Cattle for sale at Dar es Salaams Pugu market. Access to financial services in rural areas is problematic for lack of formal registration of assets, which can be used as collateral. Photo/ALLAN ODHIAMBO By ALLAN ODHIAMBO Posted Wednesday, July 7 2010 Its fast approaching midday and Mathias Kingi, a livestock trader at Dar es Salaams main Pugu market, is striving to seal the last deals for the day under the sweltering heat of the sun. Trading on this day doesnt seem vibrant, but Mr Kingi and scores of other traders seem to have already made some earnings ahead 2pm when the market closes. Conspicuous bulges around Mr Kingis shins, however, betray a serious problem among traders at this key secondary livestock market lack of access to banking and other financial services. Neatly tucked into Mr Kingis socks and partly covered by a pair of aging khaki pants are wads of currency notes he has just earned from the sale of several heads of cattle. What do I do? The banks are far away and I have to devise ways of getting my money there safe, he said. A quick glance around the market reveals a similar predicament among Mr Kingis colleagues who have also devised innovative ways of keeping their money safe. While a majority prefer stuffing wads of notes into their socks and trouser pockets, others resort to hiding the money in other undergarments. Safety of money is a big issue here and each of us has to find a way of keeping our money safe until it gets to the bank, Juma Mgasa, a 55-year-old trader at the Pugu livestock market said. Several of us have been targeted by robbers in the past and we are highly vulnerable because we have to use public transport. On an active trading day when returns are good, Mr Kingi even hires a policeman for TzSh 20,000 (Sh1,250) to provide escort to the nearest banking hall in Dar es Salaam, about 22 kilometres away. Shaban Karamba, a dealer in goats and sheep said: Pugu is tucked in a fairly remote area and we know the dangers that come with ferrying money to Dar es Salaam. Its not just us facing this problem. Many in rural areas have a similar experience. Samwel Wangwe of Dar es Salaam based Economic and Social Research Foundation (ESRF) said though reforms were underway in the countrys financial sector, there was concern that majority of the rural population (which constitutes 70 to 80 per cent of the population and comprises 90 per cent of the poor in Tanzania) have not benefited from them. Bypassed by reforms They (rural population) have largely been bypassed by these reforms. The need to enhance accessibility of financial services to the rural poor in Tanzania deserves high priority on the agenda of the on-going financial sector reforms, Prof Wangwe said in a recent report titled Innovation in Rural Finance in Tanzania. Mr Mgasa said access to credit facilities remained a tall order for the rural population. Finding access to credit facilities is quiet difficult here because most institutions fear the risk of dealing with us. Our occupation is weather related and we are many a times turned away on the grounds of the risks that livestock trade would have on loan arrangements, he said. He said that most banks and other financial institutions insist on assets such as land as collateral a position that locks out most of the rural poor. Currently, rural finance in Tanzania is provided by four categories of institutions including commercial banks and co-operative societies. Some banks have however started providing financial services to the low-income population either directly or indirectly through linkages with NGOs or savings and credit institutions as a viable poverty reduction tool. Prof Wangwe said that despite an attempt by commercial banks to make forays into the countryside, access to financial services in rural areas still remains problematic because of the absence of formal registration of assets that could function as collateral. And even when they are registered their market value is low. There is need to innovatively search for alternative ways of providing financial services without necessarily demanding physical collateral, he said. Mr Mgasa, a former civil servant, said he started his business from personal savings after failing to get start up capital from lending institutions. I started all by my personal savings and Im glad to be soldering on. No lending institutions seem keen on funding agricultural initiatives. Most of them are still deep into collateral and risk assessment of economic ventures, he said. The Finance ministry admits that although reforms in the financial sector have resulted in an increase in banks and non-bank financial institutions as well as efficiency, there has not been a corresponding growth in the rural populations access to financial services. Low returns on economic activity in rural areas, the small scale of activities, and the absence of recognised collateral result in insufficient demand to support financial institutions, the ministry said. The challenge is to pursue measures to increase returns on economic activity in rural areas through investments in infrastructure, improving policy implementation and removing structural bottlenecks e.g. formalising property rights, with a view to increasing the creditworthiness of the rural borrowers, the ministry said in a recent presentation dubbed The Role of Government in Building Sustainable Rural Financial Markets. The ministry pointed out that banks have been reporting increasing activity in agricultural credit, particularly to private sector participants, and that there was need to create incentives to support higher lending to this sector and the development of innovative credit products. As financial institutions tend to face high running costs while having small balance sheets, there is an underlying supervisory challenge for income and cost control, the ministry said. Recognised as collateral The need to enhance accessibility of financial services to the rural poor, the ministry said, was a priority item on the agenda of the on-going financial sector reforms. One key reform being pursued by the government is the formalisation of property rights to allow more assets of the rural population to be recognised as collateral, as well as interventions in the form of guarantees to build banks confidence in the rural sector. In this strategy, that has been popular in East Africa since the 1950s, the focus has been transforming customary rights to fit the market system in order to make it possible for peasants to access credit and thereby be integrated in the formal economy. In Tanzania, the period immediately after independence was defined by the African socialism ideological leanings of founder president Julius Nyerere. He asserted opposition to individual land ownership, arguing that land belonged to the whole nation with the individual only entitled to a leasehold that assures sufficient land, security and a way of raising capital Mr Nyerere presided over the expansion of the domain of public land, in effect dispossessing communities of land in much the same way as the colonists did. Tanzania, however, undertook radical tenure reforms in the 1990s. A Presidential Commission of Inquiry into Land Matters, established in January 1991 submitted its report in November 1992 and a National Land Policy was consequently passed in 1995, while a new land tenure law was enacted in 1999. The National Land Policy specifies the recognition, clarification and securing of the existing rights of customary land holders as one of its objectives. It declares that a dual system of tenure, that recognises customary and statutory rights of occupancy as equal in law, will be established. In furtherance of this commitment, the 1999 Village Land Act provides for registration of village communal lands and land held under customary rights. The act also recognises use of customary law in determining disputes relating to land held under customary rights of occupancy. An expert with the UNs Food and Agriculture Organisation (FAO), Michael Ochieng, however warned that such formalisation of land asset tenure may not yield much fruit through generalised approaches. Implementation of formalisation in East Africa should be targeted specifically to addressing the challenges of property rights in urban and peri-urban areas that are presently characterised by an interface between customary land tenure and formal statutory tenure, he said in a paper titled: Improving Tenure for Rural Poor; A Case Study for Kenya, Tanzania and Uganda. To try to introduce formalisation in rural areas, especially in the low potential areas occupied by pastoral and agro-pastoral groups, is likely to cause more harm than good as the conditions there are not conducive to formalisation. He said the most well known example of formalisation in East Africa is group ranches in Kenya. Implemented within the framework of the Land (Group Representatives) Act, the scheme led to the establishment of the ranches as a form of tenure that gave recognition to the customary tenure of the pastoral Maasai. In the end, however, the legislation appears to have done more harm than good to the pastoralists, he observed, noting that the short-term objective of the act was to secure the land rights of the Maasai by removing their lands from the designation as Crown Lands that they had at independence. Medium term In the medium term, the aim was to provide a basis for local investment in ranch development by making it possible for the Maasai to secure commercial loans using the titles as collateral. Apart from the asset formalisation programme, the Tanzanian government has over the last few years also pushed for the formation of savings and credit co-operative societies (Saccos) to help bridge the banking and financing gap among the rural population. Linking with intermediate institutions which are closer to the farmer clients reduces the cost of collecting and processing information about potential borrowers. Linkage to saccos and community banks has proved useful in cutting down administrative costs, enhancing loan recovery and improving reach without having to physically locate branches in all areas of operation, Prof Wangwe said. Remain dominant The saccos remain the most dominant member-based organisations in Tanzania and have a common bond in residences and associations in that members of the schemes usually reside in the same villages and rely on the same cooperative societies for crop sales. Farmers under this scheme open a group share account with a convenient bank catering for their needs in the area and crop sales are paid through the account. Special passbooks are provided in which all the necessary entries are recorded. The group share account is operated as a deposit account which earns interest. Members in the schemes are allowed to make withdrawals from the accounts. Members may be loaned amounts related to the size of their savings. Normally, loans are paid during crop sales though repayments can be made any time. In saccos savings are linked to credit. The saccos have helped to address the bias that often prevails against individual borrowers. Source: Business Daily My Take: Just wondering how is rural Kenya while only 10% of Kenyans have bank accounts?