African Journal of Finance and Management

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Financial Institutions And Poverty Alleviation In Tanzania

Adam Mwandenga


Financial institutions in Tanzania have operated under a competitive financial system between 1961 and 1967. The same institutions faced a turnaround in 1967 into financial repression. It was a highly regulated and specialized financial system with government intervention in the context of a centrally planned system. High inflation and negative interest rates were common. The system was geared to serve more the public sector at the expense of the private sector. With the onset of economic reforms in 1984, the economy's direction began to move away from the tenets of a centrally planned economy towards free-market orientation. In 1991 financial sector reforms became a reality.

In their current set up financial institutions are divorced from the strive for poverty alleviation. They are least involved in direct poverty alleviation and only marginally involved in indirect poverty alleviation. Poverty as a broad concept that we adopt involves both income and non-income attributes of human development. Emphasis consists in the ability to meet basic needs and sustain human decency and dignity, which goes together with participation. Financial institutions have tended to serve the urban areas. They have also favored traders rather than producers. They favor short-term to long-term lending. Lending rates for long-term are also too high to be an incentive to productive sectors of the economy. They seem to be so risk averse that, a greater proportion of their investments are in government securities, thus leading to crowding-out effect of private sector investments. This trend has to be reversed by a search for means to reach the poor directly through micro-credit facilities, other micro-credit institutions and NGOs devoted to the cause and indirectly by lending to productive sectors at less than the current rates.
African Journal of Finance and Management Vol.12(1) 2003: 83-95

AJOL African Journals Online