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This chapter presents empirical findings of the study. The findings are presented following the research questions. The presentation of the information relied on both secondary (documents) and primary (Interviews) sources. This methodology was chosen because the researcher is convinced that the subject matter would be understood better by readers when presented in this manner. As Lincoln and Guba (1985) explained, the ultimate purpose of any report is to improve the reader's level of understanding of whatever the report deals with. 4.2 Profile of the Respondents

The findings show that most of clients served by Heri Microfinance were in the informal sector as shown in Table 4.1. The study covered a sample of 40 clients of the Heri Microfinance whereby the study findings indicate that 89.7% dealt with informal/unregistered businesses, 34.8% dealt with registered business with less than 5 employees, and only 17.4% dealt with registered businesses with more than 5 employees. The findings further show that most of the clients concentrated their activities in either major centers or designated areas. On average it is revealed that 37.6% of the clients operations are based in the city center, 48.0% in major subtown centers and only 14.4% in city periphery. The poor state of the physical infrastructure was mentioned as an obstacle in reaching remote areas. Tabe 4:1


Analysis of the HERI Microfinance Operations


Types of Services Provided and Category of Clients

From the study findings, the bank was identified to provide to her clients services or products which can be grouped into three categories. The products are savings, credit and a third group termed as other services. Each category of product or service is discussed hereunder in detail. Currently there are varieties of saving products and these includes Zawadi account, Biashara account, Special Savings Account (SSA), Savings account, Fixed deposit account and Current account. The Zawadi account is a special savings account for children below 18 years of age. Parents and guardians save small amounts of money over a prolonged period into this account which enables them to pay for school fees and other needs of their children. Biashara account is a non-cheque book current account for Micro, Small and Medium Enterprises (MSMEs). It inculcates a banking culture to the MSMEs and the account holders are able to access loans through this account. The SSA is a tailor-made savings account for micro and small entrepreneurs. It provides opportunity for customers to choose among different savings profiles. There are no service charges. SSA is specifically opened for group loan client which form part of security for loans taken. No withdraw is allowed from this account until when a client wants to exit from the group. Savings account is like any other normal savings accounts. Large amounts can be withdrawn with a notice of only one day. It earns interest at the end ofthe year. Account holders can deposit and withdraw from any of the bank's branches. Fixed deposit account is opened for a fixed amount, fixed period and fixed interest. Once it is opened for a fixed period no withdraw is done until the maturity, otherwise, if drawn prematurely the interest earned is withheld. Usually fixed deposit account earns high interest compare to other deposit accounts. Lastly under savings products is the current account which is a chequing account where by account holders can easily access their deposit and withdrawal facilities. This account does not earn interest and therefore it is assumed to be operated by a corporate customer. With regard to credit products they are generally in two folds. One fold for the Micro finance credit products and the other for the corporate credit products. Micro finance credit products are categorized in two models which are individual based and group based loans. The corporate credit products are in the form of long term loans and overdraft facility. Micro finance credit folder has various products including Akiba ~'Vikundi" (Group) loans, Mavuno (Harvest) Loans, Juhudi (Efforts) loans, Daraja (bridge) loans, individual loans, consumer loans, taxi loans and vehicle loans to salaried employees or non-employees The Akiba "Vikundi" (Group) loans are in

other words a solidarity group lending. It targets small groups of six members each. Two to seven groups form a larger group. Group members must know and trust each other enough to agree to guarantee each other. Members undergo 4 weeks pre-loan training. Members have weekly savings and loan repayments. Loans last between three and twelve months. Generally the bank is offering these loans with a desire for developing the business and thus improving the living standards of its clients and gain access into other different banking facilities of savings and loans. Mavuno (Harvest) Loans are basically group loans tailored for member of groups of MSMEs operating under the auspices of religious or any other recognized institutions. It is currently operating as a pilot product. Juhudi (Efforts) Loans are group loans tailored for micro and small business women who are based in the rural areas. These women should be in the same locality, should own a business for at least six months before joining the group. Groups should have five members each and large groups of 25-30 members. The loan given under this category is between USD SO and USD 500 for individual members in the group. Types of business financed are Dairy Farming, Poultry, Cloth Selling, Retail Shops and Horticulture. Daraja (Bridge) Loans are an intermediate group-based loan product between group loans and individual loans. Groups have five to ten members. Securities used are group guarantees, savings and household chattels. Individual loans are provided as short term working capital for MSMEs. Loan amount is between USD 500 and USD 20,000. Securities for this category ate household chattels and equitable mortgages. The services are less procedural in accessmg subsequent loans than other loans. Consumer Loans targets salaried customers who are employed in various organizations. No security is required apart from employers' guaranteeunless the loan amount exceeds USD 10,000. Maximum loans amount is 12 x employee's net salary. Loan term is 3-36 months. These loans are used for business start-up capital, purchase of household equipment and house renovation. Taxi Loans are tailored loan products for taxi drivers. Beneficiaries must be members of Tanzania Taxi Drivers Association. Loan securities are Personal guarantee, group and Association guarantee. Applicant has to pay a down payment of 25% as per the proforma invoice. The car is co-owned by the borrower and the bank until he repays the loans fully. Currently taxi loans have been suspended due to poor performance. The last group of credit products is the vehicle loans to salaried employees/non-employees. This is a credit scheme for salaried employees to cater for their needs of purchasing vehicles. Employees' minimum salary

must be USD 250. Payments are done monthly in a max.imum of 36 months. The employer deducts the installments from the client's salary and pays directly to Akiba Commercial Bank. Maximum loan amount is TZS 10,000,000. Loan security is Employers' guarantee, and the purchased vehicle. For the none-employees, a 30% down payment has to be paid; client has to have. additional security in the form of either immovable or movable assets. The borrower has to have a strong source of income (business) to enable him/her repay the loan smoothly. The corporate credit products in the form of long-term loans and overdrafts facilities include the corporate loans and overdrafts. The corporate loans are for sole proprietors or companies which need a working capital of over USD 20;000. They are usually given to existing businesses. Borrowers must operate a current account for at least six months before applying for the loan. Borrowers must submit a business license, copies of audited financial statements for the last three years, business plans supported with twelve months, cash flow projections chart, Letters of Credit, Management Accounts, and other business documents such as contracts, orders, tenders in hand, invoices for goods/materials to be purchased, photocopies of titles to the proposed collaterals with their respective valuation reports from the banks approved valuers. On the other hand overdrafts are meant for financing working capital only. Beneficiaries must have an account with AKlBA for at least six months. Consideration may be given by looking into history of a client who operates an account with a competing bank. The account turnover must demonstrate the capability of serving the facility (o/d) in the ratio of 4: 1 The products in the last group termed as "other services" also have an impact in the revenue of the bank. The revenue is obtained when the bank charges commission for the services offered. These services are as follows: Money tranSfel"S This involves sending, as well as recelvmg, money from one bank or branch to another. This transaction takes place either within the same bank branch network or across other banks' branch networks. There is local money transfer and international money transfer: where the local bank sendslreceives money abroad it has to do so using a correspondence bank based abroad. At ACB money fransfer is also offered through methods such as Telegraphic money Transfer (TT), or Tanzania lnterbanks Settlement System (TISS). The ACB sends money abroad through Standard

Chartered Bank (UK) as its correspondence bank for Sterling Pounds and Euros currencies, and through the Citibank (USA) as the ACB international correspondence in USD currency. For some one to send money to ACB from abroad s/he has to quote the transferring code, known as swift code, which is unique to every bank. Tmde Finance, e.g. letters of credit, bills discounting and bills negotiation This is a bank undertakirtg that cut across transactions involved between a supplier and a buyer. Trade finance takes place between two different banks which are located in two different countries. At times trade finance might involve same bank if is undertaken by a multinational bank where the same bank is the banker for supplier and the banker in question. Under trade finance the bank handles Letters of Credit (LC), and Documentary Collection. Foreign exchange tl'ansactions This involves selling and buying of foreign currencies versus Tanzania shilling. Like other banks, ACBdoes not sell foreign currency to every one in need. It is until he/she submits evidence to the bank that there is genuine use for the currency. In foreign exchange, a customer might agree with the bank today to buy foreign currency sometimes in near future, under the terms such as forward curve, to cover hirn/her against future currency appreciation, or payment of premium, if the currency depreciates at the date of concludingsuch transaction. Performance bonds This is a sort of guarantership which the bank provides to only its good clients on demand. Performance bond is the bank's guarantee issued to its customer as an assurance to the employer of that customer that the work/product/service rendered to him (the employer) by the ACB customer will be effective and will perform as per requirement of the contract. The performance bond has time limit; once it expires the ACB is not liable for any default. Cheque guarantee This is a sort of guarantership demanded by those who issue tenders. Where those tenders are bids by a client of ACB, then ACB issues a cheque guarantee (on demand), by issuing a banker's

cheque, as guarantership, the cheque is drmvn in favour of the tender holder. The amount to be on the cheque guarantee depends on the tender requirements. Bid Bond guarantees This is another type of guarantee, but this does not differ much from the cheque guarantee. The only difference is, once ACB. client applies for such guarantee, ACB issue such guarantee in form of a commitment which is legal binding to the employer of ACB customer. Dealership It involves the dealings between the banks and individuals or other banks on issues of lehding and borrowing from the money markets including treaSury bills, negotiation on fixed deposit rates and terms. The dealership caters for overnight placement / bOITO\ving ensuring that the bank is in accepted liquidity ratios. Dealership also informs the bank on favourable rates for selling and buying of foreign currencies. Agency Commission TRA agency is the service where by ACB agreed with the Tanzania Revenue Authority to receive tax revenue from tax payers on behalf of TRA. In this case the bank will get a commission for revenue collected. Also the bank is a collecting agent, collecting the insurance premiums from customers of insurance companies, such as Heritage insurance company. As an agent, the bank gets its commission on each premium collected on behalf of the Insurance Company. Loan Revolving Fund (LRF) A Revolving Loan Fund (RLF) was one of the components of the project titled "Promoting Gender Equality and Decent Work Throughout All Stages of Life." The project was under International Labour Organization, Dar es Salaam office and was implemented froJ;n May 2004 to June 2006. The RLF was used to enable target women groups access financial services, specifically building savings, capacity and promote access to flexible loans. The RLF was administered by the Akiba Commercial Bank and the Women Executive Committee. The project

has ended and after being evaluated, it has been seen to have contributed to women empowerment and poverty alleviation. Performance wise the project has been able to reach out to the poor, using a commercially oriented organization (ACB). It has been able to have significant impact on poverty, empowerment, and quality of employment for the women involved. All indications showed that the RLF was economically viable and sustainable and that the servIces which started under the scheme are being expanded by the ACB. 4.3.2 ACB Peli'Olwance Good practice requires that any institution offering micro credit should be measured in terms of its efficiency, effectiveness, financial performance and operational performance. According to Consultative Group to Assist the Poor (CGAP) guidelines, any MFI should be measured on both the institutional performance and sustainability. Measures of improved performance include both qualitative and quantitative indicators. Under the CGAP, areas assessed include the following: General Profile, which focuses on the mission, objectives, and the effectiveness of the

organizational structure and management of the Micro finance providers. MFI Loan Delivel)' Systems, which measures the loan screening, the loan repayment

enforcement, the collateral, and the monitoring systems applied. It takes into account how simple the loan-processing period is, the time it takes to get a 10aIl; and the convenience of getting smflllioans, as well as the loan sizes offered. MFI Sel'vices, Client Outreach and the Mal'ket: The type of services offered, including

savings mobilization, clientele outreach, and the market coverage of the MFI. The growth of outreach is measured by the increase in the number of clients and improved services, and the opening of branches and other offices in cities, towns and rural areas Operational Performance: This is measured in terms of the loan processing period, the

loan delivery time, the amount of loans disbursed, outstanding loans and the loan repayment and default rates. Financial Performance: Much of the financial performance evaluation is done using

financial ratios. The basic ratios calculated included: (a) Liquidity ratios, (b) Operational efficiency, (c) Capital adequacy, leverage and structure, and (d) Profitability ratios. Lending Procedures ACB's lending methodology is based on the solidarity group lending model adopted from the Grameen Bank model operating in Bangladesh. Under this model, loan applicants have to form a self-selected group of five people in order to qualify for a loan. ACB adopted this model due to its success in Bangladesh in reaching the poor and covering its operational costs. Some modifications were made to this model so that it could suit the context of Tanzania. Such modifications include the target beneficiaries and areas of operations. ACB operates in regional centres and targets economically poor people running micro and small scale enterprises (MSEs). The following are the lending conditions, terms and procedures of ACB. a) Formation of a Group

ACB requires loan applicants to form a group of self-selected five members for guarantee purposes. The grouping is normally made at two levels. At the lower level there is a group of five clients called an Enterprise Group (EG). The second level of grouping is normally made up of ten EGs to form one big group of fifty clients called a Market Enterprise Committee (MEC). Clients are required to form a group of five selected members as a prerequisite for loan consideration because they guarantee each other in their respective groups. Also in the case of default, it is even easier to make a follow up, since each group member knows each other better than the lender. The MEC meets once a week for repayment purposes. An EG is composed of a chairperson and a secretary who are elected by group members. The MEC on the other hand is led by an Executive Committee comprised of ten members, two from each EO. Their primary task is to follow up whenever repayment problems arise and build solidarity amongst the group. b) Training

Before the disbursement of the first loan, ACB's new clients who are in an MEC group have to attend a one hour pre-loan weekly training for the first four weeks. The pre-loan training normally aims at familiarizing the clients with ACB's loan tenns and conditions. During the

training the clients have to pay a registration fee of Tshs 1,200 each. In addition the clients are required to pay a Tshs 1,500/= per week to the Loan Insurance Fund (LIF). This LIF contribution is refundable once a client decides to quit the programme. An orientation is made within the first four weeks of the preloan training where the newMEC and EG gro.up members visit each other's place of business and residence to learn about each other. This is necessary as the EG and MEC groups serve as the second and third party guarantor respectively (after the individual recipient of the loan). c) Loan Application and Approval

When a new client joins a group of five members and after having met all the basic requirements such as attending a training and paying both registration fee and the LIF of Tshs 1,200 (about US$l) and 9,000 (about US$7.5) for the first six weeks respectively, he/she becomes eligible to apply for the first loan of Tshs 50,000 (US$ 41.67). This implies that, on the fifth week, the appraisal of the first loan applicant s done and on the siAih week the first loan is issued. In other words, it takes six weeks before a new client gets the loan. Existing clients may apply for a loan after a successful repayment of the previous loan. Normally a client graduates from lower to higher stages of loan size. This is done to motivate the clients to have a good repayment behaviour in order to move to a higher loan size. Loan approval is done by the EG before seeking the approval of all MEC group members under the supervision of the ACB credit officer. Loan approval is normally determined by the performance of the business and the repayment behaviour of the client. If a meeting is scheduled specifically for approving a loan and one member of the MEC group fails to attend a meeting, the loan is not disbursed at that meeting. This is based on the reason that the fellow group members of the loan applicant are his/her guarantors; hence their absence delays the whole process of loan approval. d) Weekly Meetings and Repayment

ACB requires its clients to attend weekly meetings in the branch offices. Weekly meetings constitute the discussion of the loan application and approval, the loan repayment and payment of LIF, and normally take one hour. When one or more clients in a MEC group fail to repay the

loan according to agreed installments, the whole MEC group is stalled until the money is raised. This is a technique for pressurizing the clients to repay the loan installments on time. e) Interest Rates and Repayment Period

ACB has eight loan cycles through which a client may graduate from small loan to a larger one. The interest charged varies with the size of the loan. Larger loans attract lower interest rates and vice versa. Interest rates range from 24% to 30% per annum. Loans offered by ACB are mainly in the form of short-term working capital. Few investment loans of less than one year maturity are offered. Immovable property is used as collateral (e.g. house or land). The loans which require collateral are Tshs 3 mill (US$2,500) to Tshs 5 mill (US$4166.67). These loans require collateral because a member might disappear after receiving the loan. The type of collateral depends on the MEC's decision. ACB in this case acts as the custodian of that collateral. The repayment period ranges from six months for smaller loans to twelve months for large loans. f) Loan Size

The ACB loan sizes ranges from Tshs 50,000 to Tshs5,000,000 as shown in Table 4.2. The current loan sizes were reviewed in 2006. Previously, the minimum and maximum loan sizes were Tshs 50,000 and Tshs 600,000 respectively. The higher loan sizes have been reviewed upwards overtime while the minimum loan size has not been reviewed since inception of the programme. Table 4.2: Classification and Weekly Repayment of ACB Loans Perfolmance ofthe Bank

Generally, the performance of ACB IS regarded as good. Table 4.3 below demonstrates the historical performance of the bank from 2002 to 2008. According to the Consultative Group to Assist the Poorest (CGAP) MFls Best Practice (2001), an MFI is said to have a good performance if it has attained among other things, a minimum annual repayment rate of 95%, 154 clients per staff member and at least 88.8% operational self-sufficiency. Referring to Table 4.3 ACB has managed to maintain an impressive annual repayment rate of 100% from 2000 to 2004. There was a slight decrease in the repayment rate from 100% in year 2004 to 99.8%, 98.9%, 99.8% and 99% n 2005, 2006, 2007 and 2008 respectively. The decline was identified as being due to problems such as socio-economic and harassment from local government authorities (the majority of MSE owners operate in undesignated premises and often have their businesses demolished by these authorities). Operational self-sufficiency is referred to as the degree to which operating income covers operating expenses. ACB's operational self-sufficiency was very low (29.6%) in 2000. However it started to increase from 53% in 2001 to 100% in 2005. The increasing trend was due to the increased operating income which is partly contributed by interest from the loan_ The number of clients per staff member in ACB as shown in Table 4.6 increased from 107 in 2000 to 216 in 2005, above the minimum requirement of CGAP which is 154 clients per staff member. The disadvantage of many clients per staff member is failure to monitor and supervise them effectively. Despite this shortcoming, ACB has managed to reach a large number of clients in the country by increasing the number of branches in various regions in Tanzania, making it one of the few MFIs which covers large parts of the country. The success of ACB in reaching a large number of clients while achieving operational sustainability is explained by excellent management team, use of the Grameen Bank model, funding from external donors and management support from experiences of the central bank. Experiences pf MSEs Supported by ACB Further discussions were conducted with 40 ACB clients to get more information on how ACB assisted their MSEs. The respondents had MSEs which operated in different types of businesses (Table 4.4). Of these covered respondents 44.4% were male and 55.6% were female. a) Overcoming the Problem of Collateral

The beneficiaries of MFIs are poor people who engage themselves in micro or small scale business. Most of them have low value assets thus limiting their access to credit in formal financial institutions such as commercial banks, which require them to pledge collateral. These conditions for borrowing under individual lending mechanism are strict for majority of poor people than for those in the group lending model. The format of groups helps a number of poor people to get access to credit from MFIs than borrowing as individuals from commercial banks (i.e. group lending guarantees each other). Those who are still at low stages of business growth find it easy to borrow in groups. This also makes it easier for MFIs to reach as many people as possible. In an interview with some clients it was revealed that the group lending mechanism was good for people who are still in the early stages of business growth and do not have any other alternative source of income to rely on. Others have been able to register their businesses, to open new businesses and to increase the capital of their business. b) Building Business Relationships Getting MSEs together during regular meetings helps them exchange business ideas, techniques and experience from each other. ACB clients meet weekly for repayment purposes. During the meetings, borrowers interact with each other and discuss various business ideas, challenges ahead and various business techniques necessary to capture customers. c) Building the Saving Culture ACB requires clients to pay between Tshs 1,500/= to 5,000/= depending on their savings categQry each week as compulsory savings. These compulsory savings are for the Loan Insurance Fund (LIF). According to the terms and conditions of ACB's loan delivery, once a client is registered as a member, he/she has to pay weekly savings until he/she quits the programme. When a client decides to quit the programme all the accumulated savings are refunded. It is also important to note that even those who remain as clients of ACB benefit from this procedure because the savings help them expand their working capital. Also compulsory savings builds the tendency for saving among poor people such as owners of MSEs. Compulsory savings earn the same interest rate as the one paid to normal savings accounts. d) Income Increment and Business Expansion

All clients consulted declared that loans have increased their income in many different ways. ACB provides working capital loans, and using these loans, they were able to invest in their businesses, make profit and expand/open new businesses. Explaining the advantage of the loan available, one ACB client said: "The money 1 got fi'om ACB has assisted me to expand the restaurantand to open a new hotel business. 1 am now returning the loan of 1,000,000/= Tshs and 1 believe 1 will keep on expanding" Generally, production has increased. Clients stated that the loans have assisted them in increasing production which in turn increased their income and led to the expansion of businesses. e) Employment An increase in income is not automatically related to an increase in the number of employees. Clients explained that an increase in the number of employees depends on many factors and not income only. Most clients still have retained the same number of employees as when they started accessing MFI's services. Explaining why there is no increment in the number of employees, one respondent said that: "1 run this business as a family business, my children are enough in assisting me in the business and so there is no need of increasing employees. 1 will think of doing that may be when Jam in a stage of getting 3,090,000/= Tshs, but not now. And by then 1 will have to open another business. " Although this client had not employed someone outside of the family, the observation that some of the family members assist is an indication of employment creation. f) Capital invested When asked to compare their capital when they started business and after accessing ACB services, clients reported to have increased their capital compared to before they received the loan. It was revealed that other clients of ACB are also clients of other financial institutions. When asked about that one client said:

"ACB is assisting me in this one business but I have to find other sources of financing other business so that every business can have its own source of finance. Capital of my business has risen ji-om 2,000,000/= to 3,500,000/= Tshs because of getting loan from various institutions, I am also a beneficiary of PRIDE Tanzania Diamond Trust Bank. " Constraints Faced by MSEs a) Too SrnallLoan Sizes ACB starts lending at Tshs 50,000/= for new borrowers. This rate was set in 1997 when the bank started its operations in Tanzania. The value of Tshs 50,000/= in 1997 is not the same today, given the devaluation of the shilling against the US dollar. Most of the visited MSEs indicated that source of funds is a big problem and when asked why, as there are institutions offering loans, one client responded that: "When I joined ACB! thought I will be able to get any amount I needed, butthat was not the case, as a new member has to start ji-om the stage of 50,000/= and keep graduating until the level of 5,000,000/=. This takes so long to get enough funds for big loan seekers. " b) High Interest Rates This was indicated by the clients of the bank saying that the available funds were too expensive. As well as the interest rates that the borrower has to pay the lender, there are other direct and indirect costs incurred by the clients. These costs include registration fees, weekly compulsory savings and the loan application fee. All these add to the cost of obtaining the loan. c) Repayment Period The repayment period ranges from six months for small loans to twelve months for large loans. This is indicated by MSEs as a short period especially for those who are supposed to pay ,vi thin six months. Also the weekly repayment of interest and part of the principle of the loan limits many MSEs from growth. ACB Sustainability

Three types of overall financial sustainability indicators are used: profitability, default rate, and an indicator of the degree of subsidization. In addition an indicator of income of the beneficiary is additionally needed in order to control the target group's achievement. Sustainability is usually understood as a process involving two stages. Stage one is the operational sustainability, whereby the Institution (in this case ACB) covers its administrative costs and loan loss expenses from its client revenues. The second stage is the financial sustain-ability, whereby an Institution is