Small and Medium EnterprisesSmall and Medium EnterprisesBackgroundTraditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved are. But it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people.
In addition, most poor people have few assets that can be secured by a bank as collateral. As documented by different literature, even if they happen to own land in the developing world, they may not have effective titles to it. This means that the bank will have little recourse against defaulting borrowers.
Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development. In line with this the Government of Tanzania enacted a law (Finance laws miscellaneous amendment act 2003) with intention to promote the development of a sound and sustainable supply of financial services for households, small holder famers, small and micro enterprises in urban and rural areas by providing them with safe and accessible savings and payments services thereby providing then opportunity to improve their businesses and their livelihoods by gaining access to adequate and timely credit services.
Micro Enterprises (MEs) play a crucial role in employment creation and income generation in Tanzania. MEs all over the world and in Tanzania in particular, can be easily established since their requirements in terms of capital; technology, management and even utilities are not as demanding as it is the case for large enterprises. These enterprises can also be established in rural settings and thus add value to the agro products and at the same time facilitate the dispersal of enterprises. Indeed MEs development is closely associated with more equitable distribution of income and thus important as regards poverty alleviation. At the same time, MEs serve as a training ground for emerging entrepreneurs. In Tanzania, the full potential of the ME sector has yet to be tapped due to the existence of a number of constraints hampering the development of the sector. They include: unfavorable legal and regulatory framework, undeveloped infrastructure, poor business development services, limited access of MEs to finance, ineffective and poorly coordinated institutional support framework. The expected outcome is to have a significantly increased contribution of the ME sector to economic development of Tanzania. (National micro-finance policy, 2000).
The majority of people in Tanzania fall in the band of low income earners who need the concept of MEs to access financial services from financial institutions which deal with micro financing. There are many formal banks and Micro-financing Institutions (MFIs) that provide micro finance services to SMEs in Tanzania. This includes specialized and non-specialized banks institutions, non-bank financial institutions, rural community banks, saving and Credit Cooperatives Societies (SACCOS) and several donor-assisted Non-Government Organizations (NGOs). Some of these MFIs focus on credit only, some on savings only and others on both credit and savings. Although there are many institutions that provide financial services to SMEs in Tanzania, it still remains a big hurdle for MEs because the formal banks and MFIs have not developed the expected interest in serving the micro enterprises. (Finance laws miscellaneous amendment act 2003).
Savings and Credit Cooperative Societies (SACCOS)One of the basic principles of the Cooperatives Savings and the Credit movement is the belief in cooperation and mutual self help for improving members standards of living. Members with common needs join hands to form those quasi bank institutions, which are member owned, member controlled, and member financed, with finances mobilized through local arrangements to finance their own social, as well as economic development ventures (SCCULT-Loaning Policy and Procedures, 2003). Therefore, SACCOS lend some of their individual strength to common effort with the relatively poorer savings and credit societies, in order to expand credit for the movement, expand capacity to meet members credit requirements, and increase financial strength and
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2.1.1 Financial Freedom
In addition to monetary freedom [Page 3]
2.1.2 Financial Freedom is the freedom to act according to financial needs, rather than conform to a particular financial status. There are, of course, specific financial welfare reasons that enable members to become flexible, or to change their financial interests on the basis of market signals [Page 4]. It is also possible for such member organizations to be able to serve members’ demands only as means to improve their financial condition by means of monetary intervention. Such a flexible, financial organization must also be able to deal with many external pressures of the member organization, including political conflicts, political unrest in the member country (see Section 2.1.1 above, “Compensation to Members of Societies,” and Appendix S), political infighting, or, more recently, institutional corruption. This flexibility is part of the way, of course, to improve membership productivity, especially in countries like the US where financial and personal freedom is generally restricted. One possible way to do this is to increase or decrease financial independence for each member organization by providing the possibility for its members to act to enhance its own financial performance, such as by investing money in its own member groups and enhancing efforts with other organizations to improve financial performance by using public assistance. Member organizations also have the ability to share funds and, for example, to make use of their limited financial resources to fund non-profit organizations outside of the member federation. Furthermore, the power and privilege of being a bank organization (including that of a member organization) to engage in other organizations’ activities is especially important, as it allows them to exert full control over financial decisions.
The following examples show how banks act in the economic sphere. The next paragraph shows that banks act in their own financial sense. The following example illustrates how financial independence can be achieved by the banking community in the economic sphere:
1. Savings Bank
In one of our previous articles about the various “Bank of America”-type banks, the authors stated that only one such institution of greater influence and effectiveness could operate independent of bank subsidiaries. We can now see how these groups have their own financial welfare system, and can contribute to their own wealth (e.g., “Banks are the most important driver of overall employment in the United States,” The American Economic Papers, March 1994). In our view, bank consolidation and state-sponsored economic development through savings banks is a means to boost membership and to enhance personal financial independence, such that banks become less dependent on loans and can benefit from increased levels of lending, as explained in Section 1 before.
2. Exchange Fund
In my introduction to this article I mentioned an exchange rate of $100.00 with banks. In this comparison, bank members contribute $20 per unit of their bank’s total value to exchange rate, which is much larger than the banks’ actual exchange rate at that time. [Page 5]
3. Money Market
In our view, savings banks can serve money market function, such as purchasing services from banks or through the use of exchange pricing. They share liquidity between members and, as