Maendeleo Bank: A Bank That Serves the Underprivileged in Tanzania

Interview with Ibrahim Mwangalaba, Managing Director of Maendeleo Bank

As of March 2015 – these are the most recent figures – there were around 56 licensed banks and other financial institutions in Tanzania, against 38 as recently as 2009. Therefore, while this is a very vibrant sector for Tanzania, which is consistently attracting foreign financial institutions to enter the market, it is currently characterised by having just a few big players and several small banks. Do you think Tanzania could be running the risk of becoming ‘over-banked’?

Yes and no.

No, because, despite the 56 banks currently licensed, in addition to non-licensed financial institutions, such as micro-finance, which number over 200, the Tanzania‘s current levels of financial literacy and access to finance remain low, with the latest data showing at most 14% of Tanzanians accessing financial sector services.

Recently, we have seen growth in digital financial services, which has been mainly influenced by mobile network operators, pushing that figure from 14% to currently close to 50%, in terms of penetration. Now, if we look at real penetration, involving financial services and banks, this remains at 14%, which shows that there is still a significant unbanked population in the country.

Many banks currently have education programmes aimed at SMEs, by organising meetings and providing training free of charge; for instance, on how to formalise their businesses, in order to access banking services.

How many Tanzanians are there? The latest census data showed we are now over 45 million people. You can see the gap there. Despite there being 56 banks, there is still significant opportunity. The biggest challenge is to improve the infrastructure of existing banks and financial institutions to tap the rural areas, which are mostly unbanked. Most of these banks and financial institutions are largely in city centres. The reason is very clear: everyone needs to be profitable and nobody is prepared to venture into the rural areas, where they are unsure whether their return on investment will be positive. My assessment is that there is great opportunity and there is still room for banks to grow further. But the only thing that will ensure those banks’ growth remains viable and are able to extend their profitability over time is to place far greater emphasis on innovation. This should be the key aspect of these banks, in order to grow, sustain themselves and push penetration rates up to 80%.

Just swivelling the spotlight to Maendeleo Bank, this is a regional bank focused primarily on the unbanked, on the financially disadvantaged, as well as small to medium enterprises. How do you target your chosen segments, in order to increase usage and market penetration? What techniques, tools and methodologies do you employ to grow in those segments?

We have a number of techniques that we are using to penetrate these markets. Firstly there’s the digital, technological strategy. We have just launched mobile banking, which now enables people – particularly customers of Maendeleo Bank – to access their bank details, but non-customers are also able to send money to their relatives who bank with Maendeleo and deposit into their accounts. This is one of the aspects that has pushed us forward a good deal.

However, we currently only have one branch, which places us at a disadvantage in terms of access to our financial services. We have experienced some improvement as a result of the introduction of mobile banking, through which a number of people are now able to access our financial services. On the other hand, we also have ATMs (Automated Teller Machines). As a single-branch bank, we sought to invest in technology, by partnering with UMOJA Switch, which is the engine currently managed by around 26 or 27 small banks, some of which have naturally attained a medium size. These small banks have over 200 ATMs across the country. Customers of all UMOJA Switch members are able to access any of those ATMs nationwide. By partnering with UMOJA Switch, Maendeleo Bank customers also benefit from this service.

This provides you with a virtual banking network, in a sense?

That’s right. I would class that as the second option. The third option is to reach out to customers through the media. We advertise and we are also invited to interviews with media outlets, including TV and Radio, through which we keep the public informed regarding our bank’s activities. But there is also something very interesting at work with one of our products, namely Small Group Lending (SGL). This is a Gramin banking concept, involving particularly disadvantaged sections of the population, who do not have access to formal banking services. We visit them, far away from urban centres, we then bring them together in the centres and offer them a free 3-week training programme, after which we encourage them to build and mobilise themselves in small teams of at least five members each, who are acquainted with each other. They receive training on how to manage their finances, their business and how to keep records, which will enable them to become bankable operations in the future. Following their training, we offer them the opportunity to borrow money from the bank. We give them money with no tangible collateral, where the group’s five member themselves, known to each other, in effect make up the collateral. So we offer them finance, they get their small businesses running and they turn over money on a weekly basis.

This has helped support many people. We have over 3,000 customers currently involved in the programme and these are people who normally would not even be able to access banking services, given their underprivileged status. They do not have any collateral and their businesses are very small, ranging from $20 or $50 to $100. We give them up to the equivalent of $1,000, without any collateral. This is one of our means of achieving our goal in serving the unbanked.

We also usually organise workshops and training free of charge, aimed at the public, regardless of whether or not they are our customers of Maendeleo Bank. We announce the event, we advertise, we pay for the venue and we pay for the training. We invite experts to provide training, along with our own staff, who also form part of the training team. We train the community on how to manage their finances, how to maintain financial discipline, keep records, as well as being able to borrow from banks – not just from Maendeleo Bank, but from any other bank in the country. These are the few means the bank employs to reach out the market.

You are very proactive. These are financial literacy seminars that you organize, as well as forming miniature joint-stock companies based on trust and local community networks.

Yes, and I would also like to add that we are currently in the final preparation phase with regard to one of our most interesting products, which builds upon our small group lending and the Grameen banking concept that I mentioned. We have now transformed that from the ‘manual’ or physical visit by our agents to those centres to our technological advantage, which means that our customer will be able to form their groups, open accounts with Maendeleo Bank and borrow money without them having to come into the branch. We are calling this Savings and Credit Mobile Product branded as Jamii Loan (meaning community loan), which means that someone will be able to open accounts and borrow money from the bank through their mobile phones, while adhering to the same methodology of forming groups with a minimum of 5 up to 50 members.

Jamii Loan operates in a similar way to WhatsApp, where members appoint a group Chairperson within the 5 or so; after which the group name is chosen, as well as the date on which payments will be made to the bank. Once this has been agreed, the Chairperson may begin to register the other members, by simply providing their names and phone numbers. Once they are registered, the message will be delivered to Sandra or Ibrahim that they have been individually registered, thereby confirming their membership.

Maendeleo Bank is in itself very flexible as a bank, in seeking to accommodate a variety of our customers’ needs. Our business model is characterized by affordability, accessibility and flexibility.

When it comes to deposits, we agree that every member will deposit $50 every Tuesday, for instance. Now let’s say that Sandra defaults and does not send her payment; the next day a reminder message will be sent to all group members, informing them that Sandra did not send her payment. As a result, members will push Sandra to make her payment/deposit. There is a 3 week window period. On the fourth week, you will have to apply for a loan, through the mobile app. You will be able to access twice the amount of your payment as your loan. When you apply for this, the message goes through to the members from the core banking system, notifying them that Sandra is requesting a loan of $200 and asks them individually whether they are fine with this or not.

So this has to be agreed upon as a group? What happens if she defaults after 2-3 weeks?

Yes, there needs to be group consensus. If Sandra defaults further, the group will be automatically closed by the system and the system will pay all the debts to the bank and the balance will be distributed to group members proportionately as per their deposits. Thereafter the group will be closed.

We have trialled this as a pilot scheme, which has been greatly successful. We are planning to officially launch the product by August or so, and it is expected to be massive, where our purpose is to reach many people who are unbanked and have been unable to obtain financing from the formal banking sector.

That sounds laudable. At the end of 2013, the Tanzanian government launched what is known as the ‘National Financial Inclusion Framework’, whose aim was to reduce economic vulnerability, as well as expanding access to formal financial services to up to 50% of adults in Tanzania by 2016. How successful was this particular programme?

Oh, it was fantastic. It was very successful and we actually applaud the Governor of the Central Bank of Tanzania, who is very pro-technology and is encouraging banks to embrace it and use it to reach and attract many people, so as to allow them to bank with them or access financial services. The aim was to reach 50% financial inclusion by 2016. But results have exceeded this, and if I am not mistaken, the initiative has achieved a level of around 55-56% inclusion. While this was underway, there was an outcry from banks with regards to mobile network operators as they offer services similar to that of financial services with no Central Bank regulations imposed on them. Banks, however, have tight regulations. If the government allowed network operators to offer unregulated financial services, banks would see this as unfair treatment. But the Governor was very strong in maintaining that these were two separate entities. As a result, what the Governor is encouraging most successfully was for commercial banks to partner with the mobile network operators, which of course we did; and through this, performance in terms of financial inclusion has been tremendous.

Over 95% of businesses in Tanzania are SMEs. Most of them are highly micro-level operations. But these nonetheless contribute around 35% of Tanzania’s GDP. To what extent do you think the current banks’ high rates of interest remain a major barrier to SMEs when it comes to financing their growth? Are these too high?

Yes, of course they are too high. Currently, there are around 3 million SMEs across the country, and out of these, fewer than 15% access financial services. The biggest challenge, apart from interest rates, is the issue of financial literacy among SMEs themselves. Many of them don’t avail of banking services due to a lack of knowledge or understanding, which in turn is the result of not benefitting from clear information.

Such as keeping records, ledgers and preparing tax returns?

Yes, exactly, and many have not formalised their businesses. Some of them are not even engaged, in that they may be running a very large business, but do so very informally, where someone may simply keep records in their head, which becomes their ‘computer’. For these people to be able to access financial services becomes very challenging. Banks are now putting much effort behind addressing this challenge, and many banks currently have education programmes aimed at SMEs, by organising meetings and providing training free of charge; for instance, on how to formalise their businesses, in order to access banking services.

SMEs are certainly driving the country’s economy, and if we look at employment records, you will see that SMEs contribute the largest share of the country’s employment.

We understand that Maendeleo Bank was the 51st to open in the country, in 2013, and you listed yourselves on the DSE Alternative Market. Three years on from that, what is now Maendeleo’s next step and your development strategy going forward?

The next step is to go for an IPO, in order for the bank to raise enough capital to open branches across the country. Our five-year strategy from 2016 to 2020 aims to 1) open at least 9 new branches across the country, 2) raise capital to the tune of USD 7 million, which equates to approximately TZS 15 billion. We would then qualify for fully commercial banking status and be able to open branches all over the country.

We expect our profitability positions by the end of these five years to be no less than USD 2 million. Such are our plans, and in this regard we have already begun to reach out to our prospective investors, in order to assess whether we will be able to go for an IPO next year. It was in fact very impressive for the bank to be country’s pioneer, in terms of being listed at Dar es Salaam Stock Exchange through the Enterprise Growth Market window shortly after opening its doors to the public. We opened on September 9th, 2013, and we were already listed on November 5th, 2013. The normal requirement for listing is for any bank or company to have been in operation for at least 3 years, in addition to demonstrating a positive track record, which is needed to attract investors to invest in the bank in question. But through a number of initiatives done by the government through Capital Market and Securities Authority, designed to encourage small and medium enterprises, the government has sought to back those with good ideas and brilliant business proposals, but unable to secure capital, by allowing them to go to the public, in order to attract capital and partner with them in their business. Maendeleo Bank was the first to take advantage of this approach.

This must have been very over-subscribed at the time?

Yes, it was certainly over-subscribed; and what is very interesting is that, as we sit here and talk about it, this was a historic moment: here was a new bank, which opened in 2013 and was listed on the DSE that same year.

Last year, in December 2015, we went for a rights issue. It was very challenging, since we had not made any profit by then. The return to investors, in taking advantage of a bank’s profitability, is to receive dividends. We had not yet issued dividends by then, but we still went ahead with the rights issue. Through the rights issue, we managed to raise a further TZS 2.8 billion, which is equal to USD 1.4 million, and which was in fact very significant. In hindsight, that was a litmus test. And now that we plan to become a fully-fledged commercial bank in 2017-18. When we ask ourselves whether we will be able to raise the required funds, the answer is “Yes!”, given that the success rate for the 2015 rights issue was of 93%, which is very high in comparison with some giant companies who went for a rights issue, but with success rates of 70-80%.

As we have seen and discussed, the banking sector in Tanzania is highly competitive. There are many players involved, although as you have said, there is significant untapped potential. But my question is really about to how Maendeleo Bank will be creative in differentiating yourselves and ensuring that your potential customers really understand who Maendeleo are; and what are the innovations you plan to invest in that will make you stand out in terms of the products and services you offer, in the context of a very crowded marketplace.

You are right. I would say Maendeleo Bank is in itself very flexible as a bank, in seeking to accommodate a variety of our customers’ needs. Our business model is characterized by affordability, accessibility and flexibility. The bank’s strength lies on humility, courage, and passionately caring for our communities across the country. Our members of staff are well trained and operate with humility. We treat our customers in such a way that they form part of the Maendeleo Bank family. By doing so, despite being a new bank, we have managed to become profitable within two years, which is unusual. Why is that? Essentially, thanks to our product offering. We offer products that we have tested in the market, and which the public have been lacking. And when we launch them, our products meet their needs. As a result, acceptance rates are very high. Therefore, we are very confident that this will enable us to achieve our plans; but also through innovations, as I mentioned.

That is one of the features I wanted to delve into now. It has had a revolutionary impact on banking across Africa in recent years, which has seen the astonishing, exponential growth of mobile banking in particular. Traditional banking does not penetrate the country in the same way that mobile money transfer does, where traditional legacy branch networks essentially appear to have been leapfrogged. How relevant is it therefore for banks to even bother developing traditional branch networks?

Traditional branches are still valid, and we will continue to operate them, since the technological literacy of our communities has yet to develop further. They still find it very comfortable to have face-to-face contact with the bank teller, which requires a physical branch. Many of them also want to be approached in person by bank agents, in order to have confidence in the service, on questions such as: “How can I send money through my mobile? If I send TZS 1 million through my mobile, can they reach my account?”

As much as banks are trying to educate the public with regard to technological innovations and embrace these advancements, we still need to keep the physical branch, in order to attract those customers who are still uncomfortable about operating without physical contact. There is also the fact that technological innovations – apart from internet banking – do not allow for transactions involving large sums of money. And, so far, banks also offer limited access to internet banking, not yet giving it free rein, because of the risks ahead. As such, the physical branch still needs to be there.

We mentioned this earlier, but we return to it because it is a tantalising prospect when looked at, i.e. the market growth potential in this country, with only around 13% of Tanzanians currently accessing banking services. What of the other 87%? There is obviously a massive opportunity to grow this country’s banking business. Could you spell this out further?

In terms of the 13 or 14% who are accessing financial services, against the 87% you mention, let me talk about the latter. How are those belonging to the 87% being served when it comes to financial aspects? There are number of ways Tanzanians use to support each other on this front. On the one hand there are traditional ways, such as obtaining funds or capital from their relatives, i.e. family or friends.

Are these remittances?

Yes, this can take the form of remittances from say friends who are living in the city, or even from friends living in the same vicinity but with greater financial muscle than the other relative. They provide them with money to support their business or pay their children’s school fees. But there is also a mushrooming of street lenders, who of course charge astronomical rates.

Loan sharks?

Exactly, and they are very widespread, because most people need ready money on the spot. The notion is that if they go to the bank, this involves a process: filling the form, providing references, etc. They would rather do without all that, so they go to the money lender on the street. He just asks: “How much do you need?” – You say: “One million”; and everything is done within an hour, despite interest rates often hovering above 100%. This is what the 87% makes use of, but we also have a vast number of unregulated financial institutions, such as those offering microfinance. There are currently over 200 across the country. We also have savings and credit societies, which we call ‘saccos’. Village banking also currently provides significant support. Many people across the country take part in all these schemes, which are the ones funding that 87%, in addition to the support from relatives.

Banks now have to jump on the opportunity and play their role, in order to tap into this 87%; because if you look at the costs involved, some people currently pay over 100%, with rates of say 20% per month.

Because they have no alternative? You are saying that there has to be a drive to formalise and institutionalise the financial service sector in general?

Yes.

We have looked at your figures over the last few years, and you have posted an impressive profit, despite commencing operations only three years ago, as you mentioned. Yet, community banks such as yours often have liquidity problems, which can jeopardize their well-being, as well as their operational prospects. For the most part, their Achilles’ heel has always been a failure to mobilise adequate capital. How will Maendeleo Bank overcome these challenges, such as the small size of your existing capital base, and survive the very cut-throat competition posed by 55 other commercial and even non-banking institutions currently operating in Tanzania? I assume this is your Number 1 priority?

Thank you for the question. There are a number of ways to address these challenges, but foremost is innovation in terms of our products. We offer products suited to the market, which ensures they are sellable. When we go to the market with a product, it’s attractive. Secondly, there’s the way we opt for small margins in terms of our services fees. The cost of doing business with our bank is therefore minimal for the customer, having carried out significant research before opening the bank. We looked around at other banks, saw what they were charging: their products, services, their offering, and at what rates.

The aim of our bank has been to serve underprivileged individuals. As you are probably aware, the founder of this bank is the Evangelical Lutheran Church in Tanzania which aims at serving human beings in a holistic way. The mission of the church is to serve and support the underprivileged all members of the community regardless of their beliefs. You cannot do so by placing high costs on them. Therefore, our products are very price-sensitive. We are priced very low, in order to attract their custom. These are affordable products in terms of the mechanisms involved and their use. But we are also very flexible in accommodating a number of customers’ needs.

As you probably know, our country is at less than 20% in terms of land titling, if I am not mistaken. That figure mainly accounts for urban centres. Many people do not have title deeds on their lands to be used as collateral. In view of this, we have a number of means of supporting their financial needs without necessarily having security for the loans. Through small group lending product, the bank offers unsecured loans to our customers to support their businesses. This product has proved to offer a great relief to the low income communities in our country.

Moreover, apart from the affordable financial charges we charge on our products, we are exceptionally interactive. Through the seminars we organise, people come to understand what Maendeleo Bank is doing, and we acquire a number of customers that way, who go on to bank with us. This means our bank is normally able to sustain its liquidity, as we benefit from significant deposits. If you look at other community banks and compare them to Maendeleo Bank, I believe we are in the lead in terms of deposits. This shows the trust the community places on the bank, which guarantees its liquidity and enables it to operate comfortably, without any financial issues.