The Role of Digital Financial Services in Supporting Small Businesses in Tanzania

Small and medium enterprises (SMEs) are the backbone of Tanzania's economy, contributing over a third of the country's GDP. There are approximately 3 million MSMEs operating in Tanzania, employing around 5.2 million people. Access to finance remains one of the biggest challenges for these businesses to grow and thrive.

Lack of collateral, inadequate financial records, and high interest rates lock out many MSMEs from accessing loans from traditional financial institutions. This is where digital financial services come in as an innovative solution to drive financial inclusion and provide affordable financing to small businesses in Tanzania.

What are Digital Financial Services All About?

Digital financial services refer to financial products and services offered through mobile phones, computers, cards, wallets or other digital channels without the need for traditional physical infrastructure like bank branches. These include mobile money, agency banking, digital loans, merchant payment aggregators and other tech-enabled innovations in finance.

The most ubiquitous and widely adopted digital financial service in Tanzania is mobile money through telecom operators like Vodacom, Tigo, Airtel and Halotel.

As of December 2021, there were over 30 million active mobile money users and over 622,800 mobile money agents across Tanzania.

The Role of Mobile Money

Mobile money has transformed the financial landscape in Tanzania, enabling convenient, secure and affordable movement of money for individuals and business. Small business owners use mobile money daily to receive payments from customers, pay suppliers, pay utility bills, buy inventory and pay employees.

By plugging into the mobile money ecosystem, small businesses are able to manage their finances digitally even without a formal bank account. Some of the ways mobile money empowers small businesses include:

•         Receive payments from customers via mobile money - This enhances safety by reducing cash handling and allows faster checkouts.

•         Pay suppliers conveniently via mobile money - This eliminates transportation costs and risks of handling cash.

•         Access short term capital via mobile money savings groups - Through mobile-based chamas, small businesses can mobilize capital for working expenses.

•         Get quick liquidity by cashing out mobile money at an agent - This provides flexibility in cash flow management for small business.

•         Pay bills and employees conveniently via mobile money - This improves efficiency and provides records of transactions.

Agency Banking Services

Agency banking allows small businesses to access limited banking services through authorized agents of commercial banks as opposed to going to branches. Most banks in Tanzania like CRDB Bank, NMB Bank and National Bank of Commerce (NBC) have deployed agency banking networks that small businesses can leverage.

By transacting through these 'banking agents', small businesses can deposit cash, withdraw cash, check account balances, get statements, make utility payments, receive or send money at lower costs. Agency banking complements mobile money by bringing regulated banking closer to communities.

Digital Credit

Lack of credit history and collateral locks many small businesses from accessing bank financing. However, digital loans through mobile phones are changing this landscape. Using algorithms and big data of mobile money transactions, Alternative Credit Scoring (ACS) provides risk analysis of potential borrowers. This enables mobile-based lenders like Nala, M-KOPA and Tala to advance unsecured, short-term loans conveniently to small business owners via mobiles.

These instant digital loans can provide working capital to buy more inventory, manage cash flow gaps or invest in equipment without long application processes and collateral demands of traditional bank loans. Repayment is also made conveniently via mobile money installments.

Merchant Payment Aggregators

Accepting digital payments from customers is crucial for small businesses to remain relevant, plus cashless policies by various governments. Merchant payment aggregators like Selcom, Maxcom Africa, PayKindi facilitate mobile point-of-sale solutions for small businesses to receive payments on their mobile phones. These payment gateways allow businesses to accept different digital payment methods like cards, wallets, bank transfers seamlessly without investing in expensive POS machines and merchant accounts. This boosts the potential customer base and revenues for small businesses.

Insurance

Digital insurance platforms allow small businesses to access various insurance covers conveniently via mobile phones to protect against risks like illness, accidents, fire or floods. Leading providers like Milvik and Britam have mobile-enabled products where small businesses can compare quotes, purchase covers, file claims and receive payouts via mobile devices conveniently. By covering themselves against risks, small businesses have peace of mind to focus on their operations and growth.

Other Emerging Digital Financial Services

Various Startups are rising in Tanzania to digitize other financial services including digital lenders, alternative credit scoring companies, digital banks, blockchain-based solutions, robo-advisors and more. These emerging innovations leverage automation, artificial intelligence, and vast data to reduce costs and barriers for small businesses to access financial services.

Already, startups like Arifu and Moni enable financial education through chatbots. Rey Money and Pezesha equip small businesses with free digital accounting tools. As smartphones and internet penetration across Tanzania improves, more small businesses even in remote areas can potentially leverage digital financial tools for growth.

Policy Support

For digital financial services to continue enabling small business growth at scale in Tanzania, certain policy actions are necessary from government and regulatory bodies like the Bank of Tanzania (BoT). These include:

•         Foster competition in the digital finance ecosystem through open APIs.

•         Improve national payments infrastructure.

•         Encourage innovation of customer-centric financial services through regulatory sandboxes.

•         Promote digital and financial literacy programs for small businesses.

•         Expand internet access and improve digital infrastructure across Tanzania.

•         Ensure consumer protection and privacy as digital financial services spread.

•         Digitize government services and payments to demonstrate the value of going cash lite.

Final Words

By harnessing digital financial services powered by mobile money, agency banking and FinTech innovations, small businesses in Tanzania can gain financial empowerment. With increased capital, security, efficiency, and transparency, MSMEs are better positioned to formalize, grow and elevate Tanzania's economy. Therefore, collaborative efforts are necessary between policymakers, banks, telcos, Fintechs and development agencies to build inclusive digital financial ecosystems tailored for small businesses across Tanzania.