THE MEANING OF INTEREST AND INTEREST BASED INSTITUTIONS IN TANZANIA-PART II

INTEREST BASED ECONOMIC AND POLITICAL INSTITUTIONS IN TANZANIA.

The Prophet Muhammad peace be upon him cursed the accepter of interest and its payer, and one who records it, and the two witnesses; and he said: They are all equal.
“To err is human to get paid for it is divine.” William Freud.
“Let us look at the records.” Alfred F. Smith (Politician)..


Interest based political and economic institutions in Tanzania (IBEPI) refers to those institutions which get involved directly or indirectly in lending or borrowing or investing or formulating and implementing economic policies, legislations and regulations under the ambit of interest as defined above. Some political institutions are included in this discussion because they play significant role in the economy of the country directly or indirectly. IBEPI can be grouped into two main categories.

1. Core Institutions.
2. Intermediate and Support Institutions.

These institutions are interconnected and complementing each other in their operations and hence hard to separate one from the other.

1. Core Institutions (CI).

These institutions formulate fiscal and monetary policy, perform supervisory functions or engage in interest based transactions hundred percent or to large extent (more than 50%). These include Ministry of Finance, Bank of Tanzania, Investment and Commercial banks, Microfinance Institutions and saving and Credit Cooperative Societies (Saccos).

1.1 Ministry of Finance and Economic Affairs.

The Ministry of Finance and Economic Affairs manages the overall revenue, expenditure and financing of the Government of the United Republic of Tanzania and provides the Government with advice on the broad financial affairs of Tanzania in support of the Government’s economic and social objectives. The ministry involvement in interest based transactions is noticeable in many ways. One way, is in Public Finance Management particularly in the way government raise funds for the government and manages borrowing on financial markets. Second way, the ministry plays a role of developing regulatory policy for the country's financial sector in cooperation with the Bank of Tanzania and representing Tanzania within international financial institutions. Besides, the ministry has several subsidiary institutions which conduct business based on interest directly or indirectly which are classified among other as:

a)Regulatory institutions such as Bank of Tanzania, Gaming Board of Tanzania, Capital Markets and Securities Authority (CMSA) Public Procurement Regulatory Authority (PPRA) and Tanzania Insurance Regulatory Authority (TIRA).

b)Insurance and Banking Institutions such as National Microfinance Bank (NMB) Tanzania Investment Bank (TIB), Tanzania Postal Bank (TPB), National Bank of Commerce (NBC), National Insurance Corporation (NIC) and Insurance Deposit Fund.

c)Pension Funds such as Parastatal Pension Fund (PPF), Public Service Pension Fund (PSPF) , Government Employees' Provident Fund (GEPF)

d)Liquidation and collection firms such as Dar Es Salaam Stock Exchange (DSE), Loan and Advances Realization Trust (LART) Tribunal and Consolidated Holdings (T) Ltd.

The ministry is doing a great deal of business by owning fully or partially these subsidiaries which provide 'great service' towords building the nation. In corporate management perspective, the finance ministry is the business wing of the government. The ministry of finance and economic affairs is the mother or focal stone of all financial institutions in the country.

1.2 Bank of Tanzania (BOT).

BOT is at the apex of interest based banking and non banking financial institutions in the country. (BOT) was established in 1965 by an act of parliament. The Act supplement of the Bank of Tanzania Act 2006 specify principal function of the bank is “to formulate, implement and be responsible for monetary policy, including exchange rate policy, to issue currency, to regulate and supervise banks and financial institutions including mortgage financing, development financing, lease financing, licencing and revocation of licenses and to deal, hold and manage gold and foreign exchange reserves of Tanzania”. BOT is the government banker and its fiscal agent. The bank holds government deposits accounts as well as financing government projects under strict regulations.

In financing the government, BOT charges the government an interest of not less than 3%. The main source of funds for the bank is coming from the capital invested by the government, the government deposits and deposits of financial and non financial institutions. As the government fiscal agent, it manages the government public debt including issuance and redemption of government securities and the payment of interest.

The central bank major business is with commercial banks and other financial institutions. One of the major functions is to control commercial bank reserves and thereby credit conditions. The bank has been given powers to control the volume, terms and conditions extended through loans, advances or investment. The bank may also prescribe the maximum or minimum rates of interest that the banks and specified institutions may pay on any type of deposit and in transactions of their business. The bank as the lender of last resort provides loans and advances to financial institutions based on interest instruments for a short period. According to H.H Binhammer, “Such loans and advances have to be pledged by Government securities or short term instruments acceptable by the Bank for rediscount purposes.”

Furthermore, BOT is in charge of developing financial market. Government treasury bills and bonds are the commonly used money market instruments traded in the financial market. Since it was founded, BOT has taken the role to foster a Treasury bill market which is traded on interest basis.

1.3 Commercial Banks.

Commercial banking in Tanzania mainland was introduced by the German during the colonial period. These commercial banks were Deutsch Ostafrikanische Bank opened in 1905 and Handelsbank fur Ostafrika opened in 1911 in Dar and Tanga respectively.

In 1967, all foreign banks except Jetha Lila Bankers in Zanzibar were nationalized forming one bank, named the National Bank of Commerce under the control of the government (NBC Act 1967) . After nationalization of banks in 1967, three banks existed; NBC, National Co-operative Bank (NCB) and the People’s Bank of Zanzibar (PBZ). Later on, Tanzania Housing Bank was established. The results of this move has been described as “poor performance, insolvent and inefficient government owned banks”. As part of broad economic reforms, financial sector reforms of banking industry occurred in 1991(under BFI Act 1991), in the form of decontrolling interest rates, privatization of government owned banks and liberalizing banking sector by allowing entry of private banks (Wangwe:2004).

Currently, there are 34 commercial banks and 18 financial institutions in the country as per the BOT website on 29.05.2014. The number is likely to increase following preparatory move on going. Out of these, five banks offer Islamic Banking services devoid of interest.

1.4 Microfinance Institutions (MFI).

The term microfinance refers to the provision of financial services to low income clients, including the self employed. Microfinance institutions have been understood as an organization providing microfinance services, whether regulated or unregulated.

Tanzania poverty alleviation strategies recognize the role of microfinance activities in helping the poor and eradicate poverty in the country. In Tanzania, microfinance services have been largely provided by the government under several local government schemes and financial NGO’s (MFI-NGOs). Their main business is limited to provision of credit and charging of very high interest rate. Currently, there are about 247 microfinance institutions scattered across 26 regions in Tanzania with very small number of clientele base of not more than 400,000 making coverage of less than 1% of the country total population of 44.9 Million. MFI in the country isn’t a success story despite operating in the country for the last twenty years despite of its huge potential to eradicate poverty. The problem is high interest rate, limited customer focus and poor customer centric products and services.

1.5 Saving and Credit Cooperative Societies (SACCOS).

SACCOS are thrift organizations among groups of workers in one organization or in related organizations or professions. The coming of SACCOS in Tanzania can be traced back after 1991 when financial sector reforms took place.

SACCOS are seen by the government as one of economic empowerment programme through which small and micro entrepreneur can access loans which can transforms and improve their business and living conditions. On that regard, the Minister of Finance and Economic Affairs in the last two years budget speeches, he has ever fall short to mention SACCOS as one of government supported programme under economic empowerment programmes through which the government boost itself in the effort to eradicate poverty in the country.

Official statistics indicate that by May 2009, there were 5,042 registered Saccos, with a membership of 822,685. A half of the Saccos (53.76 per cent) are based in the rural areas, where they serve about one per cent of more than three quarters of the poorest Tanzanians. This is an increase of about 262 SACCOS from 4780 in the span of less than a year. Besides, Mr. John Haule, Deputy Permanent Secretary in the Ministry of Finance and Economic Affairs has given an update on the records when he said the number of Saccos has reached 5330 with 819,000 members as of 2009.

However, the executive secretary of the Savings and Credit Cooperative Union League of Tanzania (Sccult), Mr Abdul Mshaweji doesn’t agree with the figures because the government SACCO’s registry is not updated accordingly. Mshaweji argues that some SACCOS have collapsed and other are in “brief cases” with no physical offices but still can be found in the registry. Instead, Mshaweji estimates that there are only 2500 active SACCOS countrywide.

These SACCOS main business is to lend money to their members and charge them interest except recently launched Islamic SACCOS. This return on money lent is justified on ground such as to meet operational costs and making profit and hence maximize shareholders value for money. Some few well managed SACCOS have got loans from Banks such as NMB, CRDB, NBC and from other banks on interest. SACCOS-Banks mutual relationship is very systematic as banks find themselves relieved from the challenge of financing the poor or micro entrepreneur who doesn’t possess required experience or collateral and SACCOS finds themselves in good position to manage liquidity and meet credit needs of their members.