The Role of Financial Institutions in Economic Development

The role of financial institutions in economic development

Financial institutions are organizations, which deal with financial, services, advice, assistance or support to individuals, companies and the public at large. They are established by the public and registered by the authorities. Financial institutions may be private or the publicly owned.

The types of financial institutions found in Tanzania are

1. Banks
2. Insurance companies
3. Social security institutions.

Others are

1. Loan-giving institutions
2. Savings and credit cooperative societies (SACCOS).

A bank is an organization that provides financial services like storing and lending money to people or institutions. In Tanzania, there are two main types of banks, namely Central Bank and Commercial Banks.

The Central Bank of Tanzania (BOT)

1. Was established following the decision to dissolve the East African Currency Board (EACB) and the establishment of separate central banks in Tanzania, Kenya, and Uganda.
2. In December 1965, the National Assembly passed the bill of the establishment of the Bank of Tanzania.
3. The Bank was opened by the first President of Tanzania, the Late Mwalimu Julius K. Nyerere on 14th June, 1966.

The central bank is a national financial heart

1. The bank is independent from direct government influence when carrying out desirable monetary policies aimed at stimulating economic activities in the economy.
2. The Central Bank of Tanzania carries out its responsibilities in close cooperation with the government, and in particular the Treasury which is primarily concerned with the financial policies of the government.
3. The head of BOT is the Governor, who is appointed by the Presidents of the United Republic of Tanzania.

The role of different financial institutions in economic development

Analyze the role of different financial institutions in economic development The Bank of Tanzania has important subsidiary central banking functions. The bank has the sole right to issue notes and coins in Tanzania for the purpose of directly influencing the amount of currency in circulation outside banks, thereby providing the economy with sufficient but if possible non- inflationary liquidity.

The functions of the Central Bank of Tanzania in economic development

1. The acceptance of deposits to act as prudential reserves for these banks (that is the minimum reserves), the willingness to discount commercial and government paper, and the commitment to act as lender of last resort to these banks. It also involves the provision of central clearance facilities for inter-bank transactions.
2. The central bank is the banker and the fiscal agent of the government, and may be the depository of the government. It makes temporary advances to the government through its overdraft facility, subject to repayment within 180 days and through purchases (direct or re-discounting) of treasury bills issued by the government, which mature not later than 12 months from the date of issue. The central bank may advise the government on any matter relating to its functions, powers, and duties.
3. It may also be requested to advise the government on any matter related to the credit conditions in Tanzania or any proposal, measures, and transactions relating thereto.
4. The central bank is the depository of the official external assets of Tanzania, including gold and foreign currency reserves. Guarding international reserves may imply the determination of buying and selling rates of gold and foreign exchange in foreign exchange markets and /or the buying and selling of reserve assets for the purpose of sustaining the national currency's external value.
5. The central bank is the supervisor of banks and financial institutions. In general, this activity involves ensuring that commercial banks and other financial institutions conduct their business on and a sound prudential basis and according to the various laws and regulations in force.

Responsibilities of the Bank of Tanzania are

1. Implementation of prudential controls concerning capital adequacy, liquidity, concentration of credit and risk diversification, asset classification and provisioning, and prohibited activities.
2. Licensing of banks and financial institutions.
3. Facilitation and monitoring of Deposit Insurance Fund, the purpose of which is the protection of small depositors.
4. Modification and monitoring of the minimum reserve requirements and foreign exchange exposure.
5. The central bank promotes financial development. This refers to the establishment of an effective financial system, with the aid of which financial transactions minimum amount of cost and time involved.

Commercial banks

1. Are established for the purpose of earning profit through accepting savings, and utilizing these savings of their customers to extend loans and advance on which they charge interest.
2. These banks attract the public to deposit by giving interest rate on those deposits once made with them.
3. All the commercial banks are controlled by the Central Bank of Tanzania (BOT).

Some of the commercial banks operating in Tanzania are

1. National Bank of Commerce (NBC)
2. National Microfinance Bank (NMB)
3. Tanzania Investment Bank (TIB)
4. Akiba Commercial Bank (ACB)
5. Standard Chartered Bank (SCB)
6. Stanbic Bank (SB)
7. Habib African Bank (HAB)
8. Diamond Trust Bank (DTB)
9. Exim Bank (EB)
10. Cooperative Rural Development Bank (CRDB)

The functions of commercial banks in economic development

1. Advise their customers on issues concerning investment, trade and how to run them.
2. Act as trustees, and can also keep valuable documents like wills, certificates and gold. Hence, they ensure safe custody.
3. Provide foreign exchange to customers and help their customers in carrying out foreign trade.
4. Offer the facility of standing order where they make regular payment to a customer's creditor on behalf of insurance premium and electricity bills.
5. Offer bank draft facility to different persons in the economy, especially the traders.
6. Extend loans to several individuals and companies that are engaged in agriculture, ranching, mining, industry and trade. In so doing, the economy of a country grows.
7. Facilitate deposits of money. The commercial banks pay interest rates on the deposits.

Condition and procedures for getting services from each financial institution

1. A person has to take an introductory letter from his or her employer or from the local government officials where he or she lives.
2. He or she will present the letter to the authority concerned in the bank. A special form will be given for filling in his or her particulars and the type of account he or she prefers.
3. The applicant must provide the name of a referee.
4. When the bank has approved the application, it will open an account for its new customer. The customer will be given an account number.

There are various types of accounts such as

1. Savings account
2. Current account
3. Fixed deposit account

The customer may take a loan as per bank regulations

1. The purpose of a bank loan is to provide the borrower with a lump sum of money to facilitate various undertakings.
2. To get a loan, a person will make a formal application to the bank.
3. The manager might interview him or her.
4. The manager has the authority of deciding whom it is safe to lend to.
5. When asking for the loan from the bank, the bank may ask for collateral security.
6. It is something given by the customer to guarantee the payment of the loan.
7. The customer would be required to repay the loan by regular installments over an agreed period of twelve, eighteen, twenty-four or thirty six months.

The strengths and weaknesses of each of the financial institutions

The strengths of commercial banks

1. Easy access of services from the automated Teller Machines (ATM). This makes it easier for customers to access the bank services all the time.
2. Security to their customers.
3. Investment advice, management of investments, buying and selling of investments.
4. Safe custody of valuables (night safes).
5. Cash dispensers.
6. Loans to their customers who want to run businesses, build houses, and buy cars, for improving their living standards.

Weaknesses of commercial banks

1. Loans repayment interest rate is high.
2. Bureaucracy in taking loans from the banks. The filling in the application form and the maturity of the loan takes a lot of time.
3. Referees and collateral security is a hindrance to many customers. Due to this requirement, not everybody can get loans.
4. Low account interest rates. Owners of the accounts in the banks are paid little interest annually. This discourages people to deposit their money in commercial banks.

Principles of SACCOS

1. All members get fixed interest on their capital contributed.
2. They get dividends according to their contribution annually.
3. Members have equal voice each has one share one vote.
4. If one wants to withdraw his or her membership from the society, his/her money is refunded after submitting his/her letter of resignation.
5. Leaders are elected in a democratic way.

Importance of SACCOS in economic development

1. Members can take loans for investment in various economic activities, which improve their living standards as well as the national income.
2. They will be an able to satisfy their daily needs such as paying school fees for their children and constructing houses.
3. Members can also borrow money for starting businesses.

Conditions and procedures for getting services from SACCOS

1. There are forms given to the applicants to fill in how much they want to borrow and how they will refund.
2. The applicant must be sponsored by other members.
3. He or she should list the property, which will be confiscated in case he or she fails to pay back the loan.
4. There is a committee, which goes through each applicant's request, examining the behavior of the member carefully to find out if he or she can reimburse the loan.
5. The committee then concludes whether to give or not to give the loan.
6. Loans are utilized for various purposes such as construction of houses, starting a business, emergencies, paying school fees, livestock keeping and buying fishing implements.

Strengths of SACCOS SACCOS in their contributions to the economic development of the country

1. They give loans to their members.
2. They provide education of entrepreneurship that is how people can start business.
3. They create employment opportunities for the members.
4. They establish various social and economic ventures such as purchasing land or building a dispensary.
5. They provide financial assistance to members who are widows.

Weaknesses of SACCOS

1. There is bureaucracy in processing the loans.
2. There is favoritism in the provision of loans; other people are denied loans without genuine reasons.
3. There are not enough educated personnel to run SACCOS.
4. There are various conflicts in many SACCOS between the members and their leaders.
5. The members do not properly manage funds.

Insurance companies

Insurance companies are financial institutions that deal with managing risk of a firm or business, people and their properties.

There are mainly three types of insurance, namely

1. life insurance
2. health insurance
3. liability insurance.

Life insurance is a kind of insurance that guarantees a specific sum of money to a designated beneficially upon the death of the insured, or to the insured if he or she lives beyond a certain age.

Health insurance is an insurance against expenses incurred through illness of the insured.

Liability insurance insures property such as automobiles and professional/ business mishaps.

Importance of insurance in economic development

1. They restore loss because they take you back to the condition you were in before the disaster.
2. They cover disasters that might affect the individual (protection).
3. They reduce losses from auto accidents on the roads and fire. In running a business or any production activity mishaps may occur, thus it is advisable to insure against uncertainties that might occur.

Strengths of insurance services in Tanzania

1. Many clients have been compensated in case of loss of poverty.
2. In other types of insurance, for instance life insurance, the insured is paid back his or her contributions with interest at the end of the contract.

Weaknesses of insurance services in Tanzania

1. Insurance services are not accessible in rural areas.
2. There is a need to educate Tanzanians on the importance of insurance services.
3. Many insured people complain that insurance companies delay to compensate them in case of a loss.
4. The procedure to get compensation takes a long period of time.
5. There are unfair methods applied by some of the insurance companies to avoid full and timely compensation for the insured asset.

Social security institutions

The formal social security systems found in Tanzania are:

1. National Social Security Fund (NSSF)
2. Parastatal Pension Fund (PPF)
3. National Health Insurance Fund (NHIF)
4. Local Authorities Provident Fund (LAPF)
5. Public Service Pension Fund (PSPF)

NSSF

• Offers social security coverage to employees of the private sector and non-pensionable parastatal and government employees.

PSPF

• Provides social security protection to employees of the central government under pensionable terms.

PPF

• Offers social security coverage to employees of both private and parastatal organizations.

LAPF

• Offers social security coverage to employees of local government.

NHIF

• Offers health insurance coverage to pensionable employees of the central government.

The Social Security Regulatory Authority (SSRA)

1. Is a regulatory and supervising body of the functions of all social security schemes in the country.
2. The authority has the role of ensuring the funds are sustainable, project interests, increase coverage and reduce the burden to the government.

Functions of Social Security Regulatory Authority (SSRA)

1. Register all managers, custodians and social security schemes.
2. Regulate and supervise the performance of all mangers, custodians and social security schemes.
3. Issue guidelines for the efficient and effective operations of the social security sector.
4. Protect and safeguard the interests of members.
5. Create a good environment for the promotion and development of the social security sector.
6. Advice the minister concerned on all policy and operational matters relating to the social security sector.
7. Adopt the conventional broad guidelines applicable to all managers, custodians and social security schemes.
8. Monitor and review regularly the performance of the social security sector.
9. Initiate studies, recommend, coordinate and implement reforms in the social security sector.
10. Appoint an interim administrator of schemes, where necessary.

Strengths of social security institutions

1. Provide security to their member's contributions.
2. Doing business by giving loans to firms, associations, and individuals with interest.
3. Invest in the construction of houses for accommodations in town and sell some of them to individuals.
4. They give benefits to the members when they retire.
5. Assist members when in trouble such as sickness or treatment to expectant mothers.
6. Refund expenses incurred during the funeral of their member to the family concerned.

Weaknesses of social security institutions

1. Poor record-keeping as some members sometimes complain that their contributions are not shown on the respective records.
2. Delays when giving services to the members. It takes about six months to get benefits when a member retires.
3. Education to the members is inadequate because most of them are now well informed about their rights and contributions.
4. Some employers do not provide the correct contributions to the concerned social security scheme.
5. Some social security institutions are not giving loans to the members especially when a child wants to go to school and other development activities.
6. Money value always fluctuates which causes a negative effect to members since it affects their purchasing power.

Loan-giving institutions

1. There are several financial institutions like banks, finance companies and private moneylenders, which provide loans to people.

2. The loan taken will depend on the purpose for which it is to be taken.

3. There are various types of loans, which are available like:

   • Commercial lending
   • Housebuilding loans
   • Home financing
   • Mortgage financing

The financial resources of a person

1. Help him or her to ascertain whether it is a rational decision to take a loan.
2. The loan should be taken at reasonable interest rates.
3. The person needs to compare the interest rates from multiple lenders.
4. The repayment of loans is dependent on the prevalent interest rates of the market.

Strengths of loan institutions

1. People who take loans from these institutions establish petty businesses which raise income to their families.
2. Education provided is free of charge to all members. They are trained on how to invest and spend money wisely.
3. When members sit together and train, they form unity among themselves. They sit in groups of five, six, seven or ten.

Weaknesses of loan-giving institutions

1. The interest imposed on the loan is very high.
2. The loans given are small in quantity and cannot finance a large investment.