Tanzania occupies an area of 945,000 km2 on the coast of East Africa, with a total of over 34 million people as per 2002 population census. Approximately 80 percent of the poor live in rural areas where about 70 percent of the population lives (URT, 2004) and depend on Agriculture which contributes about 80 percent of the Gross Domestic Product (GDP) and 54 percent of the nation's foreign exchange earnings.
The Tanzania government is determining to stay the course of economic and social reforms and maintain improved macroeconomic stability. Real GDP is expected to reach the average growth rate of 6-8 percent per annum between 2005/06 and 2009/10. Domestic revenue mobilisation effort will be accelerated and external support utilized to increase the capacity for steady growth. Projections for 2005/06-2009/10 assume improvements in the productivity of agriculture and other productive and economic service sectors, tourism and mining and a strategic trade regime fostering international competitiveness, promoting private sector development and implementation of policies in respect of the Small and Medium Enterprises (SMEs), micro -finance and cooperatives.(URT,2005).
3.1.2 The strategy for poverty reduction.
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Poverty is the main challenge and fundamental issue in economic development in Tanzania. The government is committed to address this challenge in consultation with key stakeholders in the economy, especially the private sector, civil society, Non Government Organizations and other development partners. There is increasing number of households, which are not only absolutely poor but also live far below subsistence level.
The government of Tanzania both past and present have focused on ignorance, disease and poverty reduction as the main aim of their development strategy. This began in 1961 with medium and long term development plans.
Macroeconomic and sector policies associated with various reform measures where formulated by the government. These policies, strategies and reforms are aimed primarily at attaining the Tanzanian's development vision 2025 of achieving a "sustainable socioeconomic development by the year 2025" (URT,P.14).
The government prepared the National Poverty Eradication Strategy (NPES) in 1998 to provide a framework to guide poverty eradication initiatives in the country. According to URT (2002) the implementation of NPES is envisaged to reduce poverty by 50 per cent by the year 2010, and eradicate absolutely poverty by 2025. The NPES was translated into a medium term strategy for poverty reduction known as the Poverty Reduction Strategy Paper (PRSP) in 2000. The PRSP was prepared in the context of the Highly Indebted Poor Country initiatives (HIPC) process. The focus of PRSP is to reduce income poverty, improving human capabilities, survival and social well-being, and containing extreme vulnerability among the poor (URT, 2002).
The review of the PRSP in 2004 culminated into the establishment of the National Strategy Growth and Reduction of Poverty (NSGRP). The NSGRP is the second national organizing framework for poverty reduction and promotion of social inclusion. It emphasizes growth and poverty reduction at the centre of the country's development agenda. It represents a more comprehensive approach to poverty reduction than the PRSP. Thus, NSGRP builds on the PRSP and integrates components of the country's existing overall and sector strategies and polices by giving poverty more of a focus. Unlike its predecessor, NSGRP place emphasis on priority outcomes and results rather than focusing on priority sectors as was the case with the PRSP. Further more, it recognizes the contribution of every sector, includes cross cutting issues such as governance and communications (URT, 2005).
3.1.1 Tanzania poverty status.
Tanzania is considered to be one of the poorest countries in the world with a per capita GDP of US$ 267 which is far less than the average for sub-Saharan Africa of US$500 (World Development Report 2000/2001). In term of purchasing power parity, it is reported to have the second lowest GDP per capita in the world next to Sierra Leone (UNDP Human Development Report,2003). According to Randhawa and Gallardo (2003) half of its population live below the poverty line and vast majority of these poor households live in rural areas. Tanzania's human development index value of 0.40 ranks it number 160 out of 175 countries included in the 2003 UNDP Human Development Report.
Randhawa and Gallardo (2003) clarify more about the economy of Tanzania by agree that her economy depends heavily on agriculture and it contributes 45% of GDP, provides 85% of exports, and employs 80%. Services led by tourism account for 39% of GDP while industry accounts for 16%. Going by these statistics, Tanzania is classified among the poorest countries in the world.
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According to PRSP 2000 report poverty in Tanzania by using baseline, as discussion below; Poverty is largely a rural phenomenon, in the rural areas, incomes are lower and poverty is more widespread and deeper, than in the urban centres. According to the 1991/92 HBS, basic needs rural poverty incidence is estimated at 57 percent, and the food poverty incidence is about 32 percent. Tentative estimates for year 2000 suggest that the incidence of poverty in the rural areas may have increased.
Urban poverty is also widespread and increasing, although poverty is less acute in the urban area, it is still a serious problem, especially in urban areas other than Dar es Salaam. According to the 1991/1992 HBS, the basic needs poverty incidence for Dar es Salaam was 5.6 percent, and for the other urban areas, 41 percent.
Although female-headed households are not necessarily poorer than male headed
households, women are generally perceived to be poorer than men. Women represent 51 percent of the population and head 14 percent of the households. Results from household surveys show that women-headed households are not necessarily poorer than male-headed households. For example, the 1991/1992 HBS shows a poverty incidence level of 45 percent for female -headed households, and 49 percent for male-headed households. A recent case study established that male-headed household (without wives) are likely to be as poor as female-headed households (without husbands). This notwithstanding, a good number of studies suggest that women are in fact poorer than men. In particular, according to the results of the PPA (1995) survey, women perceive themselves to be poorer than men owing to their vulnerability, the lack of asset ownership (including land and livestock) and limited schooling.
Changes in the Incidence of Poverty, the incidence of poverty appears to have declined during 1983-1991 and 1991-1993, and risen during 1993-1998.
The more recent deterioration in the poverty situation is probably attributable to worsening income inequality, and relatively low rate of economic growth, particularly in the rural areas.
Education, broadly based primary school education plays a major role in strengthening human capabilities and reducing poverty. Primary school gross enrolment rate is currently estimated at 78 percent, reflecting approximately equal rates for boys and girls (79 percent and 77 percent, respectively). The overall net enrolment rate is, however, much lower (57 percent). The available data suggests that the poor are more likely to be less educated. In 1991,54.3 percent of the rural poor were literate, compared to 61 percent for the rural population as a whole. In addition, data from the HRDS (1993/1994) suggest that gross enrolment rates among poor children aged 7-9 decreased from 82 percent in 1983 to 80 percent in 1993.
Survival, recent estimates put the average life expectancy at birth at 48 years of age, compared to 52 years in 1990 and 45.3 years in1970. The more recent decline in life expectancy is largely attributable to the impact of HIV/AIDS and other communicable diseases. (PRSP,2000).
The Tanzania development vision 2025 outlines the goals of sustainable live hoods and sustained economic growth. Consequently, the development of the country's Microfinance Institutions (MFIs) is defined in various polices and strategies that include; the National Microfinance Police 2000, Small and Medium Enterprises Development Strategy 2003, and Cooperative Development Policy 2002. It is out of these policies that the legal and regulatory framework for the financial sector was developed.
3.2 Microfinance in Tanzania.
Financial sector reform in Tanzania began with the Economic Recovery Programme of 1986. The Banking and Financial Institutions Act (1991), Cooperative Societies Act 1991 and Bank of Tanzania where amended and permitted entry of private banks into the financial market and subsequently led to restructuring of all Government of Tanzania's major banks and financial institutions. This included the downsizing and privatizing of the National Bank of Commerce and Cooperative and Rural Development Bank (CRDB). Banks were required to operate on a commercial basis. In addition, prudential norms for operations and the provisioning requirements for non- performing assets out of the profits were introduced, and regulatory functions of Bank of Tanzania (BoT) intensified.
Despite the progress in the mainstream banking system, microfinance services were slow to develop due to a number of reasons as outlined in the National microfinance policy (URT, 2000).
According to CIDA et al (2003) while a combination of macro- economic stabilization and a financial sector reform process started in early nineties have laid the basic foundations for the development of sound financial sector, this has not resulted in significantly improved access to financial services by the low income people.
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In July, 1998, IFAD, in close collaboration with the government of Tanzania and potential beneficiaries, prepared a Tanzania Country Strategic Opportunities Paper (COSOP) to clarify preferential areas for future interventions by the fund. The COSOP supports the ongoing government of Tanzania process of policy reform and restructuring of the public sector which aims to reverse the national economic and social declining trends of the past.
Key features of the reform process are: the introduction of an open and liberal economic policy regime, redefinition of the role of government to that of a facilitator, regulator and policy setter of the development process, decentralization of administration power to the districts and communities and the development of microfinance services as a major instrument in an overall effort to alleviate poverty. While the role of Bank of Tanzania is to develop a policy, legal and regulatory framework, guide the development of the sector, coordinate Government intervention and interface with other stakeholders in the field, monitor performance of the sector and disseminate relevant information to the public www.bot-tz.org/MFI
The government policy from the strategic vision 2025, through the National Poverty Eradication Strategy (NPES) and Tanzania assistance Strategy (TAS) to the Poverty Reduction Strategy Paper (PRSP), the Local Government Reform Programme (LGRP) , Rural development Strategy (RDS) and the Agricultural Sector Development Strategy (ASDS) as mentioned early sees pro-poor, private sector led, economic growth as key to long- term sustained poverty reduction. All these documents emphasize the critical role to be played by the financial services.
In an endeavor to rationalize the development of a strong microfinance sector, the government of Tanzania has developed and adopted a Rural and Micro Finance Policy covering all aspects of Micro Finance Institutions (MFIs) development through registration, governance, supervision and inspection. The National Microfinance policy (NMP) responding to these higher level policy demands, articulates the government's vision for the development of pro- poor finance in Tanzania as follows:
"â€¦ Achieving widespread access to microfinance throughout the country, made possible by institutions operating on commercial principles. A wide range of institutions will be involved in the provision of services, including specialized and non- specialized banks, non- bank financial institutions, rural community banks, cooperative banks, SACCOS, and NGOs. Some providers will focus on credit, some on savings and others on both. Microfinance will be integrated with the mainstream financial system with the flexibility that ensures that their special features are not compromised. The institutions will use a variety of methodologies, each adopted for its particular Market niche. Competition will ensure that service providers operate efficiently and provide high quality services. The system as a whole will provide financial intermediation without necessarily relying on injections of external donor or Government funds. Subsidies will no longer be needed, except perhaps for organizations pushing the frontiers of the system out to the most remote or poorest clients" (URT, 2000,p.8)
The rationale behind the need for Microfinance is that for the majority of Tanzanians , whose income are very low , access to financial services offers the possibility of managing scarce household and enterprise resources more efficiently, protection against risks, provision for the future, and taking advantage of the investment opportunities for economic returns .
Below is the status of Microfinance Institutions in Tanzania according to Tanzania microfinance institutions directory (2005).
Source: Tanzania Microfinance Institutions Directory(2005, p. iii)
There are some amount of material being produced on the issue of poverty reduction especially in development finance and economics by way of researches and projects. Developing countries especially those in Africa are now the focus of international organizations, poverty alleviation programmes and researchers both individual and governmental. Their aim is to focus on tackling the root cause of economic and development problems and seeing their work result in actions, which go a long way to decrease poverty and financial exclusion of the poor in society.
For poverty alleviation programs to work at the macro economic level the root cause of economic and developmental problems need to be tackled at the grass root level. In this vein the country's poverty reduction strategy has been taken as the context within which microfinance or small scale finance provision is being used as a tool to get to the not-so well-off in the country.
Any impact of microfinance must be assessed to determine if the objective of reaching the poor is being achieved. For the goal of helping the poor to be achieved MFIs must be financially stable as without the necessary finance the target group will not be reached and the country's aim of reducing poverty levels in the medium to long term will to some extent not be achieved.
Since microfinance is seen as a link between finance and development every possible means must be taken to ensure the poor in society get the necessary finance needed to enable them rise above the poverty line and contribute their quota to nation building and economic development.