i

ST. AUGUSTINE UNIVERSITY OF TANZANIA

SCHOOL OF LAW

TheTheTheThe LegalLegalLegalLegal ValidityValidityValidityValidity OfOfOfOf InformalInformalInformalInformal LoanLoanLoanLoan SecuritiesSecuritiesSecuritiesSecurities (Collateral(Collateral(Collateral(Collateral Securities)Securities)Securities)Securities) InInInInSecuringSecuringSecuringSecuring CommercialCommercialCommercialCommercial Loans:Loans:Loans:Loans: AAAA CasaCasaCasaCasa StudyStudyStudyStudy OfOfOfOf KageraKageraKageraKagera RegionRegionRegionRegion

AAAA DissertationDissertationDissertationDissertation InInInIn PartialPartialPartialPartial FulfillmentFulfillmentFulfillmentFulfillment OfOfOfOf TheTheTheThe RequirementRequirementRequirementRequirement OfOfOfOf TheTheTheThe AwardAwardAwardAward OfOfOfOf TheTheTheThe DegreeDegreeDegreeDegreeOfOfOfOf BachelorBachelorBachelorBachelor OfOfOfOf LawsLawsLawsLaws OfOfOfOf St.St.St.St. AugustineAugustineAugustineAugustine UniversityUniversityUniversityUniversity OfOfOfOf Tanzania.Tanzania.Tanzania.Tanzania.

LaurianLaurianLaurianLaurian BenanBenanBenanBenan

June 2014

ii

CERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION

The undersigned certifies that he has read and hereby recommended for acceptance by St.

Augustine university of Tanzania, a dissertation titled; TheTheTheThe legallegallegallegal validityvalidityvalidityvalidity ofofofof informalinformalinformalinformal loanloanloanloan

securitiessecuritiessecuritiessecurities (collateral(collateral(collateral(collateral securities)securities)securities)securities) inininin securingsecuringsecuringsecuring commercialcommercialcommercialcommercial loans:loans:loans:loans: aaaa casecasecasecase studystudystudystudy ofofofof KageraKageraKageraKagera

region,region,region,region, in partial fulfillment of the requirement for the degree of bachelor of laws (LLB).

MR. MASAO EDWARD (Supervisor); signature……………………..date………………...

iii

DECLARATIONDECLARATIONDECLARATIONDECLARATION

I, LAURIAN BENAN, do hereby declare that this research paper is my own original work of

my own effort and investigations, except where otherwise acknowledged. And that it has not

been presented and it is not to be presented in any other institution for a similar or any other

degree award.

LAURIAN BENAN (Researcher): Signature………………………Date………………..….

iv

©STATEMENTSTATEMENTSTATEMENTSTATEMENT OFOFOFOF COPYRIGHTCOPYRIGHTCOPYRIGHTCOPYRIGHT

This Dissertation is a copyright material protected under the Berne Convention, the Copyright

and Neighboring Rights Act, 1999 and other international and national enactments, in that

behalf, on intellectual property.

It may not be reproduced, stored or transmitted in any form or by any means, electronic,

mechanical, photocopy recording or otherwise, in full or in part, except for short extracts in

fair dealing, for research or private study, critical scholarly review or discourse with an

Acknowledgment, unless written permission from the author or St. Augustine University of

Tanzania on behalf of the author.

v

ACKNOWLEDGEMENTSACKNOWLEDGEMENTSACKNOWLEDGEMENTSACKNOWLEDGEMENTS

Truly I am admitting from the very outset that working out this research has not by any means

been an easy task. Somewhat, it was such a demanding undertaking that in one way or another

it could not be possible to accomplish it unaccompanied. Due to this fact I feel intensely

grateful to express my earnestly appreciations to a number of few persons among many of

who in one way or another had made this research to come into existence.

Therefore, I wish to express my sincerely gratitude to my supervisor Mr. MASAO EDWARD

for his beneficial directions and contributions on behalf of St. Augustine university of

Tanzania Management.

Also I would like to express my sincere gratitude to my lovely parents, MR. & MRS. Mwl.

LAURIAN .D. KIIZA, for their financial, material and moral support they have rendered to

me.

My word of thanks also goes to all friends, especially my class mates whom we have been

together for better worse. I appreciate everything good we have shared together. But mostly

let me mention few names of my group discussion, Fatuma Mikidad, Sarivertory Twamalanke,

and Gloria Kabyazi, Kakolaki Diana, just to mention the few, and appreciate academic

contribution to this work.

I will also be ungrateful if I fail to heavily thank my interviewees and respondents, who made

much contribution to the main body of this work. I really appreciate efforts put forward by

brunch manager NMB-KAYANGA, the general director FADECCO community radio

(100.8FM) JOSEPH SKIKU, and the general community of KARAGWE WOMEN SACOSS,

mainly their chief accountant, MR. JONAS MFUNJO, I can say that this work is also a

victory of your blessed hand. Never the less I cannot forget to appreciate the contribution

made by my respondents in KITWE and RUITA village.

vi

DEDICATIONDEDICATIONDEDICATIONDEDICATION

This dissertation is dedicated to my father, Mwl. LAURIAN DAUD KIIZA, and my mother

ANAMARIA LAURIAN, my brothers, CLINTON LAURIAN, KENNEDY LAURIAN, and

DESIMON LAURIAN without forgetting my beloved sister IDDA LAURIAN, who advised

and sponsored me to pursue a bachelor degree in law. I dedicate this work special to you all to

acknowledge the blessings honored by GOD to our family. Take this work as a historical

victory of our family.

vii

LISTLISTLISTLIST OFCASESOFCASESOFCASESOFCASES

Desai & Another Vs. FINA Bank Ltd (2004)2 Ea 46

Jiwanlal Vs Rame Shwarlal, AIR (1967) SC 1118

Joachimson Vs. Swiss Bank Corporation (1921) AC 323

Mrao Ltd Vs. First American Bank Ltd (2002) LLR 3801(CAK)

Pillans Vs. Van Mierop(1765) Burr 1664

Ran Vs. Hughes (1778)7 Term Rep, 350

Salomon Vs. Salomon & Co Ltd [1897] AC 22

viii

TABLETABLETABLETABLEOFOFOFOF STATUTESSTATUTESSTATUTESSTATUTES

Bankruptcy Act 1542 (Uk).

Debtors Act 1869 (Uk).

Loans Recovery Act (Cap. 6.04) Of The Laws Of Malawi.

The Bank Of Tanzania Act No. 4 Of 2006.

The Banking And Financial Institutions (Management Of Risk Assets) Regulations, 2008, Gn

No. 374 Of 2008.

The Banking And Financial Institutions (Tanzania Mortgage Refinance Company)

Regulations, 2011.

The Banking And Financial Institutions Act No. 5 Of 2006.

The Constitution Of The United Republic Of Tanzania Of 1977.

The Corporative Societies Act, No 20 Of 2003.

The Financial Leasing Act, 2000.

The Law Of Contract Act [Cap 345, R.E 2002].

The National Micro-Finance Policy (2000).

Unregistered Lenders And The Cooperative Societies Act (Cap. 47.02) Of 1946 Of The Laws

Of Malawi.

ix

LISTLISTLISTLIST OFOFOFOF ABBREVIATIONSABBREVIATIONSABBREVIATIONSABBREVIATIONS

AC Appealed case

AERC African Economic Research Consortium

BBC British Broadcasting Corporation

BC Before Christ

BOT Bank of Tanzania

CAP Chapter of law

CO. Company

E.A East Africa

ED Edition of publication

FADECO Family Alliance for Development and Cooperation

FM Frequency modulation

GN Government notice

KAWOSA Karagwe Women Saccos

LLB Legum Legis Baccaleus/Bachelor of Laws

Ltd Limited liability

MFCS Micro-finance companies

NGOS Non-Governmental organizations

NMB National Micro finance Bank

Prof. Professor

RE: Revised law

S.T Saint

SACCOS Savings and Credit Cooperatives

SAUT St. Augustine university of Tanzania

UK United Kingdom

VIKOBA Village Community Bank

VS. Versus

x

TABLETABLETABLETABLEOFOFOFOF CONTENTCONTENTCONTENTCONTENT

CERTIFICATION……………………………………………………………………………ii

DECLARATION…………………………………………………………………………….iii

STATEMENT OF COPYRIGHT……………………………………………………….…...iv

ACKNOWLEDGEMENT……………………………………………………………….…...v

DEDICATION……………………………………………………………………………….vi

LIST OF CASES…………………………………………………....……………………….vii

LIST OF STATUTE………………………………........................…………………………viii

LIST OF ABBREVIATIONS…………………........……………………………………...…ix

TABLE OF CONTENT………………………………………………………………………x

ABSTRACT………….......………………………………………………………………...xiv

CHAPTERCHAPTERCHAPTERCHAPTERONEONEONEONE

GENERALGENERALGENERALGENERAL INTRODUCTION..INTRODUCTION..INTRODUCTION..INTRODUCTION..…………………………………………………………………………………………………………………………………………............………………………………………………………………………………………………........1

1.0 Introduction………...…………………......…………………………………………..1

1.1 Back Ground Of The Study…..…………………………………………………….....…..2

1.2 Statement Of The Problem………………………………………………………………..3

1.3 Objective Of The Study…………………………………………………………......…….4

1.3.1 General Objectives……………......………………………………………………..…..4

1.3.1 Specific Objectives…………………………………………………………………….4

xi

1.4 Research Questions………………………………………………………………………4

1.5 Scope Of The Study……………………………………………………………………….4

1.6 Significance Of Research………………………………………………………………....4

1.7 Literature Review…………………….....………………………………………………..5

1.8 Research Methodology…………………………………………………………………….8

1.8.1 Library Research…………………………………………........…………………………8

1.8.2 Field Research……………………………………………………………………………9

1.9 Conclusion..……………………………………………………………………………….9

CHAPTERCHAPTERCHAPTERCHAPTER TWOTWOTWOTWO

THETHETHETHE LEGALLEGALLEGALLEGAL CONCEPTCONCEPTCONCEPTCONCEPT OFOFOFOF LOANLOANLOANLOAN SECURITY,SECURITY,SECURITY,SECURITY, FORMSFORMSFORMSFORMS ANDANDANDANDHISTORY..HISTORY..HISTORY..HISTORY..……………………......10......10......10......10

2.0 Introduction…..……………………………………......................………………..….…10

2.1 Definitions And The Scope On Collateral Loan Securities ………………...……............10

2.1.1what Is Loan Security?……………………………………………………………...…10

2.1.2 What Is Collateral Loan Security?................................................................................11

2.1.3 Non Collateral Loan Security?.........................................................................................11

2.1.4 Informal Loan Security..................................................................................................11

2.1.5 Informal Sector...............................................................................................................12

2.2 Rationale/Why Borrowers Must Secure Their Debts...…………………………….…..12

2.3 Forms Of Loan Security.............................................................................................12

xii

2.4 Historical Development Informal Loan Security……..…………….……………………15

2.5 Conclusion……..……………………………………………......………………………..17

CHAPTERCHAPTERCHAPTERCHAPTER THREETHREETHREETHREE

THETHETHETHE LEGALLEGALLEGALLEGAL ANDANDANDAND PRACTICALPRACTICALPRACTICALPRACTICAL ASPECTSASPECTSASPECTSASPECTS RELATEDRELATEDRELATEDRELATED TOTOTOTO INFORMALINFORMALINFORMALINFORMAL LOANLOANLOANLOAN

SECURITIESSECURITIESSECURITIESSECURITIES ININININ TANZANIATANZANIATANZANIATANZANIA………………………………............................................................................................................................................................................................……………………………………………………............………………………………18181818

3.0 Introduction……………………………….……………………………………………...18

3.1 Legal Aspects…………………,……………….……………………………….………18

3.1.1 Scope And Weaknesses………….......………………………………………….……18

3.1.2 The Law Of Contract……………………....………..………………………….………19

3.1.3 Corporative Societies Act………………………………........……………….……….20

3.1.4 The Banking And Financial Institution Act.........................................…………………20

3.2 Institutional Framework.................................................................................................21

3.3 Practical Aspects.............................................................................................................22

3.3.1 General Perception On Collateral Loan Securities..........................................................22

3.3.2 Distinction Between Bank Loans And Microfinance Loan In Informal Sector...............22

3.3.3 Legal Implications In Grating And Receiving Loan Secured By Collaterals..................23

3.3.4 Importance Of Providing Loans Secured By Collaterals.................................................23

3.4 Conclusion........................................................................................................................24

xiii

CHAPTERCHAPTERCHAPTERCHAPTER FOURFOURFOURFOUR

RECOMMENDATIONSRECOMMENDATIONSRECOMMENDATIONSRECOMMENDATIONS ANDANDANDAND GENERALGENERALGENERALGENERAL CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION…………………………………………................………………………………………….......24.......24.......24.......24

4.0 Introduction………...…………………………………………………………………....24

4.1 Recommendations…...…………………………………………………………………...24

4.1.1 Financial Institutions…………………………………………………………………...24

4.1.2 Government and Law Makers…………………………………………………….…..25

4.1.3 Community…………………………….……………………………………………….25

4.2 General Conclusions……………………………………………………………….……..26

BibliographyBibliographyBibliographyBibliography…………………………………………………...…………...……………….28

xiv

ABSTRACTABSTRACTABSTRACTABSTRACT

This research work is about the assessment of the legal and institutional framework regulating

collateral securities in Tanzania. It is true that in developing countries, the majority are not

integrated in formal credit systems, as to this factor commercial bank and institutions have

been denying to strength their banking business to such population in informal sector.

Since 1970s the business perception to formal sector has changed and different banking

techniques are developed and applied to both informal and formal sector. Lending on

collaraterals has been one of the most techniques to integrate the informal business sector into

banking business. In many countries including South Africa, Kenya and Uganda, informal

loan has proved huge profit to both lenders and borrowers.

In Tanzania loan security is not only an obstacle to access of informal loans but also a limiting

point of banking business in rural and semi-urban area, where the majority are subjected in

informal sector. This work as came about to investigate the legal position of the acceptability

of informal loan security, which in most cases are unregistered and are less systematically

planed.

This work is centered on the weakness of Tanzania laws in addressing proper rules of securing

loan by using informal loan security. It should be noted that traditionally only formal security

can be accepted to secure commercial loan, as to this practice informal sector is disqualified in

lending business, therefore the effective legal and practical measures to address the proper use

of informal loan security in securing commercial loans have been pointed out in this work.

1

CHAPTERCHAPTERCHAPTERCHAPTERONEONEONEONE

GENERALGENERALGENERALGENERAL INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

1.01.01.01.0 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

In the modern centuries there has been a great change in the financial sector resulted from the

development of science and technology that has coursed the global multi-economic sectors to

be more quick. The world has experienced great evolution in financial sector as can be traced

back during mercantilism were financial sector was dominated by bullions to the current

situation where even cash is loosing the domination to electronic financial systems which are

more quick and less risky1.

This study will cut across specifically to the matters of loan securities in modern financial

systems and coverage of law thereof. Financial laws need to be, more comprehensive and

flexible to adopt the new financial loan techniques that merge from time to time. Informal

loans (unsecured lending business) being one of the technique among others.

Informal loan securities as never been accepted by many financial system and institutions due

to the mode of advancing security which is always informal in its nature2. Say house home

utensils, used clothes, furniture’s, declaration to pay, wallets, television sets, heads of cattle,

unregistered portions of land(normally smaller in size), unregistered houses, trees, radios,

watches, industrial raw materials, fixed account deposits, and the like of this nature.

This study will examine the extent to which informal loan security is incorporated and

recognized by financial laws in the financial industry specifically in the lending business, as

opposed to formal loan securities such as mortgage of certificate of title over land houses,

which involve more procedural technicalities.

1 The East Africa, January 1-7, 20012 Rosemary Atieno, FormalFormalFormalFormal andandandand informalinformalinformalinformal institutionsinstitutionsinstitutionsinstitutions’’’’ lendinglendinglendinglending policiespoliciespoliciespolicies andandandand accessaccessaccessaccess totototo creditcreditcreditcredit bybybyby small-scalesmall-scalesmall-scalesmall-scaleenterprisesenterprisesenterprisesenterprises inininin Kenya:Kenya:Kenya:Kenya: AnAnAnAn empiricalempiricalempiricalempirical assessment,assessment,assessment,assessment, UniversityUniversityUniversityUniversity ofofofof Nairobi,Nairobi,Nairobi,Nairobi, AERC Research Paper 111.

2

1.11.11.11.1 BACKGROUNDBACKGROUNDBACKGROUNDBACKGROUNDOFOFOFOF THETHETHETHE STUDYSTUDYSTUDYSTUDY

It has been a traditional approach to the most business men and money lenders that borrower/

lender must advance a loan security3 to the creditor as the way of assuring commitment that

he will pay the debt, (has it is agreed). Since times loan security has been interpreted to mean

formal evidence that a property has been deposited or bond or the like interested into a person

on behalf a person in order to secure fulfillment of his obligation.4

This approach therefore has been a turning point in categorization of loan as secured and

unsecured loan;5 secured loan has been the dominant and preferred category since the lender

is assured from the risk that may cause the borrower to default to repay the loan. However, in

recent day due to the growth of multilateral economic system and different financial

techniques, loan security is no longer necessary this is financially termed as secured lending6

since it involves collateral loan security.

In south Africa, unsecured lending seems to grow rapidly and preferred by most financial

institution reported, the guardian7…the market for unsecured loans which are not barked by

collaterals grown rapidly in recent years… unsecured credit rose by nearly a quarter…to 453

rand ($45billion )from a year ago. In Tanzania at minimal level Tanzania, financial

institutions despite the high need from Tanzanians of lower have reflected this modern

financial lending system and middle economic level has the hope of improving their capital.

The true legal position in Tanzania is not clear to whether the financial law in Tanzania

promotes or discourage this modern loan taking in many cause the financial laws seems to

reflect the traditional category that the borrower must show a certificate of either land, house

3 Defined by Encyclopedia Britannica (online).

4 Court interpretation in Jiwanlal vs. Rame Shwarlal, AIR (1967)SC 1118.

5 www.lescobank.com/loan visited on 29TH November 2013.6 The GUARDIAN 29th November, 2013, news tatled “sourth africa banks ease pace of unsecured lending”7 Ibid.

3

car and the like to the creditor for him to acquire a loan. This has excluded Tanzanians who

does not own such security from acquiring loans, mainly those living in rural areas. However,

researcher is on the concern on making investigation on the validity of the system (non-

secured loans) also looking whether the system is recognized by Tanzania legal system and

laws in general.

1.21.21.21.2 STATEMENTSTATEMENTSTATEMENTSTATEMENT OFOFOFOF THETHETHETHE PROBLEMPROBLEMPROBLEMPROBLEM

Most formal institutions still deny informal enterprises to access their services8 mainly

lending opportunity among others. Despite the fact that, it is not surprising to come across the

government policy, commercial advertisements, and publication on media advising the

subjects of this sector to increase their capital of production through taking bank loans.

Despite this emphasis, the effects of existing institutional problems, especially the lending

terms and conditions on access to credit facilities, have not been addressed by Tanzanian laws.

In addition, no comprehensive legal research has been done in this area, indicating the

potential role of improved legal approach on the correspondence of lending policies state laws

and its observance by both formal and informal financial institutions in alleviating problems

of access to credit. Knowledge in this area, especially a legal Analysis of the practical

applicability of lending policies on what amounts to good loan security in law, is lacking to

the Tanzanian community.

8 Rosemary Atone, FormalFormalFormalFormal andandandand informalinformalinformalinformal institutionsinstitutionsinstitutionsinstitutions’’’’ lendinglendinglendinglending policiespoliciespoliciespolicies andandandand accessaccessaccessaccess totototo creditcreditcreditcredit bybybyby small-scalesmall-scalesmall-scalesmall-scaleenterprisesenterprisesenterprisesenterprises inininin Kenya:Kenya:Kenya:Kenya: AnAnAnAn empiricalempiricalempiricalempirical assessment,assessment,assessment,assessment, UniversityUniversityUniversityUniversity ofofofof Nairobi,Nairobi,Nairobi,Nairobi, AERC Research Paper 111

4

1.31.31.31.3 OBJECTIVESOBJECTIVESOBJECTIVESOBJECTIVES OFOFOFOF THETHETHETHE STUDYSTUDYSTUDYSTUDY

1.3.11.3.11.3.11.3.1 TheTheTheThe generalgeneralgeneralgeneral objectiveobjectiveobjectiveobjective

To examine the legal validity and acceptability of informal loan securities In Tanzania, by

relating the commercial principle, financial policy, and community perception.

1.3.21.3.21.3.21.3.2 TheTheTheThe specificspecificspecificspecific objectivesobjectivesobjectivesobjectives

• To evaluate the existing legal status of informal loan security.

• To examine the legal financial implication of non recognition of informal loan

securities

• To oversee the community, government and financial enterprises perception to the

current lending system.

1.41.41.41.4 RESARCHRESARCHRESARCHRESARCHQUESTIONSQUESTIONSQUESTIONSQUESTIONS

• To what extent informal loan security is legally recognized in Tanzania financial

system?

• What are legal implications of non recognition of informal loan security?

• Is informal loan security a good security in law and practice?

1.51.51.51.5 SCOPESCOPESCOPESCOPEOFOFOFOF THETHETHETHE STUDYSTUDYSTUDYSTUDY

This study will examine the extent to which issues of informal loan security, are incorporated

under the micro-finance policy and reflected by the BOT Act9 and The financial institutions

Act10.

9 Act, no4 of 2006.10 Act, Act no 5 (2006)

5

1.61.61.61.6 SIGNIFICANCESIGNIFICANCESIGNIFICANCESIGNIFICANCE OFOFOFOF THETHETHETHE RESEARCHRESEARCHRESEARCHRESEARCH

This finding is of this research are of great importance to all financial institution, government

and the community(public), due to the rationale behind the matters pertaining to lending

business in both rural areas and urban areas where micro-finance industry operates. It is of

specific necessity because the lending mechanisms under this industry are of informal mode

and therefore informal loan security is the cornerstone of this financial system.

However this research enlightens the mass in understanding the legal position of acceptability

of informal loan security in micro-finance sector. The legistrative duty to incorporate informal

lending business in Tanzanian laws and the correspondence of government policy with

statutory laws. However, this research raises awareness on various current practices in micro-

finance sector, specifically in lending business and proposes the means on how can be

addressed by financial laws and policies, by reviewing such laws which regulate the same.

Generally, this research is of great importance to both academic researchers, social

researchers and economic researchers searching for relevant information concerning lending

business in informal sector.

1.71.71.71.7 LITERATURELITERATURELITERATURELITERATURE REVIEWREVIEWREVIEWREVIEW

Chipeta and Mkandawire, (1991).11 The institutions involved in this sector can be classified

as individuals, associations, business firms, and governmental and non-governmental

organizations. The common feature of lenders in this business is that they accept securities,

which are not subject to registration or, licensing procedures, or to monetary and financial

policy control.

11ChancellorChancellorChancellorChancellor CollegeCollegeCollegeCollege UniversityUniversityUniversityUniversity ofofofof MalawiMalawiMalawiMalawi and NationalNationalNationalNational BankBankBankBank ofofofof MalawiMalawiMalawiMalawi respectively in their article“FINANCIAL INTEGRATION AND DEVELOPMENT IN SUB-SAHARAN AFRICA: INFORMAL FINANCESECTORIN MALAWI”

6

Legally, literature seems to suggest that both customary and modem law recognize informal

finance and provide adequate protection to both informal lenders and informal borrowers.

under tribal law both the loans and the guarantor's obligations are enforceable, In practice

courts are rarely used by moneylenders recover loans the existence of informal lending

activities Is acknowledged through the 1934 Loans Recovery Act12 for unregistered lenders

and the Cooperative Societies Act13 for registered Societies14

In Tanzania there is no a specific statute which cover this business but only provisions under

different statutes, which provides for some elements15 together with the number of

regulations16. The position under The B O T Act is that, the primary objective of the Bank

shall be to formulate, define and implement monetary policy direct to economic objectives of

maintaining …growth of the national economy.17 This provides the better position for

Tanzanian economic system incorporate unsecured lending system for the growth of national

economy through the functions of the Bank. But none of the legal binding provision which

require the banking institution to accept borrows with no formal securities mainly from rural

area.

The very limiting provisions are provided under section 25(4) of the banking and financial

institutions Act18 which provides that for person to qualify for large exposure accommodation

must have a security against cash, or granted by an international bank. This is a remarkable

disqualification of individual in informal business who has no such securities to receive loan.

Despite the presence of big relationship and interconnection between informal business

12 (Cap. 6.04) of the Laws of Malawi13 (Cap. 47.02) of 1946. for registered14 supra15 THE BOT Act, no4 of 2006, the banking and financial Act, Act no 5 (2006) and the corporative societies Act,no 20 of 2003.16 The banking and financial institutions (management of risk assets) regulations, 2008, GN No 374 of 2008.And the banking and financial institutions (Tanzania mortgage refinance company) regulations, 201117 BANK OF TANZANIA ACT, no4 of 200618 Act no 5 (2006)

7

sectors, and micro finance sector has they both deals with meddle and lower capital subject

for unsecured loan.

COSMASCOSMASCOSMASCOSMAS STEPHENSTEPHENSTEPHENSTEPHEN (2012)(2012)(2012)(2012)19191919 observed, “Most micro-finance institution requires the

aspirants of loan to provide collateral security in order to be given loan. For the poor people,

this a big obstacles the most fail to provide the required collateral security and so they are

assured to miss the loan” This overturn the burden of providing unsecured loans from micro

finance sectors even though financial sector considers to be its concern since most of its

customers lacks collateral securities.

TheTheTheThe NATIONALNATIONALNATIONALNATIONAL MICRO-FINANCEMICRO-FINANCEMICRO-FINANCEMICRO-FINANCE POLICYPOLICYPOLICYPOLICY (2000)(2000)(2000)(2000)20202020 suggests, “Micro finance

programs use techniques and products adapted to the circumstances of low income clients.

Particular techniques may vary widely. A variety of collateral substitutes and repayment

incentives can be used so that loans are not secured in conventional sense but are adequately

protected against risk”. The policy gives the best position with no any implementation since

both the BOT Act and the financial institutions Act 21 does not provide a clear position.

The policy if it would have reflected by said laws it would have solved the problem has it

seems to consider the importance of this lending system in Tanzania where the most nationals

have no formal security. The policy also go father to provide that; one of the main differences

between micro-finance loans that is not secured in a conventional manner. It will be

necessary to develop methods of supervision to allow such lending to take place…22

This marks the duty of the government to implement its policy. “Bank shall ensure the

integrity of financial system and support the general economic policy of the government and

19 FacultyFacultyFacultyFaculty ofofofof BusinessBusinessBusinessBusiness Administration,Administration,Administration,Administration, St. Augustine University of Tanzania20 At page 1321 supra22 The national micro-finance policy of 2000.

8

promote monetary credit and banking conducive to the development of nation economic.23

The question remains on how this legal requirement has been implemented by the BOT, and

the striking force of the government to the BOT to implement its duties towards the unsecured

lending system has it is identified by, The national micro finance policy of 2000.

SHEKHAR(2009)SHEKHAR(2009)SHEKHAR(2009)SHEKHAR(2009)24242424 Acknowledges the different forms of lending money by using informal

security lending money is recognized in the following ways “usually indigenous bankers lent

money on promissory notes or receipts signed by the borrowers acknowledging the

loan……,They also lend money against bonds written out in stamped legal formals states all

the conditions of the loans in detail…’’ This form are not experienced in the financial system

of Tanzania only because the law is silent and thus banks decided to take an advantage that

each lending transaction must be secured by mortgage of certificate of house, land or other

immovable properties. A number of advantages for this system have been appointed

including role played banks using this form to poor reserved areas by formal financial system

such as development of equity banking and friendliness business between banks & bankers

and the spread of cooperation principals among the rural mass & growth of cooperative

banking institution.

1.81.81.81.8 RESEARCHRESEARCHRESEARCHRESEARCH METHODOLOGYMETHODOLOGYMETHODOLOGYMETHODOLOGY

The researcher used two (2) methods of research namely library research and field research.

1.8.11.8.11.8.11.8.1 LIBRARYLIBRARYLIBRARYLIBRARY RESEARCHRESEARCHRESEARCHRESEARCH

The library research aimed at lying down theoretical relevance to study. Relevant of financial

and law books, Banking law books and other internet materials have been being visited.

23 Section 7(1) of the BOT Act.24 Banking Theory and practice 19th Ed page 334

9

1.8.21.8.21.8.21.8.2 FIELDFIELDFIELDFIELDRESEARCHRESEARCHRESEARCHRESEARCH

The interview process was effectively conducted in order to extract information from the

general community and experts. The researcher interviewed two (2), loan officers from

commercial banks, and other two (1) from financial institutions operating in the area .Also

unstructured interview was employed in order to obtain the knowledge of the community

1.91.91.91.9 CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

This work is for an introductory part of the expected research report work. The researcher

through this work introduces the general knowledge of lending business in informal sector, in

Tanzanian perception and the general legal approach of the Tanzanian laws in this sector

when compared to other nations mostly in the less developed countries in the African

continent and the world at large

10

CHAPTERCHAPTERCHAPTERCHAPTER TWOTWOTWOTWO

THETHETHETHE LEGALLEGALLEGALLEGAL CONCEPTCONCEPTCONCEPTCONCEPT OFOFOFOF LOANLOANLOANLOAN SECURITY,SECURITY,SECURITY,SECURITY, FORMSFORMSFORMSFORMS ANDANDANDAND HISTORYHISTORYHISTORYHISTORY

2.0 INTRODUCTION:INTRODUCTION:INTRODUCTION:INTRODUCTION:

This chapter focuses on the legal concept of loan security forms and historical development of

collateral and non collateral loan securities. This focus is based on the major sources of

financial laws, and their positive reflection of the new financial techniques. It will also cut

across the traditional and modern forms of securing loans and their historical development

from time to time.

2.12.12.12.1 DEFINITIONSDEFINITIONSDEFINITIONSDEFINITIONS ANDANDANDAND THETHETHETHE SCOPESCOPESCOPESCOPEONONONONCOLLATERALCOLLATERALCOLLATERALCOLLATERAL LOANLOANLOANLOAN SECURITIESSECURITIESSECURITIESSECURITIES

2.1.1.WhatWhatWhatWhat isisisis loanloanloanloan security?security?security?security?

There have been different approaches on defining loan security depending on the time being,

professionals, and the way to which the term is applied or used.

ENCYCLOPEDIA BRITANNICA25 defines a loan security as written evidence of ownership

conferring to receive property not current in possession of the holder. This seems to follow

under traditional definition as it denotes that security must be written form and excludes

securing loans in oral form or agreement.

ALPHONCE, M.A AND URIO, J.F (2001) 26looks at loan security as it is used in banking

law to mean the acquisition of right over property taken to support the borrower’s undertaking

to repay which can be exercised if the borrower does default to repay. As to this definition

loan security involve two main important concepts that is acquiring right over the borrower’s

25 www.britannica.com, loan security in terms of business and economic perception26 ASPECTIS OF BANKING AND MICRO-FINANCE LAW

11

property whatever written or oral acquired, and the other concept is the condition to repay

back the loan advanced.

Both BOT Act27 and Banking and Financial institutions Act28 lacks a specific provision

defining loan security although recognizes advancement of security to secure loan. Under

section 40 of the BOT Act29 provides for the way in which the Bank can advance loan and the

way such loan advanced by a Bank can be secure.

2.1.22.1.22.1.22.1.2 WhatWhatWhatWhat isisisis collateralcollateralcollateralcollateral loanloanloanloan security?security?security?security?

In its ordinary meaning collateral is something pledged as security for repayment of a loan, to

be forfeited in the event of a default.30 In its broader sense Property or other assets that a

borrower offers a lender to secure a loan. If the borrower stops making the promised loan

payments, the lender can seize the collateral to recoup its losses. Because collateral offers

some security to the lender in case the borrower fails to pay back the loan, loans that are

secured by collateral typically have lower interest rates than unsecured loans.31

2.1.32.1.32.1.32.1.3 NonNonNonNon collateralcollateralcollateralcollateral loanloanloanloan securitysecuritysecuritysecurity

Non-collateral loans are available from banks, credit unions and cash advance lenders. Unlike

other types of loans that require collateral, people who apply for non-collateral loans do not

have to provide a vehicle title or other security. They can walk into a lender's office, complete

and submit an application, and based on the information provided, lenders determine whether

the individual is a candidate for a non-collateral loan.32

2.1.42.1.42.1.42.1.4 InformalInformalInformalInformal loanloanloanloan securitysecuritysecuritysecurity

27 THE BOT Act, no4 of 2006.28 The banking and financial Act, Act no 5 (2006).29 Cited above.30 Oxford advanced leaners english dictionary.31 http://www.investopedia.com/terms/c/collateral.asp, visited on 03rd June 2014.32 http://www.ehow.com/about_4608402_non-collateral-loans.html, visited on 03rd June 2014.

12

Refers to loan securities which are not officially registerd or certified, they are dully acceped

to secure Premium loans target the small entrepreneurs who fail to qualify for the Bank’s

business loans but their ventures are beyond to be served in normal Solidarity Group Lending

(SGL) due to starting loan sizes available.33

2.1.52.1.52.1.52.1.5 InformalInformalInformalInformal sectorsectorsectorsector

The working definition of the informal sector/enterprise used in the Informal Sector

Roadmap is drawn from the 1993 International Conference of Labour Statisticians (ICLS)

resolution.34 The informal sector is regarded as a group of production units which form part of

the household sector. Household enterprises are units engaged in the production of goods and

services, which are not constituted as separate legal entities independently of the household or

household members that own them. They do not have a complete set of accounts which

would permit a clear distinction between the production activities of the enterprises and the

other activities of their owners, or the identification of any flows of income and capital

between the enterprises and owners.35

2.22.22.22.2 FORMSFORMSFORMSFORMS OFOFOFOF LOANLOANLOANLOAN SECURITYSECURITYSECURITYSECURITY

The most known forms of loan security is said to be secured either in formal or informal,

modern or traditional, secured or non secured, collateral or non-collateral. it can father be

categorizes lending system depending on its area of application as public or private security,

written or non written security, or even systematic and non systematic lending. Also

registered and none registered secured.36

33 http://mkombozibank.com/?page_id=163, visited on 3rd June 2014.34 Also known as the ILO definition of the informal sector.35 Roadmap Study of the Informal Sector in Mainland Tanzania (ILO UNIDO), DAR ES SALAAM, APRIL 2002.36 Exucutive Director, FADCCO community radio interviewed on 4th sep. 2013.

13

From the above distinguished forms, only two inclusive types of loan can identified, that is

formal/secured loans and informal/non secured loans. This will automatically determine what

type of security has to be advanced as a loan security. formal loans are said to be traditional,

public, registered and systematically secured in written form. while informal loans are said to

be modern, non collateral, private and non systematically secured, normally in oral form or

even partly written.

BUKALIYA, R.37points out that, “the loan can take the form of secured and unsecured

loans... secured loans, these are form of loans where the lender has specific right to take over

specified asset of a borrower in case of default on interest payment or capital payment”.

Example of this form is mortgage on registered land and buildings, but unsecured loans

lender/bank grant loans without any specified and registered security or guarantee normally

considered low risk. The interest rate is usually higher to cover the additional risk compared

to unsecured loan which are also termed as household loans

BBC-SWAHILI38 reported from Beijing-CHINA the new way of securing loans. Lenders

were seen boding their expensive ring, bags, gold and watches to lenders who are not even

known to them and without any written document and they are given sum of money as loan in

advance.

“wanakuja hapa na kuweka lehani mikoba yao ili kujipatia fedha na kuikomboa baadaye….”

Said one of the business men from Beijing. This is system of lending in Beijing is a good and

significant example of informal loan security in modern way, as it is free from technicalities,

it is simple and a person can acquire loan within a short period of time.

Financial leasing as been recently termed among simple and beneficial forms of securing

loans in Tanzania39 under this program the lender on one side, the borrower and the seller of

working machine or equipment are involved to secure loan advance in relationship created

37 ZimbabweZimbabweZimbabweZimbabwe OpenOpenOpenOpen UniversityUniversityUniversityUniversity , The African Symposium: An online journal of the African EducationalResearch Network38 BBC-Swahili, television program, on 25th sep. 20013 at 9.00pm39 TBC1, BOT special program on financial leasing, on 24th Feb. 2014 at 10.00pm.

14

under privit to contract, This form carries both informal and formal elements, we can say that

loan secures itself.40

2.32.32.32.3 RATIONALE/WHYRATIONALE/WHYRATIONALE/WHYRATIONALE/WHYBORROWERSBORROWERSBORROWERSBORROWERSMUSTMUSTMUSTMUST SECURESECURESECURESECURE THEIRTHEIRTHEIRTHEIR DEBTSDEBTSDEBTSDEBTS

Loan security in both company law, financial law, and business law is understood as a

guarantee from the borrower that he will repay back the sum lendered, on time and condition

thereof. As to this factor lending business is created and differentiated from mere contractual

relationship.

Risk of loan is considered as the central reason as to why financial loans must be secured, that

the lender is assured, that certainly he as to receive profit whatever default or delay to repay,

and therefore in financial words lending is also investment

ROBERTS, M.41 he as termed security as a consideration in investment contract or other

valuable consideration made in the expectation of receiving a financial return solely from the

efforts of others. It is agreed that the more the risk to repay the loan the more the security

value is. In normal contracts a person can raise a defense of non performance of the contract

that was due to some reasons such as sickness, death, non natural acts and the like of such

nature, in lending business agreed parties do not contemplate any reason to subside the

repayment of a debt. If the debt is not paid then, lender acquires the right over the property

pledged, to compensate the sum advanced as a loan42. A person who duly secured would have

the protection of the law in priority over unsecured creditors43

Security is an insurance against foreseen and unforeseeable circumstances44 the lender/bank

avoid the full consequences of the customers/borrowers bankruptcy or liquidation. If is not

40‘’ Ukodishaji lasilimali ni mfumo wa kumuwezesha mkopaji kuodhi maliinayodhaminiwa na mkopeshaji…’,pointed by prof. HISSA JAIRO, from BOT.41 In his book conteporally business law, university of North Carolina, west publishing co. St. Paul.42 ALPHONCE, M.A AND URIO, J.F; ASPECTIS OF BANKING AND MICRO-FINANCE LAW.43 The decision of house of lords in, Salomon v Salomon & Co Ltd [1897] AC 22.44 Cited above, footnote No.7 above.

15

secured, the bank/lender would only be able to prove for the amount owed in completion with

other secured creditors45.

In defining baking business, the Act46 provides a number of activities involved in banking

business in which lending business is included, it is clear y provided that the business is

carried on the borrowers risk47, and it is mandatory for borrower to secure foreseen and

unforeseen risks which can prevent repayment of a bank loan. It is the right of a banker to

demand loan security from its customer before it advances a loan, normally security advanced

to secure loan is of higher value than the sum advanced as a loan so that the borrowers’

default to repay does nothing to banker’s profit.

2.42.42.42.4 HISTORICALHISTORICALHISTORICALHISTORICAL DEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENT OFOFOFOF INFORMALINFORMALINFORMALINFORMAL LOANLOANLOANLOAN SECURITYSECURITYSECURITYSECURITY

Lending business started a long time ago, it is believed that seeds and animals was lent out on

interest as early as c. 5000 BC, Among the Mesopotamians, Hittites, Phoenicians and

Egyptians, interest was legal and often fixed by the state48. In middle Ages, Major thinkers

throughout history Plato, Aristotle, Thomas Aquinas, Adam Smith viewed lending as moral

and not something that the lender should expect profit from the borrower. They believed that

changing interest is exploitative and immoral, and they thought that loan should also be

secured by moral agreement or moral trust.

The start of the 16th century brought about agrarian revolution; exploration of Trade routes

opened the New World, and expanded to the Far East, all these factors brought unprecedented

wealth to Europe. This made the lending business inevitable. Individuals and institutions that

45 In compliance with the decision in SalomonSalomonSalomonSalomon vvvv SalomonSalomonSalomonSalomon &&&& CoCoCoCo LtdLtdLtdLtd [1897][1897][1897][1897] ACACACAC 22.22.22.22.46 The Banking and Financial Institutions Act, 2006. UnderUnderUnderUnder itsitsitsits sectionsectionsectionsection 3,3,3,3, provides that banking business” meansthe business of receiving funds from the general public … and to use such funds, in whole or in part, for loans orinvestments for the account of and at the risk of the person doing such business.47 In compliance with view of LORDLORDLORDLORD ATKINATKINATKINATKIN in; JOACHIMSONJOACHIMSONJOACHIMSONJOACHIMSON VSVSVSVS SWISSSWISSSWISSSWISS BANKBANKBANKBANK CORPORATIONCORPORATIONCORPORATIONCORPORATION(1921)48 Johnson,ohnson,ohnson,ohnson, PaulPaulPaulPaul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1, pp.172.

16

had excess money wanted to generate profit through lending of their surplus, like ways

institutions and individuals who wanted to invest in trade and industrial sector without enough

capital, could achieve their goals through borrowing. As the result banks were established

throughout Europe for this purpose49. This growth involved increased activity in every sector

of the economy; banking houses were established to provide credit to a wide array of

economic endeavors and to collect surplus from the general public.

In 18th century lending was more popular and to some extent was misused. Many borrowers

defaulted to pay the loan due to insolvency of their companies, loses in business and non

production of industries due to workers movements. Also some lenders could borrow money

from the lender and change their residence completely and permanently, since there was free

movement of people throughout the world to find the areas for investment. As to this factor

loan security became necessary and inevitable.

Also defaulters were badly enforced to pay in Ancient laws a debtor might have been

imprisoned, enslaved or killed or all three. In England, the Bankruptcy Act 1542 reflected the

same that people who could not pay their debts were criminals, and required debtors to be

imprisoned50 The Debtors Act 1869 finally abolished imprisonment for debt, but lather their

securities be confiscated.

As to this reason it was necessary for the lender to be assured through advancement of

security before he lend his money to the borrower, failure to do so is clime could be put in

priority, expenses and wages of workers were given statutory priority over other unsecured

creditors, and any creditor who had contracted for a security interest would be first in the

priority to be paid.

49 James Grant, Money of the Mind (New York: Noonday Press, 1994), p. 79.

50 The Creditor in the middle Ages’ (1927) 43 Law Quarterly Review 230, 233, (online).

17

In SalomonSalomonSalomonSalomon vvvv SalomonSalomonSalomonSalomon &&&& CoCoCoCo LtdLtdLtdLtd51 Mr. Salomon was both a genuine investor and secured

creditor of Salomon & Co Ltd, On he which owned majority shares in company, companies

creditors were particularly aggrieved because Salomon himself had taken a floating charge,

over all the company's present and future assets, and so his claims for debt against the

company had ranked in priority to theirs. The House of Lords held that, even though the

company was a one man venture in substance, anybody who duly secured would have the

protection of the Companies Acts in the event of insolvency.

Informal lending gained a strong momentum in 20th century but has became dominant in the

recent years, as the result of rapid growth of science and technology, international trade,

capitalist monopoly companies and investments, development of new banking techniques, and

integration of the world under globalization. Finally, the era of credit has owned in Uganda.

The old song of no access to loan is finding away… Unregister bank never touch land title

because they have no time for surveyors, quarreling relatives and legal dispute. Cars, on the

other hand, are sold every day under private arrangements by deferred payment and nobody

raises eye brows over post-dated signed a transfer form52.

Many African countries are now adopting this business, for instance South Africa is one of

countries experienced great achievement with a very shorter period “….the market for

unsecured loans which are not barked by collaterals grown rapidly in recent years …

unsecured credit rose by nearly a quarter…to 453 rand ($45billion )from a year ago53.”

2.52.52.52.5 CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

This chapter has covered the aspects of theoretical overview, and various mode and

techniques recognized and used, in lending business has been pointed out. How and to what

extent such financial practice is applied in Tanzania is the matter of practical experience

which shall be covered in the next chapter.

51 [1897] AC 2252 Reported The East Africa, January 1-7, 200153 The GUARDIAN, 29TH may 2013,news titled “southsouthsouthsouth AfricaAfricaAfricaAfrica banksbanksbanksbanks easeeaseeaseease pacepacepacepace ofofofof unsecuredunsecuredunsecuredunsecured lendinglendinglendinglending”

18

CHAPTERCHAPTERCHAPTERCHAPTER THREETHREETHREETHREE

THETHETHETHE LEGALLEGALLEGALLEGAL ANDANDANDAND PRACTICALPRACTICALPRACTICALPRACTICAL ASPECTSASPECTSASPECTSASPECTS RELATEDRELATEDRELATEDRELATED TOTOTOTO COLLATERALCOLLATERALCOLLATERALCOLLATERAL LOANLOANLOANLOAN

SECURITIESSECURITIESSECURITIESSECURITIES ININININ TANZANIATANZANIATANZANIATANZANIA

3.0.3.0.3.0.3.0. IntroductionIntroductionIntroductionIntroduction

As the previous chapter discussed, loan whether granted in informal or formal sector must be

secured. Now under this chapter the main concern is to look on fair, cheep, simple, adequate,

and less complicated means of securing loan mainly in rural and urban informal sectors and

business. Also this chapter will cut across the legal coverage of informal loan security in

Tanzanian legal system, weaknesses of the living laws (laws in force) and the practical

experiences from the field. Lending practices in non formalized institution and semi-formal

institutions will be covered under this chapter.

3.13.13.13.1 LEGALLEGALLEGALLEGAL ASPECTSASPECTSASPECTSASPECTS

3.1.13.1.13.1.13.1.1 ScopeScopeScopeScope andandandand weaknessesweaknessesweaknessesweaknesses

Article 8(1) (b) and (c) of the constitution54 imposes the obligation to in hence welfare of the

people to the government, and the duty to be accountable to them. How can the welfare of the

people in Tanzania be enhanced is through informal lending55, provided that most Tanzanians

are integrated in informal sector and holds no formal security at all.

Bank does not finance informal business because the effect of giving or financing informal

business depends on the power of law, but since the government is not willing; it remains to

depend on the bank business arrangements, and depends to the chance of profit. As to this

assertion it evidences the lacuna of law in administering informal loans.56

54 THE CONSTITUTION OF THE UNITED REPUBLIC OF TANZANIA OF 197755 Also accepted by the government under the micro-finance policy of 2000.56 The loan officer, NMB-KAYANGA brunch, as interviewed on 3rd august 2013

19

As there is no specific enactment to administer collateral loan security, and due to the fact that

there is great demand and profit in this business, deferent laws with same related provision are

used to cover the gap and it includes, the law of contract, non-governmental organizations act,

companies act, the corporative societies act, financial leasing act, and sometime customary

practices are used and sometimes it is not even clear as to how the lending is governed

3.1.23.1.23.1.23.1.2 TheTheTheThe lawlawlawlaw ofofofof contractcontractcontractcontract

In grating loans to business man in informal sector, bankers, micro-finance Company, NGOS

and SACCOSS, secures their capital advanced as loans to their customers by formal

agreement.57 Section 25(1) (b) of the law of contract Act58 is normally of a great importance,

has at a time of advancing a loan the lender performs is part of a contract and furnish his

consideration while the borrower promises to perform is part in future time and such customer

has not furnished his consideration. It is clear an agreement made without consideration is

void, unless it is a promise to compensate, wholly or in part, a person who has already done

something for the promisor.

It’s true that it is more risky for the render to relay on a contract as it was discussed in

previous chapters, but to for such circumstances which go beyond the normal contractual

relations, specific registrations are enacted. For instance, section 5(2) of the financial leasing

Act59 provides that for avoidance of doubt, a financial lease agreement shall be a special

contract… of which operations are excluded from the scope of the existing laws.

But also acknowledge that principals of the law of contract remain important in administration

of lender-borrower relationship, that “…in a financial lease agreement shall be regulated by

57 To evidence this practice, loan Officer NMB KARAGWE BRUNCH, shown the samples contracts used inadvancement of loan in different parts of the district.58 CAP 345, RE: 2002,59 The Financial Leasing Act, 2000,

20

the law of contract…and parties to a financial lease agreement shall retain maximum freedom

to contract.

3.1.33.1.33.1.33.1.3 CorporativeCorporativeCorporativeCorporative societiessocietiessocietiessocieties ActActActAct

lending institutions which are involved under informal sector in rural and urban are registered

under section 22(b), of this Act60 in which clearly provides that “The Registrar may register

savings and credit societies, Financial Cooperatives, Microfinance Institutions, and

Cooperative banks whose primary activities are to mobilize savings and furnish secured and

unsecured loans or credit to households, smallholder producers and market entrepreneur,

micro-enterprises in rural and urban areas”61

JONAS MFUNJO62 acknowledged that the institution is registered under the Act but the

procedural lending rules remains to be formulated by the institution itself and for that case the

shareholders negotiates and agrees on the lending rules. This is insufficiency of legal lending

procedure in Tanzania informal sector is purposely so designing, section 45(l) of the Act63

provides that every registered society shall have power to make by-laws for any such things

as are necessary or desirable for the purpose for which such a society is established. This has

a great effect as far as informal loan security as concern as the institution is at liberty to accept

or reject such security, with no breach law.

3.1.43.1.43.1.43.1.4 TheTheTheThe bankingbankingbankingbanking andandandand financialfinancialfinancialfinancial institutionsinstitutionsinstitutionsinstitutions actactactact

It said to be the main statute enacted to regulate and supervise both formal and informal

banking business in the united republic of Tanzania, and interpretation of any such other law

60 TTTThe cooperative societies act, no:20 of 200361 KARAGWE WOMEN SACCOS (KAWOSA) being one of the most successive institutions, in granting informalloans in KARAGWE DISTRICT, registered under this Act.62 Chief accountant KAREGWE WOMEN SACCOS (KAWOSA), interviewed on 3rd august 201363 Cited above.

21

of such function should not contravene this law.64 The Act has comprehensive coverage to all

established banks and financial institutions involved in lending business, it goes father to

recognize informal loans industry65

Section 24(2) of the Act66 the Bank may establish limits for unsecured, partially secured And

secured accommodations, so long as the total Accommodations to a borrower do not exceed

the limit of subscription, security is at discretion of financial institution. The question remains

to be under which rules to be resorted if the bank is at such discretion, the authorized person

with such duty to answer this question under section 71 of the Act is said to be the governor,67

but yet no such rule providing for informal loan security and informal lending business in

general.

3.23.23.23.2 INSTITUTIONALINSTITUTIONALINSTITUTIONALINSTITUTIONAL FRAMEWORKFRAMEWORKFRAMEWORKFRAMEWORK

In Tanzania informal lending business is dominantly carried by microfinance institutions than

formal banking institutions, and emerged in 1990s,68 other institutions in involved in informal

lending business emerged in 2000s and they include, Limited liability Companies,

Microfinance Companies, Community Banks, Savings and Credit Societies (SACCOS),

Informal financial services providers(normally unrequested individuals), Government

programs/projects among others. The turning point of informal lending in Tanzania was

pioneered by the national microfinance policy of 2000, and the presidential fund commonly

known as ““““mabillionmabillionmabillionmabillion yayayaya kikwetekikwetekikwetekikwete”””” in the year 2006.69

64 See section 2(2) of the Act65 Under section 3, interprets out banking business, financial institutions, micro-enterprises, micro-financecompany, small holder farmers, and unsecured credit, as they are used in the business66The banking and financial Act, Act no 5 (2006).67 “The Governor may make regulations and issue directives...”68 www.tamfi.co.tz/index.php/resources/view/the_state_of_microfinance_in_tanzania69 Patricia Kimelemeta , MWANANCHI 7/7/2009

22

3.33.33.33.3 PRACTICALPRACTICALPRACTICALPRACTICAL ASPECTSASPECTSASPECTSASPECTS

3.3.13.3.13.3.13.3.1 GeneralGeneralGeneralGeneral perceptionperceptionperceptionperception onononon informalinformalinformalinformal loanloanloanloan securitiessecuritiessecuritiessecurities

Generally commercial banks does not agree that it is possible to grant loan without formal

security, it is not possible to have loan without formal security, though the bank sometimes do

provide loans to borrowers who fulfils all requirement and shows unregistered houses mainly

in rural areas.70 Were necessary to grant such informal loans the bank must be assured that

there is no doughty in its payment71. Under this category only group loans are encouraged and

preferred.

On other hand, it is very possible to acquire loan without formal loan security from micro-

finance institution, what is necessary is that security must be shown, but whether such security

is formal or not it does not matter. 72 For example a person it is possible to mortgage house

without certificate of title located in unregistered land and acquire loan from a micro-finance

institution, something which is not possible to be accepted by ordinary bankers. Evidenced to

have received loans from three different SACOSS operating in his village where no even

information that land need to be registered.73

3.3.23.3.23.3.23.3.2 DistinctionDistinctionDistinctionDistinction betweenbetweenbetweenbetween bankbankbankbank loansloansloansloans andandandand microfinancemicrofinancemicrofinancemicrofinance loanloanloanloan inininin informalinformalinformalinformal sectorsectorsectorsector

ProceduralProceduralProceduralProcedural differencedifferencedifferencedifference bank customer when he steps to ask for a bank loan must present a

valid business licence being in operation for more than six months, any loan security such as

house with a valid title, business capital operated over the area not less than three months,

valued not less than three millions and any other qualifications as the bank may think fit at a

time being. Unlike the SACCOS member, when he steps to ask for a loan guarantee of his

fellow member can stand better than any other security.

70 NMB-KAYANGA, Brunch manager interviewed on 24th July 2013.71 Loan officer NMB KAYANGA BRUNCH, interviewed on 24th July 2013.72 Jonas Mfunjo, Karagwe women SACCOS, interviewed on 3rd august 2013.73BEATUS CLOPHACE, One of our interviewee Ruita villege, in karagwe district.

23

Participation,Participation,Participation,Participation, normally association members participate in lending business of their

institution mainly in determining who is to receive a loan and at what time, likewise the

institution participate in the proper use of loan, while there is a social distance between the

business of the bank and the business of its customers

3.3.33.3.33.3.33.3.3 LegalLegalLegalLegal implicationsimplicationsimplicationsimplications inininin gratinggratinggratinggrating andandandand receivingreceivingreceivingreceiving loanloanloanloan securedsecuredsecuredsecured bybybyby collaterals.collaterals.collaterals.collaterals.

Rural community does not only fear legal uncertainty but also misuse of the law, most of our

interviewees in Kitwe village, their mind was that to take a bank loan is like to call a prison to

take you. Tanzanian laws are also outdated and live banks ineffective in lending system.74 As

to whether is aware with the law regulating VIKOBA, pointed out that the law is what

members agree on, and no one can act out of that among themselves75 Therefore that is to say

that most of informal loans are morally regulated than legal, and there are hundreds of

informal lending practices yet to be recognised by Tanzanian laws.

3.3.43.3.43.3.43.3.4 ImportanceImportanceImportanceImportance ofofofof providingprovidingprovidingproviding loansloansloansloans securedsecuredsecuredsecured bybybyby collaterals.collaterals.collaterals.collaterals.

It has been proved that informal loans remains to be of specific necessity not only to the rural

community but to the whole community involved in informal sector approximated to 70% of

the whole Tanzania community, and it includes;

ProfitProfitProfitProfit, as most institutions involved in the business have accounted profit not only to such

institutions but also to its customers. More than four SACCOSS are operating in Ruita village

and its members have achieved to establish small shops, to have permanent resident houses

and pay for school fees of their sons and daughters among others.

74 cited above75 One of our interviewee, in kitwe village in karagwe district.

24

IncreaseIncreaseIncreaseIncrease ofofofof financialfinancialfinancialfinancial circulationcirculationcirculationcirculation and growth of micro-finance sector, and therefore

households will be subjected to banking system and enjoy banking service, hence growth of

the national economy.

IncomeIncomeIncomeIncome forforforfor investmentinvestmentinvestmentinvestment76767676, it has been proved that there is frozen capital in rural areas which is

not integrated to any banking system, and this can be possible through informal loan security

by creating liquid cash and helping people to make their investment plan. To achieve this

FADECO community Radio77 has visited and encouraged financial institution with regard

possibility of investment.

3.43.43.43.4 CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

Under this chapter legal and practical aspects have been reviewed and discussed, up to this

point the true position as to the status of informal loan security as far as is concern and used in

informal sector. Also the possibility effectiveness and ineffectiveness has been put forward,

therefore the coming chapter will suggest the possible measures relevant in harmonizing

financial laws discussed and the experience shown for the proper operation informal loan

security in a modern business and financial sectors.

76 NMB-KARAGWE Brunch loan officer.77 Community radio broadcasting in KAGERA region from KARAGWE district at 100.8FM

25

CHAPTERCHAPTERCHAPTERCHAPTER FOURFOURFOURFOUR

RECOMMENDATIONSRECOMMENDATIONSRECOMMENDATIONSRECOMMENDATIONS ANDANDANDANDGENERALGENERALGENERALGENERAL CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

4.04.04.04.0 IntroductionIntroductionIntroductionIntroduction

this chapter is centered on solutions and recommendation suggested in improving the general

lending systems involved in informal economic sectors reserved in both rural and urban areas.

Different legal and practical weakness have been discovered and pointed as hindrances in the

proper operation of lending on collateral securities, one of which is the recognition of

informal loan security as a better security, under this chapter possible solutions will be put

forward as well, to lending financial institutions, the government as the policy maker and

implementers and to the general public/community at large.

4.14.14.14.1 RecommendationsRecommendationsRecommendationsRecommendations

4.1.14.1.14.1.14.1.1 FinancialFinancialFinancialFinancial institutionsinstitutionsinstitutionsinstitutions

Bureaucracy;Bureaucracy;Bureaucracy;Bureaucracy; Financial institutions must reform their lending policies and move out all

bureaucracies that prevent easy access of loans to informal entrepreneurs. Let the bank and

financial institutions step out of their offices to look for customers, they also need to be

certain and clear on the procedures to be followed by customer in informal sector78. Always

they must be governed by the legal general rule than presumptions and changing rules.

DynamicDynamicDynamicDynamic ideologiesideologiesideologiesideologies, financial institution must research on the new business ideas and reflect

the same within the relevant time than being conservative on the tradition ideas, which at a

time being may be outdated to the society. In Modern days financial institutions in many

African countries and all over the world are adopting and incorporating informal loans in their

78 Sekiku Joseph, FADECCO community radio, 100.8FM

26

banking system79, as the way to cover the most of its population. However, in Tanzania

banking business is carried in a primitive way80

4.1.24.1.24.1.24.1.2 GovernmentGovernmentGovernmentGovernment andandandand lawmakerslawmakerslawmakerslawmakers

Despite, the good ideas set out by government policies, cannot be implemented whiteout

being enforced by the law, and regulated by rules, therefore the main concern in this sector

should be formulating the policies and rule and to make sure that outdated laws are revised,

and new laws are to be enacted to cover lacunas of unaddressed spheres in informal loan

security systems. To achieve this goal the government should come out with one

comprehensive act for the purposes of administration of informal loan.

The government must use the available research findings and course the research to be

conducted on this area, in order to know the relevant financial situations, mainly to indentify

new techniques emerged in financial system within a specific period. Since this is a

constitutional obligation under Article 8(1) (b) and (c) of the constitution81 to make sure that it

improves the welfare of its people, it is important for the government to consider that most of

Tanzanians are subjected under informal sector in which informal lending is the solution for

their economic hardships if well managed.

4.1.34.1.34.1.34.1.3 CommunityCommunityCommunityCommunity

As it has been discussed in the previous chapters the community problems includes ignorance,

non-formalization of available capital into banking systems and poor investment plans. This

problem can be solved if the community members create their proper capacity of generating

79 Read from, GUARDIAN, 29TH may 2013,news titled “southsouthsouthsouth AfricaAfricaAfricaAfrica banksbanksbanksbanks easeeaseeaseease pacepacepacepace ofofofof unsecuredunsecuredunsecuredunsecured lendinglendinglendinglending”and The East Africa, January 1-7, 200180 Supra.81 The constitution of the united republic of Tanzania of 1977

27

capital, improve their investing capacity and it is important to educate themselves in matters

concerning with financial and business skills.

4.24.24.24.2 ConclusionConclusionConclusionConclusion

It is important to reform the lending systems in Tanzania, it is of no doughty that informal

loan security is an important segment in every case informal sector is thought, this is because

informal businesses in most case are not licensed, resisted, planed or even carried in a

systematic manner. As to this reason, informal sector is being left out not only by formal laws,

but also by many formal sectors.

The legal recognition of informal loan security is the turning point of integrating informal

sector into financial system, for the purpose of benefiting the majorities subjected to this

sector, improving the economy of the country and implementing the constitutional duty.

Has been observed in the previous chapters, negative perception on the current lending system

prevails among the subjects of informal sector. Most people believe that financial institution is

an exploitative capitalist institution, than development institution, has to these negative

altitude the communities goes beyond to ignore even the possible benefits of financial

institution. Proper provision of informal loan security will soften the hearts of the subjects to

widen the banking business in Tanzania.

28

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