How some community microfinance groups have turned into debt traps

Dar es Salaam. While banks and financial institutions encourage people to take loans to expand their businesses and the economy in general, it has been different for Community Microfinance Groups (CMG) in Tanzania, where more than a third join to access emergency funds.

The latest FinScope Survey 2023 indicates that 35 percent of CMG members join in order to get emergency funds, followed by 20 percent who join to save. About 49 percent of those who access emergency funds use them for funeral expenses, while 31 percent spend the money for medical reasons.

As such, CMGs are a key risk mitigation method against unexpected expenditures in the lives of many low-income earners in Tanzania.

"It is interesting to note that 2 percent of CMG members have also gained insurance benefits through their CMG. As such, the groups also intersect with community finance and the larger insurance sector," read part of the report.

However, experts and CMG members say that it is economic hardships and a lack of financial education that force people to rush for small loans. The experts further added that it is important to impart entrepreneurship training and personal financial management education to people to reduce their debt burden.

The set of financial services defined as "formal" has changed since the last FinScope was conducted in 2017 because the Microfinance Act, 2018, reclassified CMGs as formal financial services.

CMGs, which were previously identified as informal lending groups, retained a similar level of penetration in the FinScope 2023 survey even as mobile money posted substantial growth. For CMGs to be formalised they have to apply for operational licences from the Bank of Tanzania (BoT). Those that do not remain operating informally.

The report generally shows that formal financial inclusion in Tanzania has grown from 65 percent in 2017 to 76 percent in 2023. Formal financial inclusion includes financing that can be accessed from banks and other major financial institutions, registered CMGs, and mobile money.

This development was mainly driven by the significant increase in mobile money uptake and only marginally influenced by the regulation-driven formalisation of CMGs. This is because only 1.6 percent of the population that uses CMGs does not use mobile money at the same time.

CMG members’ reactions

The chairman of Rafiki Social Group in Dar es Salaam, Mr Samuel Godfrey, says failure to set priorities right is one of the reasons that force CMG members to take emergency loans.

"There are emergencies that cannot be avoided, such as illness or death, but house rent, for example, is long-term. I know we differ in terms of income, but we must learn to plan and save because there will come a time when those groups will run out of money," he stresses.

Mr Godfrey notes that the second reason is a lack of a habit to save and the unwillingness of many to engage in entrepreneurial ventures for extra income.

‘Some are satisfied with the situation and do not want to think outside the box to get out of their difficult situation. They forget that groups can collapse. People must learn how to save for themselves with the little they get," said Godfrey.

Ms Jessica Alex, a resident of Goba in Dar es Salaam, is the chairperson of Wekeza Vicoba, whose members are primarily women.

She reveals that many members of Wekeza join the group to access loans to pay off another debt whose deadline is around the corner, pay wages for a housemaid, or send money to the parents in the village.

"On several occasions financial experts have come to train us on how to start and operate businesses using small capital. But, you know, the challenge is that women have too many responsibilities at home."

Some of the women routinely fail to repay the loans, she notes brings problems when members have to share the profits at the end of each year.

Experts reaction

Social welfare expert Ms Theoefrida Mbilinyi said those who take small loans to fund household expenditures, some of which can wait, have a poor attitude towards money. Some of it could be psychological, she noted.

"We have been receiving cases of divorce as a result of loans that female partners accrue without the knowledge of the male partner," she says, citing an example of someone who took a loan to hold a birthday party. Ms Mbilinyi is of the view that there is a need to teach low-income earners the ABCs of financial discipline and entrepreneurship to protect them from debt traps.

"Most importantly, people need to learn to live within their means."
A financial expert from the University of Dar es Salaam Business School (UDBS), assistant Lecturer Mr Bless Maagi, said microfinance groups have to serve the following purposes; to provide people with an opportunity for saving; to lend to those needing small capital; and ultimately to share the profit from the accrued interest rates.

Mr Maagi said that in Tanzania, CMGs serve a negative purpose. Many people do not join for the purpose of finding an opportunity to save. Their main goal is to access loans for emergencies as well as frivolous spending.

Because, at the end of the day, many can’t repay, most groups break up soon after their creation.

Mr Maagi says members should join groups for the stated noble goals. They should buy insurance policies to help them during emergencies.

He lamented the fact that some people regarded insurance as an unfriendly product due to a lack of understanding.