers.
A suggested uniform disclosure shall be for MFIs to disclose interest rate and
other service costs to their members openly through loan contracts and by
writing on their offices notice boards. Each member MFI will be required to
have a customer notice board in the service areas/office visible to
customers where all important communication with their clients will have to
be placed. The language used on notice boards should be simple and
2. Customer complaint resolution
Complaint resolution is used as a proxy for determining how well consumers
are protected against unscrupulous or deceptive practices. Existence of a
complaint resolution process indicates that consumers have some protection.
Opinions differ on whether protecting consumers is a government function or
an industry function, or whether consumers should organize themselves to
avoid harmful practices. Ultimately, all three players have a role to play.
Where a government has established a complaint resolution process,
successful associations work with that body to ensure that it is working
smoothly and that complaints are resolved in a fair and timely manner. Where
such a mechanism does not exist, successful associations help establish a
complaint resolution process for their members, producing goodwill among
customers and avoiding negative publicity generated by unscrupulous actors
in the market. Successful associations develop relationships with consumer
advocates to ensure that they understand financial service issues, so that
customers who seek out impartial, third-party information are well informed.
To do so the Members will be required to:
•Establish customer complaints desk
•Use of suggestion boxes
•Work to solve customer complaints
•Have programmes to educate, make customers aware of their rights
At TAMFI head office, a customer complaints unit will be established. The unit
will receive and solve customers’ complaints from public with respective
MFIs and National consumer protection authority. TAMFI will periodically
measure the number of members that have in place and functioning
customer complaints systems.
3. Transparency -Financial and social performance
Financial and social performance transparency is essential for the legitimacy
of the microfinance industry. TAMFI will work to ensure members’
compliance with local and international reporting standards and build on
local initiatives to provide meaningful, relevant reporting to local
stakeholders. Members will be required to periodically publish their reports in
TAMFI Website, TAMFI Annual Magazine, and later to public Newspapers.
4. Service contracts
Prudential service delivery and customer protection best practices in lending
business require service providers to enter into contracts with their clients to
avoid harmful practices. TAMFI supports contract best practice and will
work to promote and ensure that members comply with lending best
practices. This will be done by entering into transparent documented
contracts/agreements with their customers in offering loan products and
other products that necessitates having contracts/agreements with clients.
TAMFI will periodically assess and measure compliance among members.
Service contract acts include:
•Loan contracts are made and issued to all borrowers – loan contract is
borrower’s right
•Copy of loan repayment schedule is given to a client
•Loan contracts are clear and understandable – use national local language
•Explain complete contract in non-legal, clearly understandable terms
•Provide verbal explanations for all clients, especially for illiterate clients
5. Ethical staff behavior
Ethical staff behavior includes:
•Use of polite/friendly and professional language to clients
•Ensure privacy/confidentiality of clients information
•Ensure all clients are respected
•Penalties are in place to enforce unethical staff behaviors
MFIs ensure that have in place a staff code of ethics and ethical staff
behavior are clearly described in the staff code of ethics.
6. Appropriate collection practices
Appropriate collection practices include:
•MFI has in place collection practices guideline
•Clients are explained in full about the consequences of late and non-
repayments and collections procedures before they take their loans and
during their loan repayments period
•Clients are issued receipt and given correct change to any payment they
make to the MFI
•Guarantors and co-signers are involved in enforcing late and non-
repayments
•Collectors avoid using abusive languages for enforcing collections
•For field collection, visits happen on a specific day and in day light
•Established procedures are followed during enforcing collection
•Confiscation of assets follows legal recovery channels
•Fees, penalty interest, etc., do not exceed established portion of the original
loan amount. Each institution should establish procedures to be followed.
•Interest is not charged after the loan is written off.
•If using collection agents, agents are aware of ethical behavior and
7. Staff development and management practices
•Have in place staff development policies
•All staff enjoys equal rights for development through training etc.
•Have in place staff reward system
•Staff are treated fairly and rewarded for their efforts
•Have in place transparent mechanism for addressing staff grievances and
complaints
•For field collection, special training is provided for collection staff
8. Incentives package for members to comply
The implementation of code of conduct will be accelerated by the use of a
rewarding system for good performance and penalty to bad performance.
i. Non-financial rewards system
Issue grade based certificate of compliance that will see good compliance
enter into a financial reward draw.
Issue letter of congratulations and offer material reward for winners at a
public function
Publish winners in public magazines and newspapers
ii. Financial rewards
9. Members compliance enforcement measures
•Introduce graded financial penalty system to non-compliers
•Introduce periodic warning system for non- reporting
•Introduce limited service policy to non-compliance i.e. list services that non-
compliance will miss.
•Introduce disciplinary measures for those MFIs that will be found to submit
misleading information or cheating
10. Implementation process
Implementation will be in phases.
•Phase one: Preparation phase – members will be required to put in place
necessary systems and facilitate the understanding of their on the Code of
Practices.
•Phase two: Trials phase – Members will start implementing the standards
and there after the 1st assessment on the implementation will be carried and
reviews will be made.
•Phase three: Operational phase: The Code becomes fully operational
11. Review of the code
This code will be periodically reviewed by the TAMFI Standards
Committee as it deemed necessary to do so.
12. Declaration
All microfinance institutions and other institutions dealing with microfinance,
which are part of the Tanzania Association of Microfinance Institutions
(hereunder: TAMFI) hereby adopt the Code of Standards of Practices for
Microfinance Institutions in Tanzania with the purpose of:
•Establishing recognizable standards of good conduct and open
communication towards the users of their services and towards other
microfinance institutions.
•Promoting the idea of responsibility, transparency and professionalism in
their operation.
•Promoting the achievements of the entire microfinance sector and increasing
its reputation in public.
This code also saves as Code of Business Ethics of Microfinance Institutions
working in Tanzania.
14. Basic principles
•The Code of Standards of Practices for Microfinance Institutions (hereunder:
the Code) is a voluntary framework which microfinance institutions use for
regulating their relations and business with clients, with other microfinance
institutions, with banks and other finance institutions, as well as with other
social subjects and the general public.
•By accepting the Code, microfinance institutions set a standard of good
practice, to which they adhere as to a minimum standards of practices in
their operation.
•The provisions of the Code are obligatory for all member-institutions of the
TAMFI and their acceptance and application represents one of the basic pre-
conditions for membership to the TAMFI.
•The Code contains the basic elements which every microfinance institution
needs to have in its internal regulations.
•The professional culture based on this Code should be accepted by all the
employees and should be made part of the mode of operation.
•Ethical conduct within an institution is stimulated through defining the
principles and rules of conduct and through positive examples set by
Review questions

 Question one
 Describe factors hindering the operation of microfinance in Tanzania
 Explain the microfinance models
 Identify beneficiaries of micro-finance in Tanzania
 Describe the categories of Micro-finance Institutions in Tanzania
 Describe the policies and laws that govern microfinance operations in
Tanzania
 Define the terms; micro-finance, micro-credits, financial services,
micro-finance networks and micro-finance institutions
Review questions

 What are the cons and pros of micro-finance network in Tanzania?

 What is the role of microfinance in enhancing the growth of SMEs in a
country and role of government in promoting small and medium
enterprises?
 How does digitization influence the risk assessment and loan approva
l processes in microfinance?
 The end
 Wishing all the best in your endeavor
 By Sir Nathan Mwangoka
 E-mail address: nathamwangoka@[Link]
 Mobile :0678012760