Getting a Loan in Kilimanjaro Tanzania
A study into the banking products offered to business owners and financial challenges facing entrepreneurs in Kilimanjaro
Entrepreneurs across the world cite access to finance as a key constraint of setting up and operating a business. Given the high concentration of banks in Kilimanjaro (22 registered banks) and that the majority of formal financial services offered to entrepreneurs in the region are offered by banks, Anza conducted a study into the banking products offered to business owners and financial challenges facing entrepreneurs in Kilimanjaro.
Loan Products For Entrepreneurs
The majority of financial products offered to entrepreneurs in the Kilimanjaro Region are debt loan products. A few banks offer asset financing, and others offer letter of credits and bank guarantees.
The majority of loan products from commercial banks are offered to individuals: while 68% of the banks interviewed offer loans to individuals, 32% offer loans to both individuals and groups, and none offer loans only to groups. The number of group-based loans is much higher when taking into account informal saving and cooperative societies, VICOBA, VSLAs and the numerous SACCOs in the region. Group loans allow business owners and entrepreneurs to learn from each other, and to act as each other’s collateral in order to secure a loan. The structure of the group loan depends on the methodology used by the bank or society: either each individual is given a loan based on their business, or the group is given a loan as a whole.
Interest rates for the loans differ according to the risk of the business, as determined by the banks. For individual loans, the interest rate ranges from 15-26%, averaging at 20.4%. For group loans, the interest rate ranges from 15% to 30%, averaging at 22.5%. Microfinance products often have a higher interest rate than business loans.
In Kilimanjaro, there is a wide variety of loan amounts offered by banks to business owners. The maximum amount of the loan is largely determined by the annual turnover of the business and the size of the collateral.
Whereas multiple sources cite a large gap in loan amounts, where the “missing middle” cannot access financial capital, it appears on first glance that there is a present yet less acute missing middle in Kilimanjaro. In terms of possible loan amounts, the banks in Kilimanjaro cover a wide range of loan amounts, including the “middle” category.
The average loan amounts given by banks to entrepreneurs in the Kilimanjaro region, however, show that loan amounts between 0-500K and 1.1M-5M are underserved. A gap in loan amounts therefore may not be apparent when comparing loan products available, but becomes clear when assessing the average loan amounts given out by banks in Kilimanjaro.
While commercial banks offer more products for individuals, informal and SACCOs-style associations offer more options for groups. Furthermore, while commercial banks cover every loan amount from 500K and above, the average loan amount given to business owners by banks leaves a gap in the 0-500K range and the 1.1M-5M range. Only one bank at each of 5.1- 10M, 10.1M-30M and 30.1M-50M offers an average loan amount within that range.
Challenges for Business Owners
Business owners and entrepreneurs in the Kilimanjaro Region face specific challenges when accessing financial capital from the banks. The first, most salient challenge for entrepreneurs is the question of having sufficient formal collateral to secure a bank loan.
Most banks require collateral to be in the form of a developed property, land with a title deed, or a mortgage. Some banks accept movable assets such as a car or motorbike, but not all. Some banks have introduced innovative schemes for collateral, for example issuing warehouse receipts to agriculture customers to use as collateral for a loan.
Ownership of the appropriate formal collateral is an issue for business owners looking for loans. Land title deeds are time-consuming to get as government procedures for surveying land and issuing formal ownership certificates of assets can make the process lengthy and difficult.
The issue of collateral is not a small one: for individual loans the average formal collateral required is 120%; for group loans the collateral required is around 95%. Some group loans use the group members as collateral instead of assets. Furthermore, government employees can often access a salary loan by using an employer’s letter of guarantee and their salary as collateral.
A second challenge for business owners is the business maturity needed to access a loan. The majority of banks consider 1-2 years of business operations and above an appropriate stage at which a business can access a loan. Unless an early-stage entrepreneur has significant previous business experience, he or she is unlikely to access a loan.
A third challenge for business owners is the sectors that banks consider giving loans to. For business owners working in sectors such as trade, retail, wholesale and transport, there are a variety of loan products to choose from a multitude of banks. For those working in sectors such as NGO work, education, or healthcare, however, there are limited options, as most banks do not offer those services.
Challenges for Banks
Banks in Kilimanjaro face multiple challenges when deciding whom to give loans to. There are few banking customers to start with – the FinScope 2013 survey indicates that only 16.8% of the Kilimanjaro population have/use formal bank products. 70.1% of the population use non-bank formal products such as M-Pesa, 6.9% use informal mechanisms only, and 6.2% are financially excluded. The pool of potential customers is thus small, and limits the banks ability to develop diverse and strong portfolios.
With a small group of customers and a high density of banks in the market, banks face challenges such as multi-borrowing, low repayment, and insufficient collateral. These challenges make it hard for banks to offer financial services to entrepreneurs.
Banks cite multi-borrowing as a challenge to their ability to offer loan products to business owners in Kilimanjaro. Multi-borrowing – taking loans out in multiple banks – means that the customer’s ability to pay is reduced, and that collateral used to secure the loan is often used elsewhere. With no registry to track collateral, banks find it hard to determine who is a multiborrower and who is not.
Without proper accounts and records of the business, it is difficult for the bank to determine the annual turnover of the business and to assess the risk
A further challenge for banks is a lack of financial records among micro, small and medium business owners and entrepreneurs. Without proper accounts and records of the business, it is difficult for the bank to determine the annual turnover of the business and to assess the risk of giving a loan to the entrepreneur or business owner.
A lack of financial awareness also means that micro entrepreneurs and business owners are not always aware of the ways in which a loan works and needs to be repaid. 39% of the banks surveyed rated their customers financial knowledge as “low” (before any trainings or workshops were provided), and 44% rated their customers financial knowledge as “high”. This spread largely reflects the loan amounts offered by the banks: those offering small loans generally rated their customers knowledge as lower than those providing corporate, larger loans.
Another issue identified by the banks is the diversion of funds from the business to other needs such as school fees, hospital fees, and other emergency fees. There is also diversion of funds to other assets such as other businesses owned by the entrepreneur or the entrepreneur’s family. This makes repayment of loans difficult for the entrepreneur, and puts the bank’s portfolio at risk, as loans are not repaid on time.
While bank loans remain a key source of financing for entrepreneurs, there are several challenges both for entrepreneurs to access finance, and for banks to ensure that loans are repaid and that the businesses given loans are viable, legally registered businesses.
The Anza Growth Fund
The Anza Growth Fund was created with the aim of tackling many of these key issues. By offering loans exclusively to businesses who are in the Accelerator programme, Anza are able to limit the risk while offering more flexibility and lower interests rates.
This article was researched and written by Camilla Shearman.
Read the full report and key recommendations.