Small loans, big payoffs in Tanzania

Savings group members discuss potential projects for generating income in the tiny village of Sanagiwe, Tanzania. (Photo by Sterling Roop)

Sterling Roop, a resident of Brighton, is a graduate student in international relations and African studies at Boston University.

By Sterling Roop

IRINGA, Tanzania -- Here in Tanzania I have been working on writing my thesis on how to improve microfinance for the rural poor. I have witnessed a wave of microfinance based on small groups saving money together and loaning it out to one another. One group that I visited in a poor dust-blown in northern Tanzania has been saving for five years. The first year they saved about $1,000 now and they are managing nearly $14,000 – all the while improving their incomes through business loans and group profits.

Throughout the world microcredit (small loans for the poor) has become one of the main tools used to address poverty, even earning the father of microcredit, Mohamed Yunnus, the Nobel Prize. In the last few years, development agencies, nongovernmental agencies, and some banks have realized that credit is not the only financial service that the poor need. Just like us in Boston, the poor need a safe place to save their money, access it when needed, and take out loans.

The community-based savings groups I have worked generally consist of about 30 members who buy shares in the group, which then loan out a set portion of the group’s collective money to members who need a business or personal loans. When a member buys a share, he or she must also put a small amount of money into the collective community fund, which can be used for emergencies that the groups deems fit. At the end of a set period of time, usually a year or two, everyone gets his or her money returned and a percentage of the profit earned by the interest of the loans based on the number of shares held.

A Maasai women’s savings group begins its weekly meeting in dust-blown Karatu, Tanzania. (Photo by Sterling Roop)

Eighty percent of the poor in Tanzania live in rural areas, but most of the microfinance institutions, or MFIs, and banks that I have interviewed operate in urban areas. Rural areas are hard to serve because of high transaction costs for MFIs, and this has been cited as the greatest challenge facing all of the organizations that I have interviewed or worked with in Tanzania. There is poor infrastructure, long distances between clients, and the small nature of the transactions. Reaching rural communities requires either a Land Rover or amazing dirt bike skills. This has led to an underserved population and a preference toward extending credit to the middle and lower-middle class, leaving the poorest of the poor not served at all.

As we have learned recently by the financial crisis in the United States and Europe not everyone needs a loan, but everyone needs to save and saving is the focus of these groups. Saving is very important for the poor, especially in rural areas of Tanzania where drought, crop failure, or an unexpected death can rob a family of everything they own. In addition, my research has revealed that most banks and MFI provide microloans that can only be used for business, leaving those who need an emergency loan out in the cold. As one mother that I spoke with said when one of her children got sick she couldn’t take him to the doctor until she borrowed money for a local money lender at 50 percent interest, a debt she has only recently paid off. Now she is a member of a savings group and has a safety net for emergencies in the future.

I have found that community-based savings groups in Tanzania not only provide basic financial services to the members and a safety net, but also teach members basic financial management and budgeting skills. Members told me they like that all of the transactions are transparent and they are involved in running the group. One of the greatest impacts of these groups for members has been they now have savings to use throughout the year, which shortens the “hungry season” because most group members’ incomes are often one-time payments each year after the harvest.

With savings groups, the interest and profits stay in the community, instead of going to an outside institution such as a bank. It provides loans for all aspects of life, from school fees and funeral expenses to business loans. It decreases the length and intensity of the hungry season, while teaching members basic financial skills -- preparing them to not only run their households better, but also teaching business and leadership skills in a sustainable manner. Because members run the groups, they need limited supplies and training. I have been happy to see how groups are often spreading to new villages and communities by themselves.

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