The role of the informal financial sector in the liberalized financial markets in Tanzania: a case study of rural savings and credit schemes in Kilimanjaro region

This study attempts to examine the role of the informal financial institutions in the process of financial intermediation. In recognition of the importance of these institutions especially in rural areas, Rural Savings and Credit Schemes in Kilimanjaro Region were taken as a case of reference. This study was prompted by the fact that no satisfactory efforts have so far been undertaken to explore the nature, roles, potential and prospects of informal financial institutions, especially given the paucity of services of formal financial institutions in rural areas. The current reforms in the financial sector appear to be incomplete since they ignore the informal financial institutions. The Main objectives were to identify the potentials and roles of these institutions to establish those factors that influence their growth and the effect of financial sector reforms upon them. It also aimed at establishing their operational costs and hence account for their resilience. In the course of analysis, both quantitative and qualitative methods have been used, quantitative methods were employed to explore the factors that influence the growth of informal financial 'institutions and hence limit success of financial reforms. Qualitative methods were employed to undertake a comparative analysis of savings and credit processes of both institutions aimed at establishing their relative cost efficiencies. The results obtained support the importance of the informal financial institutions in financial intermediation whose resilience stems from the failure of the formal financial institutions in meeting financial needs of small savers and borrowers. The results further demonstrate that, the informality of transactions of informal financial institutions lowers their unit costs, hence account, among other factors for their resilience. It is thus recommended that; first, when reforms in the financial sector are designed, considerations should also be made on macroeconomic conditions surrounding the financial sector, and the role of the informal financial institutions which tend to be neglected. Secondly, policies based in favour of urban areas should be avoided. Instead, rural areas should also be considered, and efforts must be made to integrate the existing informal financial institutions and the formal financial institutions. Thirdly, the recognition of relatively lower transaction costs of these institutions should be taken as an advantage to institute policies and programmes through which formal financial institutions can serve small savers and borrowers.