QUESTION: Why do you do you think youth access to finance is vital?
ANSWER: Access to affordable finance enables an individual or enterprise to enjoy the benefit of economies of scale and new technology. Availability of credit to small business and low-income households could greatly enhance their economic strength and eventually break the vicious circle of low income – low saving and low investment .
Youth makes up the World because 50 percent of the world population is under 25 years, and Tanzania has the 10th largest youth population in the world. 47 percent of the population is under 15 years and the youth boom is expected in as this number continues to rise rapidly.
Restless Development tells us that more than 50 percent of youth are unemployed. New entrants from primary, tertiary and colleges into the labor market is approximately 700,000 annually but only 3 percent secure employment in the formal sector, while 97 percent of the entrants partly fall into the informal economy and some remain inactive.
The 97 percent of youth that works on the informal sector need financial services such savings, credit, insurance, and money transfers to boost their entrepreneurial undertakings. However, the prevailing conditions in the sector do not permit youth to access the desired services; as a result, youth are left in a vulnerable position.
Q: What are the obstacles encountered by youth in accessing financial services
A: Access to financial services across the population in Tanzania is extremely
low. The recent report by Finscope shows that 56 percent of Tanzanians have no access to financial services. This makes even worse for youth as only 4 percent of young people have access to micro-credit. Youth businesses struggle to meet qualifying criteria for financial investment to start and grow their businesses.
One study done by Chijoriga and Cassimon (1999) revealed that, to get loan from Microfinance Institutions (MFIs) involves high transaction cost due to bureaucratic procedures and time involved in processing the loan. The study also pointed out that asymmetric information between borrower and lender is very high and this led to MFIs imposing tight monitoring and supervision rules to borrower.
The following are specific challenges facing youth to access financial services: First is the minimum age of 18 years, which one has to attain to open and operate a bank account or access credit. This condition impedes many youths from accessing financial services. A big number of youth starts enterprising activities as early as they are 14.
Second is the stringent ‘now your Customer Conditions. 95 percent of banks require customers to have residence confirmation letter from their local leadership. This is the most frustrating procedure, as most of people prefer opening bank accounts from their working areas to their residential areas.
One needs to leave work to go fetch the letter, and often the government officials are not found in their offices. Moreover, this procedure attracts un-receipted fee that goes in the name of cost sharing.
Another problem is that many youths live in rented houses, and due to frequent increase of house rent, youth tend to move places often and the nature of their business – leaving home early in the morning and returning in the evening make them to be unknown by their street leaders, hence denied confirmation letters.
Third is the non-financing of start-up projects. Except Tujikomboe Microfinance, no financial institution extends credit to newly formed business or project. They require the business to be operational for at least one year.
Fourth is the tough collateral conditions. All banks and majority MFIs require borrowers to pledge valuable chattels or to mortgage their property to access credit. It takes years for a youth to build his or her assets base that could be used as collateral.
Fifth is the lack of transparency by financial service providers. Many MFIs and some banks do not explicitly outline the terms of their loans for borrowers to make informed decisions. MFIs and banks do not offer financial literacy programmes to their customers. As a result, most of the youth sometimes will borrow money that they would have not if the lenders were transparent enough on their cost structure
Six is the lack of product innovation by the financial service providers. There is little room for innovation; instead, product copycat business is in the helm. I have heard of a big financial institution that had to receive donor funding to launch a product for youth. Hitherto, there is no bank with a special window or teller serving youth.
Q: What are some of the measures employed to curb the problems
A: In my opinion, if you look at the banks and MFIs, I can categorically say there is none who has devised ways of increasing youth access to financial services. On the side of the government, they were some efforts by government through the Youth Development Fund in the districts since 1993/94, but the programme has largely been a failure with poor loan repayments, and failure by the district council to allocate 10 percent of their revenue for the revolving fund.
Q: What should be done to address the problem?
A: I think given the increasing youth population in the country, which is a potential client base and the high levels of youth unemployment, financial institutions, and the government should be looking for proactive approaches to help youth realize their full economic potential. Deliberate measures should be put in place to support youth increased access to financial services and increased financial capability to use those services effectively to invest in their enterprises, education, and health
Q: So, What financial institutions can do to increase access to finance?
A: There should be deliberate efforts to lower to 14 years the minimum age required to open account, transact, and borrow money. The Governments should establish a youth financial inclusive regulatory framework and banks and other providers. There should be a change the mindset that chattels are the best collateral. Business itself and a guarantor personal could also work well.
I gave a loan of Tsh 500,000 to a youth just by holding his bank ATM card. The Bank and MFIs should look for other ways of raising their capital or securing their loans apart from the certain percentage of approved loan amount paid upfront. These Banks and MFIs should charge stop charging exorbitant interest rates…..increase efficiency to lower operational costs.
These financial institutions should develop ways of attracting youth to use financial services. If it takes one to queue for 40 minutes to make a deposit obvious, that will be a disincentive. Studies from other countries show that youth like to access service in places such as shops in the community as opposed to banking halls where they have to wait in long queue and are often intimidated by bank staff. Points of service were particularly attractive for rural youth because it eliminated costs of travelling to the bank. Furthermore, financial literacy programs for customers should be developed.
Financial education and entrepreneurship development can also assist youth in taking greatest advantage of the financial services available. Also, government policies and incentives can help stimulate the financial sector to design appropriate financial products as well as innovative delivery channels including low-cost access points such as mobile banking. Stakeholders should join hands with credible MFIs that have passion of serving the youth
Q: What is the financial landscape in Tanzania
A: The financial landscape in Tanzania is comprised of mainly banks, pension funds, insurance companies, financial markets, and other financial intermediaries. However, the sector is dominated by banking institutions, which account for about 75 percent of the total assets of the financial system.
The banking system has a very limited level of penetration in the rural areas of Mainland Tanzania, primarily attributed to the tendency for banks to be located in areas with high population densities and high economic activities.
Recent study shows that access to financial services by Tanzanians is as follows: 12.4 percent of the population is served by formal financial institutions; 4.3 percent is served by semi-formal institutions such as SACCOS and Microfinance Institutions (MFIs), as well as M-Pesa, government loan schemes; 27.3 percent is served by informal institutions such as VICOBAs etc, and According to Finscope study of 2006, over 18.8 million (54 percent ) of the population still has no access to any financial services.
The microfinance sector serves mainly the medium and small enterprises that contribute to more than 50 percent of the employment in the country and offers primarily small business loans. Individual players have been delivering financial services to low-income communities since late 1980s and early 1990s but their efforts have been disenchanted by limited skills and experience, inappropriate methodologies that were copied from the Asian microfinance experience and difficulties in access to sources of funding.