Microfinance - All PDF

Module Description:
Module Number 12
Code Number: BFU 08605
Name of Module: Microfinance
Module Prerequisite: None
Number of Credit: 12
Sub enabling outcome

• Ability to draw distinction between commercial banks and micro financing institutions
• Ability to explain the operation of MFIs
• Ability to analyse economic environment for MFIs in rural and urban settings
• Ability explain the evolution of SMEs, SACCOs, and CBOs in Tanzania
• Ability to describe the guidelines governing the microfinance institutions; policy, Regulations
and operations of MFI
SUB ENABLING OUTCOMES RELATED TASKS
4.2.1 Distinguish between commercial banks and
a) Meaning of Microfinance and Conventional banks
micro financing institutions
b) Describe the concepts of microfinance
c) Distinguish between conventional banks and MFIs

4.2.2 Explain the operation of MFIs
a) Identify clients and services offered by MFIs
b) Explain MFIs different lending methodologies
c) Appraisal of micro credits and safeguards against default
d) Analyze MFIs financial statements

4.2.3 Analyse economic environment for MFIs in
a) Describe MFIs key financial factors
rural and urban settings
b) Examine interest rate practices in MFIs
c) Describe marketing strategies in MFIs

4.2.4 Explain the evolution of SMEs, SACCOs, and
a) Describe the growth of SMEs, SACCOs and CBOs in
CBOs in Tanzania
Tanzania
b) Identify MFIs best practices
c) Describe Social and cultural issues impacting on economic

activity
4.2.5 Describe the guidelines governing the
a) Describe guidelines governing the MFIs
microfinance institutions; policy, Regulations
and operations of MFI
b) Explain the impact of corporate structure on governance
c) Describe MFIs/Donors relationship

Methods of Delivery and Assessment
The module will be delivered through lectures, tutorials and seminars. At least two timed
tests, assignment/s, quizzes and a final examination will be administered for assessment
purposes. The module work will constitute 40% and the final examination will account for
60% of the entire assessment.
Recommended Readings
1. Ledgewood, J. (2001), Microfinance Handbook, World Bank Publications.
2. Ledgerwood, J., Earne, J. and Nelson, C. (2013) The New Microfinance Handbook: A
Financial Market System Perspective. Edited by J. Ledgerwood, J. Earne, and C.
Nelson. Washington D.C.: The World Bank. doi: 10.1596/978-0-8213-8927-0.
3. Robinson, M (2001), The Microfinance Revolution, World Bank Publications
4. TIOB (2004), Bankers’ workbook series, Microfinance
Additional Readings
1. Kironde, J.M.L. R.B. Mabele, H. Mutagwala (2003), Re-establishing Effective Housing

Finance Mechanizations, Tanzania, UN-HABITAT.
2. Aryeetey, E. and M. Missanke (1998), Financial Integration and Development,

Routledge (UK).
3. URT (2017), National microfinance policy
4. URT (2014), The Banking and Financial Institutions (Microfinance Activities)

Regulations, 2014
5. URT (2013), The cooperative societies act
6. URT (2003), Tanzania SME Development Policy 2003
7. Macha, J.,J., (2017). Rural Citizens’ Perceptions on Microfinance Services Adoption in

Tanzania: Moderating Effects of Demographic Factors. International Journal of
Management, Technology, and Social Sciences (IJMTS), 2(2), 70-83
8. Ledgerwood, J., & White, V. (2006). Transforming Microfinance Institutions.
MICROFINANCE
AN OVERVIEW OF THE FINANCIAL SECTOR
IN TANZANIA
There has been a remarkable improvement in
the provision of financial services in Tanzania
since 1990s following various government
efforts to promote the use of formal financial
services (Bank of Tanzania, 2011)
A wide range of reforms in the financial sector
that aimed at creating an effective and efficient
financial system have been implemented in the
country
May 8, 2019 Dr Macha J 1
AN OVERVIEW OF THE FINANCIAL
SECTOR IN TANZANIA
The principal elements of the financial sector

reforms were:
liberalization of interest rates
elimination of administrative credit allocation
strengthening BOT’s role in regulation and
supervision of financial institutions

SECTOR IN TANZANIA
privatisation and restructuring of state-owned

financial institutions; and
Allowing entry of private local and foreign
banking institutions
The reforms were enshrined in the Banking and
Financial Institutions (BAFIA) Act of 1991 for the
banking sector and Cooperatives Act of 1991 for
SACCOS
Following reforms private banks and financial
institutions increased from zero in 1990s to 58 in
2017
SECTOR IN TANZANIA
A Gap in the financial Sector:

Restructuring of Government owned banks
such as the National Bank of Commerce and
CRDB which had national-wide branches that
had long served the rural areas, had many of
their loss-making branches closed down.

SECTOR IN TANZANIA
Also, the private institutions that entered the

banking sector mainly served the peri-urban
and urban areas and high-income earners
And were reluctant to extend services to the
low income population due to lack of
acceptable collateral, documentation
requirements, and other associated reasons

SECTOR IN TANZANIA
This resulted in the reduction of financial

services available to the majority of the
Tanzanians, particularly the rural population
that make-up about 70.9% of the total
population (NBS, 2013) and
About 90% of the poor Tanzanians live in the
rural areas (IFAD, 2014)
28.2% of Tanzanian live in poverty(FinScope,
2013)

SECTOR IN TANZANIA
Simultaneously, reform of the agricultural

sector resulted in the dismantling of
cooperative unions’ agricultural marketing
mechanism, which had provided credit for
inputs with repayments made through
deductions from crops sold through the
cooperative system.

SECTOR IN TANZANIA
By the mid 1990s it had become apparent

that the increase in the number of banks and
the increase in efficiency in the banking
sector had not brought about corresponding
increase in access of financial services by the
rural population

SECTOR IN TANZANIA
This led to the Government’s decision to

promote microfinance, among other
initiatives, in order to facilitate development of
an integrated broader-based financial system
in the country.

MICROFINANCE
. Meaning of Micro-finance
The term micro-finance is derived from the
term finance
Finance involves looking for sources of funds,
how to invest those funds and at the end
managing those funds.

MICROFINANCE
The microfinance services are provided by
microfinance institutions (MFIs) which offer
microfinance services with a dual objective to
serve the poor and low income people and
yet be sustainable in the long run.
The micro-credit provided by MFIs enables
people to set up or develop their own small
businesses capable of generating income.

MICROFINANCE
Microfinance defined
Microfinance is defined as the provision of formal
financial services, such as micro-loans, savings
and insurance to the poor and low-income people
as well as others who are excluded from the
formal financial system (Consultative Group to
Assist the Poor, 2012).
MICROFINANCE
Jean-Lucy (2006) define microfinance as the

provision of financial services (such as credit,
savings, insurance) to people living in poverty
who do not have access to mainstream
financial sector.

MICROFINANCE
Microfinance means the provision of
financial services including micro saving,
microloan, micro insurance, micro leasing,
micro housing, micro pensions, money
transfers, financial education and business
development to the low-income population
(individual, household, enterprises) who are
systematically excluded from the financial
system (NMP, 2017)
MICROFINANCE
Microfinance refers to the loans and savings

facilities offered by microfinance institutions
such as rural banks, credit cooperatives,
credit-granting non-governmental
organizations (NGOs) extended to small-
scale borrowers (Llanto, 2001)

MICROFINANCE
The term microfinance refers to provision of

financial services to low-income clients,
including the self employed (Ledgerwood,
2001).

MICROFINANCE
From the definitions, we can have four broad
categories of services provided by MFIs to
clients (Ledgerwood, 2001)
Financial intermediation services
Social intermediation services
Social services
Enterprise development services
The Services depend whether MFIs adopt
minimalist or integrated approach
DEVELOPMENT OF MICRO-
FINANCE
Many associate micro-finance with the
provision of small loans to the poor.
The microfinance industry has developed

from a history of micro-credit programmes;
yet, today it has grown to cover a broader
range of products and services, from credit
and savings, to pension, insurance and
money transfers.

FINANCE
Today many speak in more general terms of
micro-finance as the provision of financial
services to those excluded from the formal
financial system. This broad definition pushes
thinking about products as well as the
markets that they serve.

FINANCE
An effective microfinance is positioned to
overcome a variety of access barriers to a
wide range of financial services for many
different customers who are excluded from
the formal financial system.

FINANCE
Following the well known success of the
Grameen bank in Bangladesh with group
savings and lending for the extreme poor,
many development agencies have promoted
various forms of MFIs.

FINANCE
The model used by Grameen bank in
Bangladesh has been widely adopted.
The origin of Grameen Bank can be traced
back to 1976 when Professor Muhammad
Yunus, Head of the Rural Economics
Program at the University of Chittagong,
launched an action research project to
examine the possibility of designing a credit
delivery system to provide banking services
targeted at the rural poor
FINANCE
The action research demonstrated its
strength in Jobra (a village adjacent to
Chittagong University) and some of the
neighboring villages during 1976-1979.
With the sponsorship of the central bank of
the country and support of the nationalized
commercial banks, the project was extended
to Tangail district (a district north of Dhaka,
the capital city of Bangladesh) in 1979

FINANCE
With the success in Tangail, the project was
extended to several other districts in the
country.
In October 1983, the Grameen Bank Project
was transformed into an independent bank by
government legislation

FINANCE
In January 2011, borrowers of the bank were
8.4 million, and 97% of borrowers were women
The number of employees until January 2018
reached 20,138
It is the bank for the poor and loan repayment
rate is 98%
According to Grameen bank, their services are
delivered at the door step of the customers
Except loan disbursement

FINANCE
Interest rates are in four categories (Grameen
bank, 2016)
Loan category Interest pa
1 Loan for income generating activities 20%
2 Housing loans 8%
3 Higher education loan:
i) During the study 0%
i) After the study 5%
4 Struggling members 0%
The structure considered the financial status and

repayment capacity
Interest is calculated using declining balance
method
DEVELOPMENT OF MICRO-FINANCE
.
It struggled through several years to grow into
a bank owned by the poor (75% of the shares
were owned by landless borrowers, the rest
by the government of Bangladesh) for the
poor.

Objectives of Grameen bank project

extend banking facilities to poor men and
women
eliminate the exploitation of the poor by
money lenders. They charged as high as
10% per week
create opportunities for self-employment for
the vast multitude of unemployed people in
rural Bangladesh

Bring the disadvantaged, mostly the women

from the poorest households, within the fold
of an organizational format which they can
understand and manage by themselves
Reverse the age-old vicious circle of "low
income, low saving & low investment", into
vicious circle of "low income, injection of
credit, investment, more income, more
savings, more investment, more income

FINANCE
Many microfinance practioners have adopted
the Grameen bank model but have modified it
to suit the environment they operate in.
Bank Rakyat Indonesia started in 1964. It is
state owned with a biggest outreach of more
than 3 million clients.

FINANCE
Banco Sol in Latin America is one of the
successful banks in solidarity group lending in
the world.
SafeSave in Bangladesh
K.Rep in Kenya started as an NGO but later
transformed into one of the most successful
banks in Africa in terms of products
development and branch network.

FINANCE
In the 1980s a majority of agricultural credit
was provided by government sponsored
programs and usually heavily subsidized. At
present a variety of new initiatives for savings
and credit have sprang up.

CHARACTERISTICS OF MFIs
The activities usually involve:
Small loans
Informal appraisal of borrowers and
investments
Collateral substitutes, such as group
guarantees
Access to repeat and larger loans, based on
repayment performance

MICROFINANCE
NOTE:
MFIs can be non-governmental organizations
(NGOs)
savings and loan cooperatives
credit unions
government bank
commercial banks, or non-bank financial
institutions.

REASONS FOR GROWTH OF
MICROFINANCE GLOBALLY
The growing number of success stories
Availability of better financial products as the
result of experimentation and innovation
Microfinance contribution in strengthening
and expanding existing formal financial
systems
The potential to build on traditional systems
The promise of reaching the poor

MFIs FINANCIAL SERVICES
MFIs offer variety of products and services to
their clients
The services include financial services and non-
financial services
Most MFIs provide some form of social
intermediation, especially if they work with
groups
Also some MFIs provide enterprise development
services such as skills training and business
training that include book-keeping, marketing,
production
The services help to improve the ability of low
income or poor individuals to operate
microenterprises efficiently and utilization of MFIs’
financial services
Which services should be offered by MFIs?
Decision about services to offer depends on
different factors that include:
• MFIs’ objectives
• Target market demand
• Presence of other service providers
• Cost of delivering the services
The characteristics of the environment in
which the product will be delivered
Virtually all MFIs offer credit services to their
clients
Moreover, MFIs offer other financial products
that include savings, micro-insurance, micro-
pension, credit cards and payment services

Credit products: Low-income households
demand loans for both income generation
and income smoothing and risk
management.
Micro-insurance: Micro-insurance is the
provision of insurance to low-income
households, including insurance for life,
health, property, disability, and agriculture
(crop).

Money transfers and remittances:
Microfinance institutions have recently started
to enter the remittances market, and they will
have an important role in reducing the
transaction costs of remittances in the future.

Agricultural and rural finance: Agriculture
lending is increasingly seen in the context of
building permanent rural financial systems
rather than separate agricultural credit
schemes, and as one among many
necessary interventions for food security and
rural development.

Housing loans: There is a close connection
between housing and income generation
since a house often is used as a shelter and
as a place to house income-generating
activities. Few MFIs provide housing loans
today, but new initiatives are emerging.

SAVINGS
Savings: Savings are often the only way of

managing emergencies, smoothing
consumption, paying for a major life event
and taking advantage of a business
opportunity. The poorest often prefer to save
instead of taking a loan, mainly due to risk
and cost aspects.

SAVINGS
Some MFIs do not provide saving services
due to:
Mistaken belief that poor cannot save and do
not save
Regulatory restrictions, they are not allowed
to mobilize deposits until they meet certain
conditions
Subsidized credit funds contribute to limited
mobilization of saving deposit as well

SAVINGS
Poor people save for the following needs:
Consumption smoothing
Investment or business opportunities
Life-cycle events
Retirement
Emergencies

SAVINGS
Savings clients are influenced by three major
benefits:
Convenience
Liquidity
Security

SAVINGS
Limitations of informal savings
High risk
Indivisible
Illiquid
Limitations of formal savings
Complicated procedures
Minimum balance requirements
Inconvenient location

SAVINGS
Low-income clients are often unable to
access savings services from traditional
banks due to:
Limited branch network or
Reluctance of banks to deal with small
amounts of money

SAVINGS
MFIs mobilize savings in two different ways
Compulsory savings
Voluntary savings

MFIs CLIENTS
Women
Low income individuals
The poor
Micro-entrepreurs
Smallholder farmers
Resettled persons

Capital and Funding Sources
Donor funds
Retained earnings
Compulsory savings
Voluntary savings
Loans from commercial sources and paid-in-
equity
Local donations and contributions

MICROFINANCE IN TANZANIA
Until mid 1990s Microfinance was still a

relatively new concept in Tanzania
Microfinance in Tanzania began with NGOs
and SACCOs (Savings and Credit
Cooperative Organizations) and has
continued to grow with the increased success
of microfinance internationally.

The government tried to convince commercial

banks to support small and medium
businesses
Once the National Microfinance Policy (2000)
was implemented in 2001, microfinance was
officially recognized as a tool for poverty
eradication and with its increased use and
exposure to the country, banks interest in
offering microfinance services was enhanced

In 2005 a survey was done by the Bank of

Tanzania (the overseer of microfinance under
the Ministry of Finance) and updated the
directory of microfinance practitioners and
included basic information on microfinance
institutions including commercial banks,
financial institutions, financial Non-
Governmental Organizations (NGO)

Savings and Credit Cooperatives Societies

(SACCOs) and Savings and Credit
Associations (SACAs).
The directory included a total of 8 banks, 45
CBOs, 2 companies, 95 Government
programs, 1,620 SACCOs, 48 SACAs and 62
NGOs.
In 2013 the number of SACCOs reached
5,559 (URT, 2013)

THANK YOU FOR LISTENING
Is microfinance useful to men or women?

Discuss

MICRO FINANCE AND TRADITIONAL
BANKING
Providing microfinance services is very
different from providing traditional banking
services and various models have been
developed and adapted to deal specifically
with the unique requirements of microfinance
clients.
8 May 2019 Dr Macha J 1

DIFFERENCES BETWEEN MICRO FINANCE
AND TRADITIONAL BANKING
Size of Loans
The micro-finance institutions have relatively small
capital base than commercial banks. MFIs therefore
deal with small loans relatively to their size.
The table below indicates minimum core capital
requirements for banks and financial institutions in
Tanzania (BAFIA, capital adequacy regulation, 2015)

DIFFERENCES BETWEEN MICRO
FINANCE AND TRADITIONAL BANKING
S/No. Types of Institutions Minimum Core Capital
1 Fully-fledged Banks
Commercial Banks Fifteen billion shillings

Cooperative Banks (Nation-wide network) Fifteen billion shillings
2 Limited Scope Banks

Microfinance Banks Five billion shillings
Community Banks Two billion shillings
Cooperative Banks (Regional) Five billion shillings
3 Specialized Institutions
Development Finance Institutions Fifty billion shillings
Finance Lease Companies One billion shillings
Housing Finance Companies Fifteen billion shillings
Tanzania Mortgage Refinance Company Six billion shillings
(TMRC)
Merchant Banks Twenty five billion shillings
Islamic Banks Fifteen billion shillings

Operations and requirement
Microfinance operations are simpler than
commercial banks operations. Commercial
banks have complex loan procedures that
take long to process and require a lot
information to be provided

Cost of loans
Generally, MFIs charge high interest rate compared
to conventional banks because the funding could
be expensive if no donor funds or subsidies and
they deal with relatively risky set of borrowers with
collateral free loans
In addition, MFIs charge high interest rates
because their borrowers have no sizeable
overheads and can afford to pay. Due to their size,
follow up costs are high. Commercial interest rates
are relatively lower.
To some MFIs interest rate ranges from 3%
to 20% per month (NMP, 2017). Commercial
interest rates are relatively lower. CGAP
(2002) indicates average returns for
microenterprises in Kenya, Philippines and
India ranged from 117 to 847%.

Type of borrowers
MFIs target the poor and unbanked low
income individuals. By the very nature of the
business, micro finance institutions face high
administrative costs per loan. Also intensive
monitoring efforts are required to ensure
payment. Most of the micro entrepreneurs do
not keep financial records and assessment of
performance is difficult and costly.

On the contrary conventional commercial
banks target customers who can afford bank
conditions. Banks prefer large businesses
where they can obtain big interest income.

Collateral
the banking and financial institutions act
requires lending be subject to collateral.
Micro-finance has other forms of collateral
which are substitute and alternative forms of
collaterals

Door step’s financial services
Most of the services provided by commercial
banks are bank door services, which means the
clients have to go to the banks to avail financial
services. Most of the services provided by
Microfinance institutions are door step services,
which means the staffs of the MFIs deliver their
financial services at client’s door step.

Lending models
Microfinance use both individual and group lending
models, but conventional banks commonly use
individual lending model; e.g. a group 5-individuals
from a particular community may borrow individual
loans and guarantee each other.
Thus, they’re effectively borrowing the loans
together since if one person cannot pay back his or
her loan, then others have to pay it back or they are
all at the risk of defaulting and never borrow from
the MFI again
Compulsory savings
It is also known as compensating balances or
forced savings that represent the amount of
fund which must be contributed by the
borrower as a condition for receiving a loan
Many MFIs require clients to hold a balance
stated as a percentage of the loan in savings
for first or subsequent loans (or both)
Compulsory savings are not available for
withdrawal while a loan is outstanding
compulsory savings act as a form of collateral
Most compulsory savings are available for
withdrawal only at the end of the loan term,
provided the loan has been repaid in full

COMPULSORY SAVINGS
MFIs imposes compulsory savings so as to:

Enhance clients’ savings discipline
Protect clients’ savings from less important uses
Act as a form of collateral
Serve as an important source of loan capital to
MFIs
Provide a stable source of funds to MFIs
because they are illiquid
Obtain less costly funds than liquid savings
services
COMPULSORY SAVINGS
The drawbacks of Compulsory savings to clients
limited access to their savings
They might be forced to borrow from expensive
sources to meet emergencies
Lose access to credit incase circumstances force
them to withdrawal the savings
Part or all savings could be lost due to group
members’ default
It may exclude the very poor

SUPPLIERS OF FINANCIAL
INTERMEDIATION
Formal sector institutions
Semi-formal sector institutions
Informal sector institutions

FORMAL SECTOR INSTITTUTIONS
These are institutions, which are subjected

not only to general company laws and
regulations but also to specific banking
regulations and supervision. These include
Commercial banks
Savings banks
Rural banks
Postal savings banks

FORMAL SECTOR INSTITUTIONS
Cooperative banks
Development banks
Finance companies
Building societies and Credit unions
Pension funds
Community banks
E.g. CRDB, Akiba bank, TPB, NMB, Access
bank,

SEMI-FORMAL SECTOR
INSTITUTIONS
They are not regulated by banking authorities

but are usually licensed and supervised by
other government agencies.
Semi-formal institutions provide products and

services that fall somewhere between those
offered by formal sector and informal sector
institutions.
SEMI-FORMAL SECTOR
INSTITUTIONS
The design of their loans and savings
products often borrows characteristics from
both sectors.
In most countries semi-formal institutions

often receive donor and government support
through technical assistance or subsidies for
their operations. Examples
SEMI-FORMAL SECTOR
INSTITUTIONS
Savings and credit cooperatives
Multipurpose cooperatives
Credit unions
Village banks
Registered self-help groups and savings club
Non-governmental organizations , e.g. Pride
Tanzania, SEDA, PTF

INFORMAL SECTOR INSTITUTIONS
Informal financial intermediaries operate

outside the structure of government
regulation and supervision.
Often they do not comply with common book

–keeping standards and are not reflected in
official statistics on the depth and breadth of
the national financial sector.
It is an unorganized ‘nuisance’ sector whose

members, for example do not pay any form of
tax, on the other hand it provides jobs and
increase incomes of the most vulnerable
groups in a city – the very low income group.

Savings and loan associations

Rotating savings and credit associations
Non-registered self-help groups
Individual moneylenders
Pawnbrokers
Traders and shopkeepers
Families and friends

SELF-HELP GROUP
It is also known as the bank-linkage model
It commonly involves two institutions i.e NGO
promoter and banks
NGOs and other government programs facilitate the
formation of SHGs
A good example in Tanzania is CRDB bank-linkage
model
The members maintain their accounts with the SHGs
Normally bank does not have direct dealing with
individual members

SELF-HELP GROUP
The group make decision on regular savings
that is managed by group
Members can borrow individually from the
group at terms decided by the group
SHG opens bank account and deposit funds
in order to qualify for bank loans
Well kept records by the SHG, swift account
operations and other qualifications enable the
group to access bank loans for on-lending to
its members
SELF-HELP GROUP
Benefits of using groups in MFIs
Economies of scale – more clients served by a fixed
operating investment
Economies of scope – ability to deliver multiple
services through group mechanism
Reduce information asymmetry
Improve loan collection
Costs and risks transferred to clients
Reduce moral hazard risks through group monitoring
Assistance with repayments

SELF-HELP GROUP
Disadvantages of using groups
Group formation and maintenance can be
costly, time-consuming
Costs and risk are transferred to clients
Reduced learning of individual client’s credit
histories

SELF-HELP GROUP
SHGs
Bank:
Group savings
External loans
SHG:
Savings
Internal account
Internal loans
NGOs:
Group formation
Training

SELF-HELP GROUP
Internal loans are small and mostly used for
consumption purposes
Income generation mainly begins once the
group access bank loans
Loans are used for wide range of economic
activities

ACCUMMULATED SAVINGS AND
CREDIT ASSOCIATIONS (ASCA)
ASCAs – it involves keeping savings collected from
members during the meetings
The savings act as the source of fund that is lent to
members at their convenience
Interest is earned on the amount lent to members
Accumulation of savings can take place indefinitely
The collection and distribution do not necessarily
match
Typically all capital is distributed periodically and the
group is dissolved

MICROFINANCE TIERS IN TANZANIA
The National microfinance act 2018,

recognizes four tiers of microfinance in
Tanzania
Tier 1: Deposit taking microfinance service
institutions
Tier 2: non-deposit taking microfinance
service providers such as individual
money lenders

MICROFINANCE TIERS IN TANZANIA
Tier 3 : Comprise of SACCOS

Tier 4: comprise of community microfinance
groups

ROLES OF MICROFINANCE
INSTITUTION
They provide the rural population with access
to savings within the local area and with a
certain cushion against economic
fluctuations, and they encourage a
cooperative and community feeling, as
evidenced by

INSTITUTION
Microfinance institutions play a
complementary role to the banking system by
extending credit to borrowers whom banks
view as too costly or too risky to reach.
Microfinance institutions can play an
important role in development in
circumstances where other sectors of the
economy are repressed.

INSTITUTION
Microfinance institutions attempt to compete
with moneylenders by offering credit to a
broader range of households on more
favorable terms.
Lacking collateral, and often living far from
banks, poor households often turn to expensive
informal moneylenders when confronted with
urgent credit needs. Repayment of these
moneylenders may leave some families worse
off.

INSTITUTION
The groups formed provide joint collateral
and serve as instruments for spreading
valuable information that is useful for
economic and social progress.
All economies rely upon the financial
intermediary function to transfer resources
from savers to investors.

PRINCIPLES OF MICROFINANCE
The poor need a variety of financial

services, not just loans
Poor people need a wide range of financial
services that are convenient, flexible, and
reasonably priced.
Depending on their circumstances, poor
people need not only credit, but also savings,
cash transfers, and insurance.

Microfinance is a powerful instrument

against poverty
Access to sustainable financial services
enables the poor to increase incomes, build
assets, and reduce their vulnerability to
external shocks. Microfinance allows poor
households to move from everyday survival
to planning for the future, investing in better
nutrition, improved living conditions, and
children’s health and education.
Microfinance means building financial

systems that serve the poor
Poor people constitute the vast majority of the

population in most developing countries. Yet,
an overwhelming number of the poor
continue to lack access to basic financial
services.
In many countries, microfinance continues to

be seen as a marginal sector and primarily a
development concern for donors,
governments, and socially-responsible
investors.
In order to achieve its full potential of
reaching a large number of the poor,
microfinance should become an integral part
of the financial sector.

Financial sustainability is necessary to

reach significant numbers of poor people.
Most poor people are not able to access
financial services because of the lack of
strong retail financial intermediaries. Building
financially sustainable institutions is not an
end in itself.

It is the only way to reach significant scale

and impact far beyond what donor agencies
can fund. Sustainability is the ability of a
microfinance provider to cover all of its costs.
It allows the continued operation of the
microfinance provider and the ongoing
provision of financial services to the poor.

Achieving financial sustainability means

reducing transaction costs, offering better
products and services that meet client needs,
and finding new ways to reach the unbaked
poor.

Microfinance is about building permanent

local financial institutions
Dependence on funding from donors and
governments—including government-
financed development banks—will gradually
diminish as local financial institutions and
private capital markets mature.

Micro-credit is not always the answer

Micro-credit is not appropriate for everyone or
every situation.
The destitute and hungry have no income or
means of repayment need other forms of
support before they can make use of loans.

In many cases, small grants, infrastructure

improvements, employment and training
programs, and other non-financial services
may be more appropriate tools for poverty
alleviation.
Wherever possible, such non-financial
services should be coupled with building
savings.

THANK YOU FOR LISTENING
End

LENDING IN MICROFINANCE
In practice the micro-credit are the first

products offered by MFIs once they open
their doors
Micro-loans can be offered by any institution
that include regulated and non-regulated
such as private and public financial
institutions, moneylenders etc.
Micro-enterprise lending were the common
development tool during 1980s and 1990s.

Most of the poor and micro-enterprises fail

access credit services due a number of
limitations which are addressed in
Microfinance such as:
Lack of Collateral - Micro-lending
methodologies involves the use of non-
traditional collateral, peer pressure, social
capital, incremental lending and compulsory
savings

Information asymmetries – poor lack credit

history and business records thus difficult for
banks to asses their character. The asymmetry is
reduced in microfinance through the use of
groups, guarantors, stepped lending
Minimizing costs – Simple credit procedures, shift
some of costs to groups like loan appraisal and
monitoring, low cost staff members, basic
infrastructure in offices, immediate follow up of
delinquent loans

LENDING METHODOLOGIES IN
MICROFINANCE
The methods can be divided

into two broad categories
Individual Lending
Group lending

LENDING METHODOLOGIES IN
MICROFINANCE
Individual loans – are delivered to individuals
based on ability to provide the MFI with
assurances of repayment and some level of
security.
Group based approaches – loans granted to
groups, that is either to individuals who are
members of a group and guarantee each
other’s loans or to groups that then sub loan
to their members.

INDIVIDUAL LENDING
Most MFIs have successfully developed

effective models to lend to individuals that
use both formal lending and informal lending
as done by money lenders.
It does not rely on groups to overcome the
challenges of lending to the poor
It adapts conventional banking to the unique
characteristics of target clients or informal
businesses

INDIVIDUAL LENDING
Information to assess risk is not gather through

documents, rather through inspection of business
and household, recommendation from respected
individuals in the community.
Similar to banking, assessment for credit
decision consider character, capacity and
collateral (among the 5 Cs of credit assessment)
Other Cs may be consider too such as capital
and condition
However, with varied emphasize, where the
primary being character, capacity and finally
collateral.
INDIVIDUAL LENDING
The character of prospective borrower can be
assessed through Interview with :
Neighbours
Customers
Suppliers
Community leaders

INDIVIDUAL LENDING
Loan assessment determines the cash flow
of the entire family. Normally, poor or low
income individuals have several sources of
income as part of their survival and risk
reduction strategy.
Collateral – there are wide options for
security in micro-lending relative to
conventional banking that include personal
guarantees, jewellery, productive assets from
the business, household furniture
INDIVIDUAL LENDING
The above non-traditional forms of collateral
primarily demonstrates borrowers
commitment and rarely used as secondary
source of repayment

INDIVIDUAL LENDING
In the Informal sector lending:

They approve loans based on personal
knowledge of the borrower rather than on the
sophisticated feasibility analysis, also they
use informal collateral.
Less bureaucratic procedures in responding
to clients needs.
Money lenders demonstrate that the poor do
repay loans and able to pay relatively high
interest rates.
INDIVIDUAL LENDING
But in most cases loan from money lenders

are often not taken for productive purpose
rather for emergency or consumption
smoothing.
Interest rates are higher than formal sector
loans but lower than informal sector loans.

INDIVIDUAL LENDING
Screening of potential clients by credit checks

and character references.
Tailoring of loan size and term to business
needs
The frequent increase over time for the loan
size and terms to business needs.
Efforts by the staff to develop close
relationship with clients
Referees, financial analysis, credit history
INDIVIDUAL LENDING
Frequent and close contact with individual

clients.
It is more/ often successful in urban where
client access is possible.
Individual lending can also be successful in
rural areas, especially through savings and
credit cooperatives or credit unions.
Compulsory savings usually not required

INDIVIDUAL LENDING
Loans to individuals are usually larger than

loans to members in groups
Provide revenue base to cover the costs of
delivering and maintaining the loans than
group loans.
Training and technical assistance may be
provided by credit officers, sometimes per
fee- basis or mandatory.

INDIVIDUAL LENDING
Use of commercial banks for collection and

disbursement.
e.g.
ADEMI (The association for development
of micro-enterprise) Dominican Republic
FECECAM – Benin – rural areas
bank Rakyat – Indonesia
Self – employed women's (SEWA)
association – India
GROUNP vs. INDIVIDUAL LENDING
Group meetings can be used to educate clients –

issues like nutrition, family planning,
Groups encourage economic and social
cooperation – useful for bulk purchases, group
security in market places, digging wells, pit latrines
Groups enhance negotiation skills
Networking opportunities
Group methodologies are more appropriate for new
business, individuals who lack collateral
Cost per loan in individual lending are relatively
higher than group lending
GROUP BASED LENDING
It involves the formation of groups of people
who have a common wish to access financial
services.
Group - lending approaches frequently build
on or imitate existing informal lending and
saving groups e.g Rotating savings and credit
associations (ROSCAS).

GROUP BASED LENDING
Group-lending have adapted the ROSCAS
model to provide extra flexibility in loan sizes
and terms and in general to allow borrowers
access to funds when needed rather than to
wait for their turn
Borrower groups or guarantors help to assess
the character and capacity of micro-loans
applicants e.g. Grameen Bank – Bangladesh
Stepped lending i.e. gradual increase of loans
help to learn about the borrower and enterprise
GROUP BASED LENDING
ACCION International’s solidarity group
lending
Grameen and ACCION, facilitate formation of
small groups (4 to 7 people) and make
individual loans to group members
Other models like village banking used by
FINCA utilize larger groups of between 30
and 50 members , also lend to group itself
rather than to individuals

ADVANTAGES OF SOLIDARITY GROUP
LENDING
The use of peer pressure as a collateral

substitute
The group – based lending programs target the
very poor, who cannot meet the traditional
collateral required by most Fls rather guarantees
are established as collateral substitutes.

ADVANTAGES OF SOLIDARITY GROUP
LENDING
It reduces certain institutional transaction

costs; this is due to shifting of screening and
monitoring costs to the groups
The group meetings held regularly may tend
to avoid or reduces MFIs individual client’s
business visit

DISADVANTAGES OF SOLIDARITY GROUP
LENDING
Group training costs tend to be quite high
Client transaction costs are high as well as

more responsibility is shifted from the MFI to
the clients themselves

DISADVANTAGES OF SOLIDARITY GROUP
LENDING
Some members in groups may default, and

other group members may be punished for
the irresponsible repayment of other group
members.
If several members of a group encounter
repayment difficulties the entire group often
collapses, leading to a domino effect.

The most well- known lending
methodologies are:
Individual lending
Grameen solidarity group lending
Latin America solidarity group lending
Village banking
Self reliant village Banks

INDIVIDUAL LENDING
Refers to provision of credit to individuals
who are not member of a group that is jointly
responsible for loan repayment.
It requires frequent and close contact with
individual clients to provide credit product
tailored to the specific needs of the business.

GRAMEEN SOLIDARITY GROUP
LENDING
This was developed by Grameen Bank of
Bangladesh to serve rural, landless women
wishing to finance income generating
activities.
The model is prevalent mostly in Asia and it
has been replicated in other contents, such
as Asia, Africa and Latin America.

LENDING
Peer groups of five unrelated members are
self-formed and incorporated into village
centres of up to eight peer groups
Attendance of weekly meetings and weekly
savings contribution, group fund contributions
and Insurance payments are mandatory

LENDING
Savings done for four to eight weeks prior
receiving a loan and must continue for the
loan duration
Group fund is managed by group and can be
lent to group members
Group member guarantee each other’s loan
and are legally responsible for repayment by
other members.

LENDING
No further loans given if all members do not
pay their loans on time
No collateral is required
Loans are made to individuals within the
group by the local credit officer at the weekly
meetings, initially two members receive loan,
after repayment two members will also
receive a loan etc.

LENDING
Credit officers usually carry between 200 and
300 clients.
They provide pre-credit orientation and
minimal technical assistance.
Loan appraisal is performed by group
members and centre leaders

VILLAGE BANKING
These are community – managed credit and
savings associations established to provide
access to financial services in rural areas,
build community self-help groups, and help
member accumulate savings
The model was developed in the mid 1980s
by FINCA (Foundation for International
Community Assistance)

VILLAGE BANKING
The bank is financed by internal mobilization

of members funds, and loans provide by
MFIs.
A village bank consists of its membership and
management committee, that receive training
from the sponsoring MFIs.

VILLAGE BANKING
Membership in a village bank usually ranges
from 30 to 50 people, and most of whom are
women
Membership in a village bank is based on self
selection
The sponsoring MFI lends seed capital
(external account) to the bank, which then
lends on the money to its members

VILLAGE BANKING
All member sign the loan agreement to offer a
collective guarantee
The loan amount to the village bank is based
on an aggregate of all members loan
requests
Basically the amount varies btn countries, but
commonly they are small like $ 50 and
typically short term loans (four to six months)
Repaid in weekly instalments

VILLAGE BANKING
The amount of the second loan will depend
on the members’ savings during the first loan
period through weekly contributions
The methodology anticipates that the
members will have saved a minimum of 20%
of loan amount per cycle (internal account)
No interest paid on savings

VILLAGE BANKING
Regular weekly meetings or monthly are held

to collect savings deposits, disburse loans,
attend administrative issues, training by MFIs
officers
Members receive a share from the bank’s
relending or investment profits
E.g. FINCA, CARE , Catholic Relief Services
(CRs)

SELF-RELIANT VILLAGE BANKS
Also known as savings and loans

associations
They are established and managed by rural
village communities
They differ from village banks in that they
cater for the needs of the village as a whole,
not just a group of 30 to 50 people.

The model was developed by a French NGO,

The centre for international development and
research, in the mid 1980s
The supporting program identifies villages
where social cohesion is strong and the
desire to set up village bank is clearly
expressed
The villagers themselves set the rules for
their organization

They elect the management and credit

committee and two or three more managers
depending on the needs of the bank
The self-reliant village banks mobilize savings
and extend short term loans to villagers on an
individual basis
The sponsoring program does not provide
lines of credit

The association acts as intermediary and

negotiate lines of credit with local banks
This links the village banks to the formal
financial sector
There is no direct link between loan amounts
and a member’s savings capacity
Interest rates are set by each village
according to its experience with traditional
savings and loan associations

Loans are to individuals and collateral is

necessary, above all it is village trust and
social pressure that ensure high repayment
rates.
Loans are paid in one installment
E.g. Burkina Faso, Madagascar, Gambia
(Village savings and credit associations or
VISACA)

LATIN AMERICAN SOLIDARITY GROUP
LENDING
They provide loan to individual members in

groups of four to seven
Member cross guarantee each other’s loans
to replace traditional collateral
The model was developed by ACCION
International in Latin America and adapted by
many MFIs

LENDING
Clients are mainly informal sector micro

business e.g. Merchants, who need WC
Group members guarantee loan repayment
Access to subsequent loan depends on
successful repayment by all group members

LENDING
Payments are made weekly at program office.

The model incorporates minimal technical
assistance to the borrowers, such as training
and organization building
Credit officers work with between 200 and
400 clients do not get to know their clients
very well

LENDING
Loan disbursement is made to group leader

at branch office who immediately distributes
to each member.
Credit officers make brief, occasional visits to
individual clients
credit officers perform an analysis of each
client’s loan request (less intensive compared
to individual model)
Group members receive equal loan amount
with some flexibility in subsequent loan.
LENDING
Savings are often required but often deducted

from the loan amount at the time of
disbursement rather than client save prior
loan.
Savings save primarily as compensating
balance, guaranteeing a portion of the loan
amount.

LENDING
Initial loan $100 to $ 200, subsequent no

limit.
Interest rates are high and service fees
charged
Very few voluntary savings products offered
The Latin American methodology is a
minimalist approach
E.g. BancoSol Bolivia

THANKS FOR LISTENING
WISH U ALL THE BEST

International Journal of Business Marketing and Management (IJBMM)
Volume 2 Issue 3 March 2017, P.P.60-70
ISSN : 2456-4559
www.ijbmm.com
Village Community Banks (VICOBA) and Members’ Business

Sustainability: Case study of Kunduchi Ward at Kinondoni
District in Dar es Salaam
Dr. Simon S. Lushakuzi1, Kissa Killagane2 and Goodlove E. Lwayu3
ABSTRACT : This study was conducted in Dar es Salaam at Kinondoni District. The main objective of the
research was to analyse the contribution of VICOBA and members’ business sustainability at Kunduchi Ward.
It focused on members who own business in ten (10) VICOBA groups found in Kunduchi ward, whereby the
members’ businesses seems to be not performing well although VICOBA provide credits, trainings and
supervision to its members. Literature review focuses on Entrepreneurship theory and Grameen model.
A case study design was adopted with a sample size of seventy six (76) respondents through the Glenn sample
size formula. The research used questionnaire to VICOBA members and interview guide to VICOBA trainers.
The research findings were based on credits, trainings and supervisions of VICOBA to its members’ business,
whereby VICOBA provide credits in a simple way but they have no enough business trainings and frequently
supervision which lead to the failure of business performance.
The study came up with the conclusion that, provision of credits alone to VICOBA members does not make their
businesses perform well but also there is a need for VICOBA to provide business skills and frequently
supervision in order for the members to obtain right skills and operate their businesses under competitive
environment.
I. INTRODUCTION
Despite, all bank operations being managed by VICOBA members themselves at the village/street level
and model experts capacitate them with trainings on group leadership, business operation, risk management and
entrepreneurship skills, still their income generating activities are not sustainable, and fail to develop their
businesses.
However, VICOBA members‘ growth and development were mainly inhibited by access to finance, poor
managerial skills, and lack of training opportunities and high cost of inputs (Cook &Nixson, 2000).Therefore,
business has to consider the sustainability strategies as a means of business survival. Yunus (1984) argued that,
whether like it or not sustainability offers both threats and opportunities for small businesses, and the potential
impact on companies' long-term success.
According to the report by the government of Tanzania three organisations, namely SEDIT, Care International
and WCRP played a great role in the formulation and growth of VICOBA in the country (URT, 2009). Basing
on that fact, the government continued to implement the National Economic Empowerment Policy by
disseminating it to the majority of citizens to enable them understand it and participate effectively in its
implementation; provide training to entrepreneurs; sensitization on saving and investment, sensitization on
formation of SACCOS and VICOBA; and conduct studies aiming at developing entrepreneurship skills, as well
as initiating and improving economic activities (URT, 2011).
Financial Institutions continued to support Entrepreneurs by providing special trainings and supervision on how
to manage loans they get from the financial institutions. Due to that some of the Entrepreneurswere forced to
introduce Income Generating Activities (IGAs) in order to get a weekly or monthly interests. Unfortunately,
they failed to get any supervision from Finance providers on how to conduct their IGAs in order to be
successful. As a result, customers‘ IGAs were not sustainable and failed after sometime.
In general, the primary purpose of all credit programs for small and micro-enterprises is to raise the living
standards of beneficiaries, their families and their communities through improved production in their businesses
(Basu, 2005).
International Journal of Business Marketing and Management (IJBMM) Page 60

Village Community Banks (VICOBA) and Members’ Business Sustainability: Case study of Kunduchi.
Therefore, the researcher finds that there is a gap between VICOBA and member‘s business sustainability, so
the research analysed the contribution of VICOBA on member‘s business sustainability in Kunduchi Ward.
II. LITERATURE
Village
Village is the word which originates from old French, from ―ville‖ farm from Latin villa (Oxford
Dictionaries, 2014). A village is a small settlement usually found in rural setting, generally larger than a hamlet
but smaller than a town, having between 500 to 2500 inhabitants (Stevenson, 2006; Websters-online-
dictionary.org, Economic and Social Research Foundation, 2015 and Cambridge English Dictionary).In most
parts of the world, villages are settlements of people or community clustered around a central point. A central
point is most often a church, marketplace, or public space like open space or developed square, and a village
organized in this way is called a nucleated settlement. Some villages are linear settlements. This line can be
natural, such as a river bank or seashore. Also, villages are developed around a transportation route, such as a
railroad line. In addition, there planned villages, outlined by city planners for purpose of easy provision of
various services like education, health, local jobs and financial assistance by government or non government
organizations. A village as settlements has primary activities such as farming, fishing, mining, livestock
keeping, and trading centers. This was the case in most countries in the world before industrial revolution. The
industrial revolution of the late 18th and early 19th centuries forever changed village life. As this happened,
countless small villages grew into cities and towns as nucleated settlements build up around factories, where
before industrialization many villages were build up around churches, schools or community centers (Taylor, C.
1984;Wild, M. T., 2004; Stevenson, 2006 and OECD, 2011).
Villages function as units of local government. In most countries including Tanzania, a village is an official
administrative unit (Economic and Social Research Foundation, 2015; OECD, 2011; Wild, , 2004 and
Stevenson, 2006). So, as an administrative unit is a single component of government, with its own leadership
and services. Villages are normally permanent, with fixed dwellings; however, transient villages can occur.
Community
The term "community" is used extensively in almost all areas of our lives. The word "community" derives from
the Old French comuneté which comes from the Latin communitas (from Latin communis, things held in
common) (http://www.oxforddictionaries.com/definition/english/community) and has been used in the English
language since the 14th century.
A community is commonly considered a social unit (a group of three or more people) who share something in
common, such as norms, values, identity, and often a sense of place that is situated in a given geographical area
(e.g. a village, town, or neighborhood). Although communities are usually small relative to personal social ties
(micro-level), "community" may also refer to large group affiliations (or macro-level), such as national
communities, international communities and virtual communities. The concept which was further developed in
the 19th century to contrast the dynamics and relationships of residents within a local setting to that of larger and
more complex industrial societies (Bakardjieva, 2008).
Thus, it refers to both the development of a social grouping and also the nature of the relationship among the
members. The term is most often associated with one or more of the following characteristics: common people,
as distinguished from those of rank or authority; a relatively small society; the people of a district; the quality of
holding something in common
and a sense of common identity and characteristics.
In addition community is Self-organized network of people with common agenda, cause, or interest, who
collaborate by sharing ideas, information, and other resources.
(www.businessdictionary.com/definition/community.html).
Today, the following main types of communities have been identified by Delanty, 2003 and James, 2006. First,
location-based communities where member share physical space, they range from the local neighbourhood,
suburb, village, town or city, region, nation or even the planet as a whole. These are also called communities of
place or Geographic communities. Second, identity-based communities in these communities‘ members choose
to associate with each on the basis of a common interest or shared concerns. They are sometimes formed by
self-identified members of a reference group based on characteristics outside of their control. They may be
included as communities of need or identity, such as disabled persons. These are also called Communities of
interest or are sometimes referred to as "communities within communities". Third, organizationally based

communities which range from communities organized informally and associations to more formal incorporated
associations, like, economic enterprises or professional associations at a small, national or international scale.
Lastly are virtual communities which are groups of people that primarily interact via communication media
rather than face to face. Their called an online community, if the mechanism is a computer network (Rheingold,
2008).
An individual can belong to several different communities at the same time. Communities can be healthy or
unhealthy. In an unhealthy community there may be an environmental disaster, a high level of poverty, or
entrenched conflict over a divisive community issue. A healthy community starts with broad community
engagement, leadership, and the development of a shared vision and community goals, effective planning, local
government commitment and collaborative use of internal and external resources.
(www.librariesincommunities.ca/?page_id=3)
Bank
In Tanzania, a bank is an institution authorized to receive money on current account subject to withdrawal by
cheque (http://www.bot.go.tz/BankingSupervision/registeredBanks.asp). Banks are licensed to deal with money
and its substitutes by accepting time and demand deposits, making loans, act as an intermediary in financial
transactions, and provide other financial services to its customers and investing in securities. The bank generates
profits from the difference in the interest rates charged and paid (www.advfn.com/money-
words_term_401_Bank.html).
Banks do many things, but their primary role is to take in funds—called deposits—from those with money, pool
them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to
the bank) and borrowers (to whom the bank lends money). Depositors can be individuals and households,
financial and nonfinancial firms, or national and local governments. Borrowers are the same (Gobat, 2012).
Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit
organizations.
The banking industry can be divided into following sectors, based on the clientele served and products and
services offered. The classification includes: Community banks which are locally operated financial institutions
that empower employees to make local decisions to serve their customers and the partners; Community
development banks which are regulated banks that provide financial services and credit to under-served markets
or populations;
Credit unions or co-operative banks are an important source of rural credit, governed by the provisions of State
Cooperative Societies Act and meant essentially for providing cheap credit to their members, who meet criteria
of the co-operative; Retail Banks also called savings banks provide basic banking services to all strata of the
population, specifically to individual consumers. In other countries are called Building societies and Postal
savings banks; and Commercial Banks which provide financial services to businesses. Others are Private Banks
which manages the assets of high-net-worth individuals; Offshore banks located in jurisdictions with low
taxation and regulation; Specialized Banks which are foreign exchange banks, industrial banks, development
banks, export-import banks catering to specific needs of these unique activities. These banks provide financial
aid to industries, heavy turnkey projects and foreign trade; Ethical banks that prioritize the transparency of all
operations and make only what they consider to be socially responsible investments; A direct or internet-only
bank which operate without any physical bank branches, conceived and implemented wholly with networked
computers;Investment Banks which assists individuals, corporations and governments in raising capital by
underwriting and/or acting as the client's agent in the issuance of securities; Thus, relate to activities on the
financial markets; Islamic banks adhere to the concepts of Islamic law; and also Central banks which are
normally government-owned and charged with quasi-regulatory responsibilities. They generally provide
liquidity to the banking system and act as the lender of last resort in event of a crisis. Central banks are bankers‘
banks, like Bank of Tanzania.
Business
Business is an activity, which provides society (or others) needed goods and services at a profit. It is engaged in
selling ―needed‖ goods to society (Schlais, et al. 2011). People organise to achieve some goal or objective. It
might be very long run complex plan such as establishing plants, equipment and a marketing force to dominate
the World unto market.
Every business requires three basic resources to function and compete: ideas, people and money. In the World of
business, those resources are configured and reconfigured over and over again to satisfy the needs and wants of
the market.

The real arts of business is to take the basic resources-ideas, people and money-and get them working together
as a growing, functional operation. Building a business requires the ability to understand and manage the
network of interrelationships that delivering your product or service to the market requires (Capsim, 2015).
Village Community Banks (VICOBA)

In Tanzania, the acronym ―VICOBA‟ for Village Community Bank was coined in September 2002. Social and
Economic Development Initiative of Tanzania (SEDIT), CARE and The World Conference Religion and Peace
(WCRP) are the major organizations that participated in coming up with the VICOBA concept and its acronym.
The background of the acronym is a CARE international model developed in Niger, West Africa in 1991 (URT,
2009). According to SEDIT (2010) VICOBA is a grassroots based lending model, which focuses on fostering a
participant‘s ability to innovate and manage viable income generating activities.
Thus, In addition, VICOBA is a non-traditional form of money-lending (Fisher &Sriram, 2004).
According to Bee, (2007), VICOBAs are groups of maximum 30 people that meet regularly, usually once per
week, to save shares in the VICOBA and give loans to the members. Among the 30 people there is one
chairperson, one secretary and one accountant. The members within the group are divided into sub-groups of
five people to work as each other‘s referees when someone wants to take a loan, which together with the savings
works as a collateral instead of other assets. VICOBAs are, as mentioned above, informal and not regulated or
controlled in any governmental act or policy and the VICOBAs form their own rules and regulations.
VICOBA is a self-financing scheme needing no external funds as the group members work with their own
capital mobilized through shares and other contributions. Matching loans may be provided to support substantial
loaning during the first cycle. The system on financial transactions is quite simple and transparent.
Documentation of the transactions is convenient even to the local people who are semi-illiterate. For example,
symbols and illustrations are used to clarify some of the complex mathematical operations (Bee, 2007).
Unlike with the conventional Microfinance Institutions, levels of the interest rates are low (5% - 10%) and are
decided by the members. Moreover, the interests paid are shared among the borrowers and thus increasing the
range of benefits to the members. In this way, the interest earned on loans goes directly to the group. This
demonstrates the focus of VICOBA on assisting the poor to improve their living standards through introducing
some income generating activities.
Moreover, VICOBA groups are guided by regulations, procedures and by-laws formulated by their own
members, and therefore promoting the sense of ownership. The consultants and field agents just provide
guidance and advice in the process. The group leadership team is democratically elected from among the group
members and serves voluntarily; this makes the leaders win the members‘ trust, respect and commitment to
obeying their instruction (Bee. 2007).
The internal social pressure of the collateral groups of five (5) members each and that of the large group
encourages members to mobilize weekly shares, reimburse loans on time and attend group meetings regularly.
VICOBA scheme does not prevent its members to participate in other savings and credit activities run by other
settings provided they continue abiding to the agreed by-laws, regulations and procedures.
Thus, VICOBA is a form of empowerment-based economics which falls under the larger umbrella of micro-
finance. Micro-finance as a whole is focused on the entrepreneurship of individuals, generally with a goal of
lifting low-income or disadvantaged groups out of poverty and providing the means for them to prosper
(Tervalon and Murray-Garcia, 1998). The methodology is simple and easy to replicate. It builds on local
capacities and is adapted to a wide variety of local cultural contexts. VICOBA has been implemented in many
places of Tanzania and looks very different in individual settings or within unique groups.VICOBA MODEL is
said to be a good TOOL to implement different policies, strategies, programs and projects (URT, 2010; SEDIT,
2008 & 2010; Kihongo, 2005 and Ngalemwa, 2013).
Furthermore, VICOBA members have been implementing Millenium Development Goals (MDGs),National
Strategy for poverty Reduction (MKUKUTA), Tanzania vision 2025 financial inclusion strategies etc. This
arrangement makes VICOBA groups the best economic building blocks (units) within both the rural and urban
settings (URT, 2010; SEDIT, 2008 & 2010; Kihongo, 2005 and Ngalemwa, 2013).
According to Bee (2007), VICOBA scheme emphasizes on capacity building of its members in order to improve
performance of their activities. Normally, before the onset of the VICOBA business operations, members attend
capacity building training courses on basic savings & credit skills, business Selection, Planning and
Management (SPM). Proportional sharing of revenue generated from loan interests and other group activities

encourages further investment among the individual members. Therefore, this research underpinned with the
Entrepreneurship Theory of Shane (2003) and Grameen Model of Professor Yunus Muhammad (1999).
Entrepreneurship Theory
The theory consists of opportunity discovery, evaluation of the opportunity and the decision to exploit the
opportunity. Others elements of the theory include self-employment, business operation and performance.
The theory highlights four operational measures of performance which are survival, growth,
profitability/income, and experiencing initial public offering. Survival refers to continuation of entrepreneurial
activity while growth refers to increase in the venture‘s sales and employment. Profitability refers to new
surplus of revenue over cost (Shane, 2003). For the purpose of this study the issue of experiencing initial public
offering will not be discussed.
Opportunities are created by the institutional or external environment for those entrepreneurs who could identify
them to start or improve their businesses and subsequently, their welfare (Fotabong and Akanga ,2005; Shane,
2003). Entrepreneurs‘ ability to identify and tap such opportunities differs between entrepreneurs. It also
depends on their ability to access information and willingness to act upon the information in terms of risk; that is
their attitude (Shane, 2003). Individual attributes affect discovery of entrepreneurial opportunity. It is made up
of psychological and demographic factors such as motives, attitude to risk, education and training, career
experience, age and social status.
Changes in business environment such as economic, financial, political, legal, and socio-cultural factors also
affect discovery of opportunity. For example, income level of the entrepreneur, capital availability, political
stability, poor supervision, laws concerning private enterprise and property rights, and desire for enhanced social
status by the entrepreneur could affect discovery of entrepreneurial opportunity.
Evaluation of the identified opportunity is another stage in the entrepreneurial process, and appropriate decision
at this stage leads to the decision to exploit the opportunity (Shane, 2003). The decision to exploit the
opportunity depends on the intention of the entrepreneur, and the appropriate measure of entrepreneurial
decision-making is intention which leads to recognition of entrepreneurial opportunities (Shane, 2003).
Exploitation of the opportunity depends on the entrepreneur‘s level of education, skills or knowledge acquired
through work experience, social networks; credit (Shane, 2003).
Grameen Model
The Grameen Model was invented in 1976 by Professor Muhammad Yunus, the founder and Managing Director
of Grameen Bank. The Model proved to be successful and today is practiced in more than 250 outlets of
Grameen Bank in more than 100 countries (Yunus, 1999). The Grameen model was copied and modified many
times according to the respective needs of regional markets and clients. Therefore many other models are
extensions of, or derived from, the Grameen Model. Basically a new branch of the MFI is set up in a village
with a Field Officer and some qualified workers, who have already done research on the population there in
advance and made their choice according to its potential demand and its need of financial support. These
employees of the MFI support then up to 15 to 20 villages in the surrounding and are strive to make the local,
poor people aware of the microfinance possibilities through word of mouth and personal advisory (Yunus and
Allan, 2007). The lending process is similar to the solidarity group approach. Groups of five are created.
However in the beginning only two members of the group receive a loan.
Sustainability and profitability of MFIs are monitored for one month. The credibility of the group will then be
based on the repayment performance of the first two individuals. If they are reliable and could pay back their
loan, the remaining members qualify for a loan as well, since the group is jointly and severally liable for the
single members. Given that loans are being correctly and timely repaid, the cycle of lending continues.
III. METHODOLOGY
Research Design
The case study design was applied in conducting the research because it is the most flexible of all research
designs, allowing the researcher to retain the holistic characteristics of real-life events while investigating
empirical events.

Sample size and Sample technique

Seventy six (76) respondents from VICOBA members and VICOBA trainers were involved in the study. This
number was considered appropriate due to time and cost constraints. The probability or random sampling was
adopted to select VICOBA members and VICOBA trainers.
n=
Where; n =sample size
N=population size
e= the level of precision i.e. 0.1 (10%)
In this study the questionnaire was designed with questions which were primarily based on multiple item
measurement scales. Questions were designed to evaluate business status and age of VICOBA members. Also,
questions on source of capital, loans offered by VICOBA, its type and repayment period. In addition questions
related to trainings and supervision offered by VICOBA to its members was designed. Data derived from
questionnaire were analyzed by using SPSS and results presented in tables.
FINDINGS
The respondents marked one of the options that best reflects his/her opinion. Their responses are illustrated in
Tables.
Table 1: Frequency distribution of business status
Business Status Frequency Percent
Well established 13 17.8
Young 27 37.0
Growing 21 28.8
Declining 12 16.4
Total 73 100.0
Source: Field Data, 2016
The table 1 illustrates that, 27(37.0%) of the respondents had businesses which are young. However, 21(28.8%)
of the respondents had businesses which are growing, 13(17.8%) of the respondents had businesses which are
well established, and 12(16.4%) of the respondents had businesses which are declining. This indicates that
businesses of the VICOBA members are young because they lack entrepreneurship skills and supervision;
therefore their businesses are not sustainable. There are businesses which are growing because of experiences
from other businessmen. Moreover, there are other businesses which are well established because of the capital,
skills and other factors which support business. However, there are businesses which are declining because they
lack support from VICOBA trainers.
The researchers asked about the age of the VICOBA member‘s businesses. The responses found in Table 2.
Table 2: Frequency distribution of age of business in years

Age of Business in Years Frequency Percent
1 - 5 years 42 57.5
5 - 10 years 22 30.1
More than 10 years 7 9.6
Don't know 2 2.7
Total 73 100.0
Table 2 shows that, 42(57.5%) of the respondents had businesses which existed for 1 – 5 years, while
22(30.1%) of the respondents had businesses which established for 5 – 10 years. 7(9.6%) of the respondents
had businesses which existed for more than 10 years and 2(2.7%) of the respondents did not remember the
exactly years started their businesses. This indicates that, VICOBA members had businesses which existed
from one to five years, which means that these businesses do not exist for the long time. They are falling after
some time.

Source of capital of VICOBA members were asked and the responses are shown in Table 3.
Table 3: Frequency distribution of sources of capital

Sources of Capital Frequency Percent
Own Source 11 15.1
Loans 58 79.5
Grants 1 1.4
Other sources 3 4.1
Total 73 100.0
Table 3 shows that 58(79.5%) of the respondents satisfied with loan as a source of Capital, while 11(15.1%) of
the respondents had their own source of Capital, 3(4.1%) were getting capital through other sources. 3(1.4%) of
the respondents had grant as a source of Capital in their businesses. This indicates that VICOBA members
preferred loans as source of capital when they establish their businesses. This can be because of an easiness of
getting loans or they lack other source in respective areas.
Researchers also asked question about the source of loan of VICOBA members. The responses were illustrated
in Table 4.
Table 4: Frequency distribution of sources of loan

Sources of Loan Frequency Percent
VICOBA 65 89.0
Banks 1 1.4
Other Sources 7 9.6
Total 73 100.0
With regards to provision of loans benefits, 65(89%) of the respondents got loans from VICOBA. 7(9.6%) of
the respondents received loans from other sources, while 1(1.4%) of the respondents got loans from Banks. This
indicates that VICOBA members pleased with the loans from VICOBA because, most of them are poor who do
not meet the banks and other source of finance requirements for loans. Therefore, they prefer to have loans with
VICOBA because the rules and regulations of VICOBA loans are attainable.
Researchers also, wanted to know the different types of loans provided by VICOBA. The responses found in
Table 5.
Table 5: Frequency distribution of types of loan

Types of Loan Frequency Percent
For Business 13 17.8
Group Loans 3 3.7
Emergency loans 1 1.4
Personal Loans 56 76.7
Total 73 100.0
Table 5 explains that, 56(76.7%) of the respondents preferred personal loans, while 13(17.8%) of the
respondents had business loans. 3(3.7%) of the respondents got group loans and 1(1.4%) of the respondents had
emergency loans. This indicates that, personal loans are more effective for VICOBA members because they
believe that it is better for an individual to get loan and pay back and not group to pay the loan, with the reason
that every group member has his/her own behaviors which differ with other in term of money. However,
VICOBA loans are for all individual members and not for a certain group.
In addition researchers asked question about the period of paying loans offered by VICOBA. The responses
were shown in table 6.

Table 6: Frequency distribution of time for repayment of loans in VICOBA

Time for Repayment of Loans Frequency Percent
One month 6 8.2
six months 39 53.4
one year 24 32.9
Don't know 4 5.5
Total 73 100.0
The table 6 reveals that, 39(53.4%) of the respondents paid loans for six months, while 24(32.9%) of the
respondents paid loans for one year. 6(8.2%) of the respondents paid loans for one month and 4(5.5%) of the
respondents did not know the exactly time for loan repayment. This indicates that, VICOBA members paid
loans for the short period of time in order to allow all members to have access of getting loans because if they
would allow loans for long repayment period, will affect borrowing or few members would get loans.
Another question asked about the processes of getting loans in VICOBA whether are easy or not. The responses
are shown in Table 7.
Table 7: Frequency distribution for easiness of getting loan from VICOBA

Easiness of Getting Loan Frequency Percent
Not easy 5 6.8
Easy 41 56.2
Very Easy 23 31.5
Don't know 4 5.5
Total 73 100.0
In table 7, the 41(56.2%) of the respondents satisfied with an easiness situation on getting loans from VICOBA,
23(31.5%) of the respondents got very easy situation in getting loans from VICOBA, 5(6.8%) of the
respondents did not feel that it is easy to get loans form VICOBA and 4(5.5%) of the respondents did not know
if VICOBA provide loans in an easy way or not. This indicates that, VICOBA members face easiness situation
in getting loans although VICOBA had its rules and regulations in providing loans to its members.
Furthermore, researchers asked whether VICOBA provide business trainings or not. The responses were shown
in Table 8.
Table 8: Frequency distribution of any business training offered by VICOBA

Responses on Whether Business Training Frequency Percent
are Offered
Yes 72 98.6
No 1 1.4
Total 73 100.0
Table 8 shows that 72(98.6%) of the respondents got business trainings from VICOBA while 1(1.4%) of the
respondents did not get any business training from VICOBA. This indicates that VICOBA provide trainings to
its members because training enables members to understand clearly how better to manage their group activities
and provides business management skills that enable them to select, plan and manage their IGAs profitably.
Although there are other VICOBA groups did not provide business trainings to its members.
Question J (attached in Appendix II), asked the time of business trainings provide by VICOBA. The responses
are described in Table 9.

Table 9: Frequency distribution for duration of business trainings provided by VICOBA

Duration of Business Trainings Provided Frequency Percent
One month 46 63.0

3 months 14 19.2
Six Months 10 13.7
A Year 2 2.7
Total 73 100.0
With regards to the duration of training provided by VICOBA, 46(63.0%) of respondents got business training
for one month, while 14(19.2%) of the respondents trained business skills for three months. 10(13.7%) of the
respondents trained for six months, and 2(2.7%) of the respondents trained business skills for a year. This
indicates that VICOBA members trained business skills for the short period of time which lead them not to
perform well in managing their businesses. There are other VICOBA members who got business trainings for
three or six months. This helps them to manage well their businesses, although VICOBA have to conduct
trainings frequently because business skills are growing and modernized every day, therefore the trainers should
create new skills for the members to have sustainable businesses.
Question if VICOBA supervise members‘ businesses were asked and the answers were shown in Table 10.
Table 10: Frequency distribution of VICOBA supervision in Business

VICOBA supervision in Business Frequency Percent
Yes 23 31.5
No 50 68.5
Total 73 100.0
In table 10 illustrate that, 50(68.5%) of the respondents did not receive any supervision in their businesses from
VICOBA while 23(31.5%) of the respondents got business supervision from VICOBA. This indicates that most
of the business did not receive supervision from VICOBA. However, for those who got supervision they got it
from the first time when the business is in an introduction stage only. Although a business have four stages;
introduction, development, mature and decline. Therefore, VICOBA members need regular supervision in each
stage of business.
Additionally, researchers wanted to know the number of supervision per year made by VICOBA to its members.
The responses are shown in Table 11.
Table 11: Frequency distribution for the VICOBA supervision per year
VICOBA Supervision per Year Frequency Percent
Twice 6 8.2
Once 22 30.1
Never 40 54.8
Don't remember 2 6.8
Total 73 100.0
Table 11 explain that, 40(54.8%) of the respondents did not supervised by VICOBA, while 22(30.1%) of the
respondents supervised once a year. 6(8.2%) of the respondents supervised twice a year and 2(6.8%) of the
respondents did not remember if they were supervised or not. This indicates that VICOBA supervisors do not go
to the members‘ businesses to see if they perform well or not. Any business needs supervision from the experts,
therefore VICOBA have to provide close supervision to those members who own business. However, there are
some businesses which are supervised by VICOBA experts once or twice per year and others do not remember
if they got any supervision per year.

IV. Conclusion
From the finding of this study it can be concluded that, VICOBA can play a great role in reducing
socioeconomic hardship of the poor. Also its lending model is unique and an effective tool for development of
communities through encouraging and advising members to invest in IGAs with good productive potential.
However, provision of credits alone to the members without business skills and supervision will not be possible
for enterprises to perform at optimal level. Therefore, VICOBA have to be closer with the members in each
stage of their development.
VICOBA should provide frequently business trainings on business management so as to enable its members to
operate their businesses under competitive environment. Through training, the enterprises owners can acquire
networks, technology, new and better management techniques.
The Government should support all VICOBA implementing agencies to establish an umbrella institution at
National level that will work as their networking platform for the purposes of increasing geographical coverage
while protecting the authenticity of this unique development Model. In addition, the Government should enact
different policies which favour the informal financial settings such as VICOBA since the current microfinance
policy in use favours the formal and semi-formal financial institutions which are legally registered by the Bank
of Tanzania.
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THE INSTITUTE OF FINANCE MANAGEMENT
DEPARTMENT OF BANKING AND FINANCIAL SERVICES
BBF III - 2018/19
CLASS ACTIVITY
BFU 08605: MICROFINANCE

15TH APRIL, 2019
You are required to select one Microfinance Institution (MFIs) that would help
to address the following issues:
i. Describe the selected MFI’s background
ii. The current status of microfinance in Tanzania
iii. Describe the steps in involved in registering MFIs in Tanzania (hint:

consult various bodies, indicate documents and other pertinent issues)
iv. What are the current and planned products to be offered by the MFI?
v. Describe the market niche served by the MFI and the characteristic of
clients and products
vi. Does the MFI take into account SMEs policy of Tanzania? What are the
key issues about the policy in which they do adhere?
vii. Does it operate in the rural or urban areas or both? Why?
viii. What are their sources of funds? How do they affect the kind of services
provided?
ix. Which institutions facilitate their operations in the country such as

regulatory bodies and donors
1
x. Does the MFI accept deposit from the public? If no, why not?
xi. Is compulsory savings required? Why? What are the advantages and
disadvantages
xii. Lending methodology and strengths/weaknesses for adopted/adapted

methodology
xiii. How do the concepts; wholesale and retail lending apply to the
institution? Provide examples
xiv. How the MFIs could minimize default risk?
Note: Deadline-29th April, 2019. The report will be collected after class
presentation. To be done in groups of 6 students to a maximum of 10. Initially
select MFI and email to me (koroma85@yahoo.com) for approval prior starting
to work on it.
2
BBF III - 2018/19
TUTORIAL QUESTIONS
29TH APRIL, 2019
1. With examples describe characteristics and efficacy of informal financial
services available in Tanzania
2. SHGs-bank linkage model is very common lending model in Asian countries
especially in India. Similarly CRDB bank employs the similar model in providing
financial services to the low income individuals and micro-enterprises in
Tanzania. Discuss how CRDB conduct it and categorically explain the benefits
of the model to the stakeholders involved.
3. Explain the factors that may discourage commercial banks involvement

in the informal economic activities.
4. Discuss why some MFIs may adopt both group lending and individual or both
lending methods
5. How does SACCOs model of lending in microfinance differ from other models
6. Describe briefly the following terms
a) Grameen bank model and ASCAs

b) Compulsory savings and voluntary savings
c) MFIs mission drift
d) MFIs commercialization
e) MFIs outreach and sustainability
7. The formal, semi-formal and informal financial institutions although they differ
in a number of ways, they normally provide services which are similar in nature
(Financial services). What do you think are the benefits of integrating the formal
and informal financial services providers?
8. With examples, discuss the difference between ROSCAs and VICOBA; and
provide the strengths and weaknesses of each model
BBF III - 2018/19
TUTORIAL QUESTIONS
10TH APRIL, 2019
1. The primary objective of microfinance service is to alleviate poverty in the community.
However, most of the participants in microfinance services are women. With relevant
examples, discuss the reasons for such practice.
2. Discuss the way micro-credit services assist the poor, low-income individuals and micro-
enterprises?
3. Why recent years have experienced a rapid growth of microfinance industry in Tanzania
and other parts of the world?
4. How is poverty defined and categorized in Tanzania? How far down the income scale do
formal financial services reach?
5. Discuss briefly some of the key issues of the first and second generation of the financial
sector reforms in Tanzania.
6. Some MFIs provide financial services and non-financial services. What kind of financial
services are provided? Discuss the reasons for MFIs to provide non-financial services.
7. On 1st December, 2018, Mr. Hellod was granted a loan that worth 98,670,000
Bangladesh Taka (BDT) by Grameen bank, repayable in 4 years on equal half yearly
installments. According to Grameen Bank, the interest is computed based on the reducing
balance method. The bank charged an interest rate of 20% p.a. and Mr. Hellod accepted.
Required;
i. Discuss briefly the common methods for computing interest
ii. Based on the loan details above advice the customer whether the method is
favorable or not? Advice other possible method with its usefulness or limitations.
8. Discuss the limitations of the National Microfinance Policy (NMP) 2000 and the way
each limitation is addressed in the current NMP 2017.
9. a) What do you understand by the concepts outreach and sustainability as used in
microfinance?
b) Discuss how different sources of fund may affect MFIs approaches and mission to
serve the poor and low-income people.
10. The population census of 2012 indicates about 70.9% (NBS, 2013) of Tanzanians live in
the rural areas where most of them engage in agricultural activities. However, the sector
has not been performing very well. Provide brief background of the agricultural sector,
discuss its importance, its limitations and the way microfinance can be useful in
improving agricultural production in the country.
11. One of the BBF students was amazed to figure out that there is a course for microfinance
in addition to other banking courses during her third year studies. His worry was why
issues about conventional banking and microfinance taught in the same class while they
are identical. What are your views?
The only place where poverty should be is in museums –Prof Yunus M

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Module Description:

Sub enabling outcome

c) Distinguish between conventional banks and MFIs

b) Explain MFIs different lending methodologies

c) Appraisal of micro credits and safeguards against default

d) Analyze MFIs financial statements

c) Describe marketing strategies in MFIs

b) Identify MFIs best practices

c) Describe Social and cultural issues impacting on economic

c) Describe MFIs/Donors relationship

4. TIOB (2004), Bankers’ workbook series, Microfinance

1. Kironde, J.M.L. R.B. Mabele, H. Mutagwala (2003), Re-establishing Effective Housing

2. Aryeetey, E. and M. Missanke (1998), Financial Integration and Development,

3. URT (2017), National microfinance policy

4. URT (2014), The Banking and Financial Institutions (Microfinance Activities)

5. URT (2013), The cooperative societies act

6. URT (2003), Tanzania SME Development Policy 2003

7. Macha, J.,J., (2017). Rural Citizens’ Perceptions on Microfinance Services Adoption in

The principal elements of the financial sector

May 8, 2019 Dr Macha J 2

privatisation and restructuring of state-owned

A Gap in the financial Sector:

May 8, 2019 Dr Macha J 4

Also, the private institutions that entered the

May 8, 2019 Dr Macha J 5

This resulted in the reduction of financial

May 8, 2019 Dr Macha J 6

Simultaneously, reform of the agricultural

May 8, 2019 Dr Macha J 7

By the mid 1990s it had become apparent

May 8, 2019 Dr Macha J 8

This led to the Government’s decision to

May 8, 2019 Dr Macha J 9

May 8, 2019 Dr Macha J 10

May 8, 2019 Dr Macha J 11

Jean-Lucy (2006) define microfinance as the

May 8, 2019 Dr Macha J 13

Microfinance refers to the loans and savings

May 8, 2019 Dr Macha J 15

The term microfinance refers to provision of

May 8, 2019 Dr Macha J 16

The microfinance industry has developed

May 8, 2019 Dr Macha J 18

May 8, 2019 Dr Macha J 19

May 8, 2019 Dr Macha J 20

May 8, 2019 Dr Macha J 21

May 8, 2019 Dr Macha J 23

May 8, 2019 Dr Macha J 24

May 8, 2019 Dr Macha J 25

1 Loan for income generating activities 20%

3 Higher education loan:

i) During the study 0%

i) After the study 5%

The structure considered the financial status and

May 8, 2019 Dr Macha J 27

Objectives of Grameen bank project

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Bring the disadvantaged, mostly the women

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