Community banks in Tanzania must work more closely with local businesses. This would be a win-win situation for both sides that would boost the country’s economy.
In a country such as Tanzania, which is ambitious to be counted among middle-income nations, a main instrument for creating wealth is the banking system that must grow on the back of the economy.
Though Tanzania's political conditions have been favorable to the banking industry, many of the local banks set up in recent years have been finding the going tough. This is mainly due to the country's poverty-stricken, rural economy.
Under these circumstances, it is vital for actors in the agricultural sector to generate a surplus from which these banks can mobilize savings for further investment. Otherwise the banking system can only operate as a money transmission system.
So far very few local enterprises reach out beyond the town or region in which they are located. Some, with business acumen, have attempted to create a demand for their products and services on a broader scale. This involves marshalling production resources from different areas in collaboration with banks.
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In Tanzania, however, people have turned to desperate measures in order to make ends meet. These include illegal fishing, goods smuggling, human trafficking, unlicensed mining, game poaching and counterfeiting, which tarnish the country's international image.
This means that, no matter how transparent small banks might be in their operations, the current financial environment in the country makes it very difficult for financial institutions to thrive.
The Bank of Tanzania's announcement last week, that it had revoked the licenses of five underperforming community banks, and placed three others on a watch list for six months, sent shock waves through the financial community.
Tanzania's small banks have made little progress in propping up local business and even their existence is hardly known to the public. After opening doors to customers, it seems their management expected money to flow easily into the bank vaults.
These banks have overlooked potential clientele, including small industrial producers, smallholder farmers and youth-led enterprises in need of credit to help them raise productivity. Loans to such groups could be an incentive to increase output and an indirect investment in the value chain that would boost people's incomes.
Banking is not the same business as managing a savings and credit association, as many initiators of community banks think. In the arena of free-market forces, banks are set up with specific corporate goals to promote, and must uphold strong accountability to the shareholders as well as the general public they serve.
Three of the disbanded banks — Njombe Community Bank Limited, Kagera Farmers' Cooperative Bank Limited and Meru Community Bank Limited — were located in agriculturally rich areas where farmers are in need of expert guidance on lucrative crops to grow. Presently, many are at a loss about the future since the fall in the prices of traditional cash crops, coffee in particular.
But Tanzanian entrepreneurs should not see the closure of these banks as a dead-end situation for private initiatives to establish community banks, rooted in the desire to promote economic well-being.
With adequate resources and proper planning, these banks can make an indelible mark on the people's welfare and pave the way for the establishment of new business sectors. However, they require professional management and leadership that are not only focused on acquiring wealth.