For Tanzania, bringing even more money within everyone’s reach is key

In less than eight years, there has been extraordinary progress in bringing the majority of Tanzanians into the mobile money revolution, mostly by adopting an efficient, low-cost mobile money transfer system. Doing more to support the much larger, formal financial system is now critical for the growth of the country’s business sector and its ability to mobilize savings and gain access to affordable credit, according to a new World Bank Group report, “Money Within Reach: Extending Financial Inclusion in Tanzania.”

“The mobile money revolution has made a tremendous impact on the lives of millions of people who can now send and receive money and thus save at low cost,” says Bella Bird, the World Bank Country Director for Tanzania, Somalia, Burundi, and Malawi. “With more effort, the remaining one-third of Tanzanians could also have access. Access to credit through the formal financial sector, however, remains a critical constraint to the growth of the domestic private sector, and thus a constraint on growth and to poverty reduction.”

The ninth edition of the Tanzania Economic Update analyses the country’s extraordinary progress in bringing financial services to 62% of its population today compared to 11% in 2006, making it a regional leader in the use of digital financial services and putting it on a solid footing to achieve Universal Financial Access by 2020.

Tanzania has 58 banks and a per capita reach of 2.5 bank branches and 6.4 ATMs per 100,000 adults. While most of the population live in rural areas, Bank operations are concentrated in the country’s three largest cities and largely serve better-off city dwellers and formal businesses.

“Financial development can make an important contribution to Tanzania’s development. Supportive government policies and access to affordable credit are necessary to crowding in private investment, especially for the micro, small, and medium size enterprises vital for inclusive growth and poverty reduction,” says William Battaile, the World Bank Lead Economist, who authored the report.

The report shows the Tanzanian economy has continued to record relatively strong performance, with low inflation and growth above its regional peers. Real GDP growth for 2016 is estimated near 7%. The short- to medium-term macroeconomic outlook remains stable, though emerging risks need to be carefully managed, including budget implementation and private sector development. To maintain and increase the momentum, Government will need to focus on three key growth enablers: continued macroeconomic stability; the effective implementation of public investments; and supportive policies to promote private sector investment and growth.

Financial Inclusion is an area of significant success, and the mobile money revolution has played a major role in it. These are operated by a network of agents across the country offering a range of services and products, whereas the traditional bank-dominated financial system remains mostly urban-based and is still unaffordable for the vast majority of Tanzanians and their businesses.

From less than 200,000 subscribers in 2008, the total number of registered mobile money user accounts grew rapidly to 53.3 million by the end of February 2016, with 17.6 million active users conducting at least one transaction within a window of 30 days.

Where ordinary citizens once had to enter into risky arrangements to send money urgently to their families, the mobile money services have almost eliminated this risk and drastically reduced the time and cost transactions used to take. They have moved further to offer products at affordable cost, such as insurance and credit, as well as offering platforms for paying utility bills.

Despite these significant developments, full financial sector integration continues to elude Tanzania, and the 9th Economic Update argues it is vital for promoting and sustaining growth in several ways, including by mobilizing savings to allocate them to households, businesses, and government for productive investments.

“What the dynamic mobile services sector has done is create new opportunities for individuals that never existed before,” says Andrea Mario Dall’Olio, co-author of the 9th Tanzania Economic Update. “However, there is now a need to support the gradual upgrading of those mobile service customers from transactional services to savings and credit services, which are still the domain of the traditional banking sector.”

About 56% of Tanzanians borrow money to meet their consumption and access social services. The primary source of loans for 63% of Tanzanians remains informal networks, such as friends and family, while 17% of Tanzanians use mobile network loans, and only 7% of people have obtained credit from banks.

To further illustrate the formal banking sector’s central role in savings and credit, at the end of 2015, the value of mobile money stocks – money deposited in trust accounts by mobile operators in commercial banks – accounted for less than 3% of total bank deposits. Loans extended through mobile money products were estimated to make up less than 1% of the total value of bank credit.

More than 40% of formal Tanzanian enterprises have identified access to finance as the most significant constraint to doing business. And with a 17.1% ratio for credit to the private sector to GDP, Tanzania is in fact lagging behind in the region and urgently needs reforms to improve access to bank credit for its micro, small, and medium-sized enterprises, which can be a conduit for accelerated poverty reduction.

According to the Update, Tanzania can build on its recent achievements in mobile money by expanding financial inclusion and increase access to credit to enterprises. This would involve:

• Extending access to finance to the 40% of Tanzanians still excluded from the financial system. This requires tackling demand and supply-side constraints, such as channeling government payments, such as the conditional cash transfers from the Tanzania Social Action Fund, through electronic channels; accelerating the universal coverage of the national ID system; and strengthening financial education programs to develop citizens’ financial and digital skills and literacy.

• Ensuring a level playing field to reduce barriers to the use of financial products and services. This entails designing a deposit insurance mechanism for mobile financial services and improving the consumer protection framework; and facilitating the sharing of infrastructure and the achievement of full scale interoperability between banks and other retail payment service providers.

• Lowering the cost of risk through a better selection of borrowers and improved recovery, and by reducing disincentives for lending to the private sector. Increasing the number of individuals and businesses that have access to credit is critical for informal micro-entrepreneurs to access investment and working capital to formalize for expanding their operations.

The Tanzania Economic Update (TEU) is issued twice a year by the World Bank, with each edition describing the current state of the economy and providing in-depth coverage of a topic of strategic significance to the country to stimulate policy analysis and debate.

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» Download: Money Within Reach: Extending Financial Inclusion in Tanzania | Tanzania Economic Update, April 2017 (PDF, 6.55 MB)