MZUMBE UNIVERSITY

MBEYA CAMPUSCOLLEGE

DEPARTMENT OF BUSINESS STUDIES

NATURE OF WORK : GROUP ASSIGNMENT

COURSE : BAF-BS II

SUBJECT NAME : FINANCIAL SYSTEMS

SUBJECT CODE : FIN 214

LECTURER NAME : Mr. BONUS

GROUP NUMBER : 10

DATE OF SUBMISSION : December 22, 2023

Questions

Working as accountants at a large bank in Tanzania you have been called for a meeting with the
top management to discuss about the bank’s strategy and your role as employees within that
strategy. Among the key issues, you are informed that the bank wants to invest heavily on its
expansion which will include the opening of many new branches in rural areas of Tanzania to
support BoT’s campaign on financial inclusion. The statement immediately divides the room as a
reasonable number of attendees of the meeting feel that opening many branches is no longer
necessary in order for the bank to service populations residing in rural areas; other members
reckon that there are already financial services that are within reach of these populations in rural
areas which would make it difficult for the bank to really put a mark in such areas. Required:
Argue for and against the need for commercial banks in Tanzania to open branches in rural areas
to address issues of financial inclusion in this era.

Required:

Argue for and against the need for commercial banks in Tanzania to open branches in rural areas
to address issues of financial inclusion in this era.
A commercial bank is a kind of financial institution that carries all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment, and
other such activities. These banks are profit-making institutions and do business only to make a
profit. The two primary characteristics of a commercial bank are lending and borrowing. The
bank receives the deposits and gives money to various projects to earn interest (profit). The rate
of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at
which a bank lends money is known as the lending rate,(Mokeeva, et al 2019).

Liberalization of the financial sector facilitated participation of private financial institutions,

restructuring of public financial institutions and privatization, elimination of interest rate
controls, credit allocation and targeting. In addition, the role of the Bank of Tanzania in
supervision and regulation of financial institutions was strengthened. Following the privatization
of the financial sector, the number of financial service providers increased and diversified, which
include commercial banks, development banks, insurance and social security funds, and capital
markets. The role of the central bank was re-defined and strengthened in terms of price stability,
supervision and regulation. Although there is an increase in financial sector service providers and
products, rural households' access to financial services did not improve, (Rwechungura, K.,
&Kaleshu, J.2020).

The main purpose of commercial banks is to provide financial services to the general public and
also provide loan facilities to the business which helps in ensuring economic stability and growth
of the economy. Therefore, we can say that credit creation is the most important purpose of
commercial banks.

There are three different types of commercial banks. Aikaeli J. (2006).

Private bank. It is a type of commercial banks where private individuals and businesses own a
majority of the share capital. All private banks are recorded as companies with limited liability.
Such as CRBD Bank and others.

Public bank. It is a type of bank that is nationalized, and the government holds a significant
stake. For example, Tanzania postal Bank (TPB) and other related.
Foreign bank. These banks are established in foreign countries and have branches in other
countries. For instance, Standard & Chartered Bank, Citibank, and more such banks.

The presence of commercial banks in rural areas of Tanzania can have significant implications
for the economic development of these regions. Whether it is necessary or not depends on
various factors, including the existing financial infrastructure, the level of economic activity, and
the needs of the local population. Let's explore both perspectives in detail.

Arguments for the Need for Commercial Banks to Open Branches in Rural Areas in Tanzania:

Access to financial services: Many rural residents may not have easy access to banking services,
relying on informal channels. Commercial banks can extend their services to remote areas,
providing a formal platform for financial transactions. This helps in bringing a larger segment of
the population into the formal financial system, promoting financial inclusion. Opening bank
branches in rural areas would provide easy access to financial services for the rural population.
Many people in rural areas lack access to basic financial services such as savings accounts,
loans, and insurance. By opening branches, commercial banks can bridge this gap and provide
these essential services to rural communities. Capital for Agriculture and Small Businesses,
Rural areas often depend heavily on agriculture. Commercial banks can provide loans and
financial services to farmers for purchasing seeds, fertilizers, and equipment. They can also
support small businesses in these areas, stimulating economic growth and creating employment
opportunities, (Rankho, K., & Macha, L. J. 2022).

Example: In a remote village in Tanzania, farmers have to travel for hours to reach the nearest
bank branch to deposit or withdraw their money. By opening a branch in this village, the farmers
can conveniently access banking services, safely store their money, and even access loans for
agricultural investments.

Economic development: Commercial banks can encourage a culture of savings among rural
residents, offering them secure places to deposit their money. This, in turn, allows the banks to
pool funds that can be used for investment in local development projects, infrastructure, and
other community needs. By bringing banking services to rural areas, commercial banks can drive
economic development. Access to credit and other financial services enables rural businesses to
grow, invest, and create employment opportunities. This, in turn, leads to increased income
generation, poverty reduction, and overall improvement in living standards, (Richard, E. 2010).

Example: A small-scale entrepreneur in a rural area who lacks access to formal credit may be
unable to expand their business. However, with the opening of a bank branch nearby, the
entrepreneur can now access affordable loans, invest in new machinery, and hire more workers,
thus contributing to the local economy.

Technology and digital banking: The presence of commercial banks in rural areas can facilitate
the adoption of financial technologies (fintech) that enable digital banking, mobile payments, and
other innovative solutions. This can enhance the efficiency and accessibility of financial services,
making transactions more convenient for rural residents. Opening bank branches in rural areas
can facilitate the adoption of technology and digital banking solutions. This promotes financial
inclusion by enabling rural residents to access digital payment systems, mobile banking, and
other technological advancements, thus reducing the reliance on cash transactions, (Kang, J., &
Park, S. 2014)

Example: A farmer in a remote village can use their mobile phone to make digital payments for
seeds, fertilizers, or even veterinary services. By having a bank branch nearby, the farmer can
easily learn how to use digital banking services and make secure and convenient transactions.

Arguments against the Need for Commercial Banks to Open Branches in Rural Areas in
Tanzania:

Cost considerations: Establishing and maintaining bank branches in remote rural areas can be
costly. If the cost of operation outweighs the benefits, commercial banks may be reluctant to
expand into these regions, especially if the potential customer base is limited. Opening bank
branches in rural areas can be expensive and may not have a sufficient return on investment for
commercial banks. This is because of the low population density, limited economic activities,
and high operational costs associated with running a branch in such areas, (Richard, E , et al
2008)

Example: A bank may find it financially unfeasible to open a branch in a remote village with low
population density, as the costs of establishing and maintaining the branch may outweigh the
potential revenue generated from limited customers.
Lack of infrastructure and resources: Rural areas often lack the necessary infrastructure, such
as reliable electricity and internet connectivity, which are crucial for the functioning of bank
branches. Additionally, there may be a shortage of skilled personnel to operate these branches
effectively, (Raphael, G. 2012).

Example: A remote village with unstable electricity supply would make it challenging for a bank
to provide uninterrupted banking services. Moreover, finding trained professionals willing to
work in rural areas may pose challenges, affecting the quality of service provided.

Also Low Demand for Sophisticated Financial Services: In areas where the majority of the
population engages in subsistence farming or other simple economic activities, there may be
limited demand for complex financial services offered by commercial banks. In such cases,
simpler financial institutions or microfinance institutions might suffice, (Bee, F. K. 2007)

Cultural and financial awareness barriers: Cultural factors may influence the financial
behavior of rural communities. If there is a strong preference for traditional or community-based
financial practices, the adoption of commercial banking services might face resistance. In some
cases, rural areas may already have established informal financial systems, such as savings
groups or cooperatives. If these systems effectively meet the financial needs of the local
population, the introduction of commercial banks may be redundant. Some rural communities
may have cultural barriers or limited financial literacy, leading to a lack of interest or trust in
formal banking institutions. This may result in low demand for banking services and limited
usage of bank branches if they are opened in these areas.(Bee, F. K. 2007).

Example: In certain rural areas, there may be a strong preference for informal savings and
lending groups within the community due to social trust like VICOBA (Village community
bank), SACOSS. The community's reluctance to engage with formal banking services could
make it difficult for commercial banks to attract customers to their rural branches.

Therefore, while the need for commercial banks to open branches in rural areas in Tanzania is
vital for financial inclusion, some challenges should be considered. Despite potential cost and
infrastructure barriers, the increased accessibility to financial services, economic development,
and the integration of technology can significantly benefit rural communities in Tanzania. The
necessity of commercial banks in rural areas in Tanzania depends on a careful consideration of
the local context, including the existing financial landscape, economic activities, and the needs
and preferences of the population. A balanced approach that takes into account the potential
benefits and challenges is essential to ensure that financial services contribute positively to the
development of these regions.

REFERENCES

Aikaeli, J. (2006). Commercial banks efficiency in Tanzania. Available at SSRN 980933.

Bee, F. K. (2007). Rural financial markets in Tanzania: an analysis of access to financial

services in Babati district, Manyara Region (Doctoral dissertation).

Kang, J., & Park, S. (2014). Factors influencing electronic commerce adoption in developing
countries: The case of Tanzania. South African Journal of Business Management, 45(2), 83-96.
Mokeeva, N. N., Bakunova, T. V., &Frais, V. E. (2019). Modern Paradigm of Commercial Bank
Funding: Socio-Economic Aspects. In 2nd International Conference on Education Science and
Social Development (ESSD 2019) (pp. 630-635). Atlantis Press.

Rankho, K., & Macha, L. J. (2022). The Role of Commercial Bank Practices on the Performance
of Small and Medium Enterprises in Tanzania–A case of selected Commercial Banks in
Tabora. African Development Finance Journal, 3(1), 117-154.

Raphael, G. (2012). Commercial banks efficiency in Tanzania: A non-parametric

approach. AfracanJournal of Business and Management, 4(21), 55-67.

Richard, E. (2010). Factors that cause non-performingloans in commercial banks in Tanzania and
strategies to resolve them. Moving Africa Toward Sustainable Growth and Technological
Development, 11, 16-23.

Richard, E., Chijoriga, M., Kaijage, E., Peterson, C., &Bohman, H. (2008). Credit risk
management system of a commercial bank in Tanzania. International Journal of Emerging
Markets, 3(3), 323-332.

Rwechungura, K., &Kaleshu, J. (2020). Stability and Profitability of Commercial Banks in

Tanzania.Afracan Journal of Business and Management, 4(21), 50-53