Title
A Journey towards Financial Sustainability for Tanzanian Saving and Credit Unions:
There is a glimmer of hope but still it is a long miles away for second half
Introduction:
In the field of economic science we have unique ways of measuring sustainability and performance
of financial organizations. I am going to show you an example of how this works, through a study I
did on Tanzanian Savings cooperatives. First I will tell you a bit about these financial institutions
with a specific focus on saving and credit cooperatives, then I will explain how we analyze and
measures performance and sustainability in my field and then I will give you examples of other
places this kind of analysis is useful to business and economies. So let’s go to point one Point 1:
How is economic growth created in a country? Well, economic growth happens when people start
up new business ventures, or grow their existing businesses. This stimulates the economy it
provides jobs and people who earn money
But to start a new business or grow an existing one you need money, and most business rely on
some form of loan finacing. In fact economists have found that there is a direct link between the
amount of money available to business owners in a country and the economic growth in that
country.
Despite such understanding Africa and other developing has consistently failed to provide finance
for majority population . Unfortunately mainstream financial institutions such as banks are not
designed to offer small loans to people with very low income levels. In Tanzania for example, where
I did my research about 90% of the population is excluded from the main stream banking sector.
The result of this is that many developing countries have seen the rise of new types of financial
insitutions specifically aimed at financing the poor.
A particularly interesting example is the Saving and Credit Cooperative. As the name suggests, these
cooperatives differ from banks in tht they are owned and managed by their members within a
democratic structure. ?
What is interstOne ng abut them is their astoundingly rapid growth. in Tanzania – the number of
SACCOs have increaserd by 587% in the past 10 years! For economistx such an explosive growth
rate demands attention. Something significant is happening, and it either signals a stairway to
economic heaven or a high way to financial crisis. Is this a bubble, heading for a crash, or a truly
sustaiable business model that offers a solution to economic growth in developing countries?
And so as economists we feel compelled to do some diagnostic testing to tell whther these
organs=isations are which scenario is true. In our experience, the highway to financial crisis usually
leads away from economic fundamentals, whereas the stairway to heavan only ever grows on the
foundations of sustainable profitability.
ANd so the central questions that we need to ask in relation to the Saving cooperatives is: Are they
based on economic fundamentals? or to put it another way Are they profitable and are they
sustainable.
Point 2:
One of the the measures of profitability that we use is called the Return on Assets.
This tells us how efficient management is in converting the assets of the business that which is
earned by the busienss into revenue. A company with lots of assets should probably be making more
money than a company with fewer assets. In the microfinance industry in whcihc the saving cooerpatives fall 3% is regarded as a good RoA. This means that if your company is worth a million
rand your annual income should be at least 300 000.
To assess whther a busiess is sustainable, we use another measure. we divide the total revenue of the
business by the the total operating cost. In other words can the business generate enough income to
cover its own operating costs? For a buseiness to be sustainable it needs to have a consistent income
stream big enough to at least cover its expenses. in other word the score should be at least 1 or as a
percentage should be at lest 100%
Point 3:
This kind of analysis is often used in financial industry and can be easily extended into other
industries. The existing studies in my field have been focusing on large banks and relatively larger
microfinance because of the data availability. My study is one of its kinds to focus in Tanzanian
SACCOs.
Our results shows that, out of 103 SACCOs included in the study
61% of them were operationally sustainable
and only 51% were both operationally and financially sustainable.
In summary we found that on average SACCOS are sustainable and they relatively performing well.
However about 50% of them are struggling to catch up. This is useful because it shaded some light
on the SACCOs longevity and it offers important insights for researchers, policy makers, regulators
and shareholders in the industry.
On average the return on asset was 7% which is higher than other microfinance internationally and
the average sustainability score was 127% which is higher than the minimum threshold .
The most important determinant of sustainability was found to be return on asset and cost per loan
portfolio.
Conclusion:
So I have given you an example of a method of analyzing the performance and sustainability of
financial institutions, based on my work with Tanzania Cooperatives.
I have given you some background about these institutions, explained the way we analyzed their
performance and sustainability and what we found through it.
Strong exit line.
My take home message is that there is glimmer of hope toward financial sustainability path, but
more work is waiting ahead.
Appendix
Original Title of the Paper
Financial Sustainability of Saving and Credit Cooperatives: Evidence from Tanzania
Original abstract of the paper
Tanzania has recorded unprecedented growth in saving and credit cooperatives (SACCOs) in the
past decades. Their growth in numbers has surged from 803 in 2000 to 5400 during 2012. Despite
the impressive growth recorded, the prevailing view that these institutions suffer from high
transaction costs due to their small size and their exposure to a relatively high risk clients calls for
rigorous scrutiny of their performance and sustainability. Understanding the performance and
sustainability of these institutions is important in two folds: one, it is a necessary condition for
institutional longevity and lasting services to the poor; two, it is an important barometer for
researchers, policy makers, regulators and shareholders in guiding the industry in the desired
direction. Therefore, the purpose of this study is to estimate performance and financial sustainability
of SACCOs in Tanzania. Based on the census data of audited SACCOs from four regions of
Tanzania, performance was estimated using returns on assets and financial sustainability as a ratio of
total revenues generated to total expenses plus loan loss provision. The empirical estimates revealed
that out of 103 SACCOs included in the study 61% of them were operationally sustainable and only
51% were both operationally and financially sustainable. On average the return on asset was 7%
which is higher than other microfinance internationally and the average sustainability score of 127%
is reasonably good. The most important determinant of sustainability was found to be return on
asset and cost per loan portfolio.