Experts list benefits and risks of village community banks

What you need to know:

  • The emergence of community microfinance groups has been crucial in enhancing micro and small entrepreneurs’ access to capital.

Dar es Salaam. It is no secret that community microfinance groups like Village Community Banks (Vicoba) are essential to improving the economic standing of low-income Tanzanians, particularly women.

The emergence of community microfinance groups has been crucial in enhancing micro and small entrepreneurs’ access to capital.

The lack of sufficient collateral for both urban and rural-based entrepreneurs, as well as the actual absence of many commercial banks in rural regions, have created a funding gap that has been filled by Vicoba loans.

However, experts say that although community microfinance has helped low-income earners improve their financial position, the security of Vicoba’s funds is always at risk.

This is because many groups are not in the banking system, thus posing a security risk.

There are lessons that commercial banks and formal microfinance institutions can draw from Vicoba and other community microfinance groups, experts contend.

The biggest lesson is the need to reduce loan interest rates and conditions to reach entrepreneurs with no collateral.

In other words, every entrepreneur with a bank account should be able to access small loans, they say.

Enabling environment

When tabling the state of the economy report in Parliament last week, the Minister for Finance and Planning, Dr Mwigulu Nchemba, said in 2022 a total of 37,153 community microfinance groups would be registered.

“In 2022, the government continued to create an enabling environment for coordination, registration, and promotion of the establishment and development of Community Microfinance Groups,” Dr Nchemba noted.

He added that the number of members of those groups has reached 945,326, partly due to increased awareness among the public on the importance of establishing and joining such groups.

Community Microfinance Groups are tailored microfinance programmes based on membership.

It is designed to provide credit to low-income people who need capital to start their own small businesses.

The programme brings together groups of 25 to 50 people, mostly women, and allows them to combine their savings to create a community-based bank.


Speaking to The Citizen yesterday, an economist from the University of Dodoma (Udom), Dr Lutengano Mwinuka, said these groups have helped change the lives of low-income earners, especially women.

At the moment, they have set up their own system on how to lend to each other at interest rates that they see as affordable, and the guarantee comes from the members themselves.

“It’s time for the government to design systems that will regulate these groups,” Dr Mwinuka noted.


Some groups use the banking system to conduct their operations and facilitate loan repayment by members.

But as most members do not have bank accounts and as many groups operate informally, they use the personal bank accounts of some leaders of the groups.

“Basically, this is not safe at all, but it is necessitated by the fact that many groups are not registered in the formal systems, said a treasurer for a Dar es Salaam-based Wekeza Vicoba, Ms Fatuma Abdullah.

She noted that there is a need for stakeholders and the government to help impart financial literacy to the group.

She said in their group last year, the Secretary disappeared with more than Sh3 million that was profit for the year because the members trusted her and allowed the money to be deposited in her personal account.

“The group collapsed, but we decided to start over with fewer members. Basically, we learned a lesson, and now we are completing the process of writing a constitution so that we can open the group’s account.”

Ms Victoria Banzi, a member of Mama Afrika Vicoba, also based in Dar es Salaam, said community microfinance groups operate more on trust.

“We have bank accounts, but sometimes lenders do not deposit the money on time because of less stringent borrowing conditions. That is a big challenge,” she noted.

Ms Banzi added that it is not that the money circulating among the Vicoba members is little, as it could reach Sh100 million per year.

This is a large amount for low-income earners, which requires proper financial handling procedures and systems to reduce risks.


A lecturer from the University of Dar es Salaam (UDSM), Dr Tobias Swai, said financial literacy among savings and loan groups is very important.

Associated with that is the ability to impact knowledge of savings, investment, and budgeting.

Higher learning institutions such as the University of Dar es Salaam Business School (UDBS) and particularly the UDSM Centre for Banking and Financial Services Research can help banks and financial institutions design and deliver modules that are relevant to these groups.

The modules can also undertake monitoring of their financial affairs.

“We can partner with financial institutions to offer digital training and create a database for the development of replicable models of training, monitoring, and evaluation across the country and beyond,” he said.

One of the important skills needed nowadays in the country and especially in households is financial literacy to enhance financial inclusion. Financial inclusion is important in the financial system, and it is important to formulate government policies to accelerate economic growth and poverty alleviation.