In a packed and conversation-filled room in northern Tanzania, the wheels of microfinance are spinning – quietly and efficiently, yet furiously. Every week, this group of people owning and running small businesses worth less than $700 comes together in Arusha to make payments on microloans received from Promotion of Rural Initiatives and Development Enterprises Limited (PRIDE), a Tanzanian microfinance institution. Each also deposits earnings into a savings account, in fulfillment of the requirement that borrowers incrementally strengthen their financial position. The U.S. Agency for International Development (USAID), through a 75% bond guarantee, has helped PRIDE maintain and increase microcredit activities.
When called to the front of the room, borrowers push a small pile of well-worn Tanzanian bills across a table toward three employees. The first counts the money, the second makes a notation or two on a printed spreadsheet, and the third slides change back across the table. These transactions, happening one after another, are banal to watch but breathtaking to consider. This is innovative thinking – applied to small lending – at work. Entrepreneurial but poor Tanzanians, who are shut out of traditional sources of credit, are being empowered (through microcredit loans up to $650) to realize all manner of small business dreams, and lift themselves and their families out of poverty.
In Tanzania, most land is untitled and there is no legal framework allowing “movable assets,” such as livestock, to be used as collateral for accessing loans. Typical bank loan models simply do not work here, but in microfinance…collateral is not necessary. PRIDE counts on good-faith and social cohesion for repayment by making group loans that involve 50 people. Group members work out the specific allocation of funds themselves and are responsible individually and jointly for paying the loan back. This multi-borrower structure values each entrepreneur’s success, incentivizing more successful entrepreneurs to assist struggling peers, and the intra-group transparency promotes fiscal responsibility by each group member, ensuring high levels of repayment.
How well does it work? In Tanzania, 99% of all PRIDE microloans are repaid.
Martha Mpinga is a Tanzanian entrepreneur who purchases small amounts of African textiles from wholesalers and sells them to retail buyers for a profit. “I started with a loan of 50,000 Tanzanian shillings (approximately $35),” she explains. Once the original was repaid, she qualified for a higher microfinance loan. Martha has repeated this cycle several times as her business expanded. “My loans grew…and now I have a loan of 1 million shillings (approximately $650).” At this loan level, sufficient inventory is maintained and it drives a sustainable business. She pulls richly-patterned wax print cloths, used by local woman to make clothing, from her bag and delivers a convincing sales pitch about their high quality and other decorative uses for such beautiful fabric. The Arusha branch manager, who is standing nearby, ribs Martha that she could avoid next week’s trip to the branch by making a second microloan payment today, using the proceeds from this just completed sale. They laugh, both knowing that the regular repayment meetings which bring Martha together with 49 other entrepreneurs, is essential to the microfinance model.
In November 2010, USAID provided its first guarantee for a microfinance bond issued in sub-Saharan Africa. With USAID’s support, PRIDE secured 15.3-billion Tanzanian shillings ($10 million) from the Tanzanian capital markets. As a result, access to credit will no longer be just a dream for an estimated 10,000 additional Tanzanian entrepreneurs.