TANZANIA. Diagnostic Review of Consumer Protection and Financial Literacy. Volume I Key Findings and Recommendations.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized TANZANIA Diagnostic Review of Consumer Protection and Financial Literacy Volume I Key Findings and Recommendations November 2013 Public Disclosure Authorized THE WORLD BANK Financial Inclusion and Infrastructure Practice, Financial Inclusion and Consumer Protection Service Line Africa Region Financial and Private Sector Development Vice-Presidency Washington, DC

2 This Diagnostic Review is a product of the staff of the International Bank for Reconstruction and Development/the World Bank. The findings, interpretation and conclusions expressed herein do not necessarily reflect the views of the executive directors of the World Bank or the governments they represent.

3 Acknowledgments A World Bank mission visited Tanzania from January 21 31, 2013 to prepare a Diagnostic Review on Consumer Protection and Financial Literacy (CPFL). The team was led by Johanna Jaeger (Financial Sector Specialist, FFIMS) and comprised Dusan Lalic (banking sector expert), Ms. Leyla Castillo (Financial Sector Specialist, FFIMS) and Richard Symonds (pensions sector expert). Andrea Dall Olio (Sector Leader for Financial and Private Sector Development, AFTFE) joined key mission meetings. Adetola Oyebanjo and Sarah Fathallah (both Financial Analysts, FFIMS) provided inputs and support during the preparation of the present report. The mission met with representatives of all relevant stakeholders, including the Ministry of Finance, the Bank of Tanzania, the Social Security Regulatory Authority, the Fair Competition Commission, other government ministries, market players, public agencies, industry associations, consumer associations and legal experts. The mission team is grateful for their support and collaboration. Peer review comments were received from Fiona Stewart (Senior Financial Sector Specialist, FCMNB), Samuel Maimbo (Lead Financial Sector Specialist, ECSF2) and Colleen Macenik (Financial Economist, ECSF1). Douglas Pearce (Acting Manager, Financial Inclusion and Consumer Protection Service Line), Irina Astrakhan (Sector Manager, AFTFE), Andrea Mario Dall Olio (Lead Economist, AFTFE) and Smita Wagh (Financial Sector Specialist, AFTFE) provided guidance and comments. Ros Grady (Senior Financial Sector Specialist, FFIMS) led the dissemination of this report at a workshop conducted on Friday, 22 November The team expresses its appreciation to the Tanzanian authorities for their cooperation and collaboration during the preparation of the review. Detailed comments on the draft report were provided by Bank of Tanzania and Ministry of Finance. The project team would like to thank all those who so generously contributed to the final report. The review was prepared as part of the Swiss State Secretariat for Economic Affairs (SECO) Trust Fund on Consumer Protection and Financial Literacy and received complementary funding from the World Bank Africa Region Vice Presidency. i

4 TANZANIA Diagnostic Review of Consumer Protection and Financial Literacy Volume I Key Findings and Recommendations CONTENTS Acknowledgments... i Preface... 1 Executive Summary... 2 I. Context for CPFL in Tanzania... 6 IMPORTANCE OF CONSUMER PROTECTION AND FINANCIAL LITERACY IN TANZANIA... 6 FINANCIAL LITERACY... 8 II. Framework for Financial Consumer Protection in Tanzania INSTITUTIONAL ARRANGEMENTS KEY RECOMMENDATIONS LEGAL AND REGULATORY FRAMEWORK KEY RECOMMENDATIONS III. Consumer Disclosure KEY FINDINGS KEY RECOMMENDATIONS IV. Business Practices KEY FINDINGS KEY RECOMMENDATIONS V. Dispute Resolution Mechanisms KEY FINDINGS KEY RECOMMENDATIONS VI. Financial Education KEY FINDINGS KEY RECOMMENDATIONS Tables Table 1: List of Recommendations... 4 Table 2: Access to Financial Services in Selected Southern and East African Countries... 6 Table 3: Sources of Income of Tanzanian Population... 9 Table 4: Regulatory and Supervisory Framework for Microfinance Institutions i

5 Figures Figure 1: Level of Awareness of Basic Financial Concepts... 8 Figure 2: Access to Finance in Rural and Urban Areas... 9 Figure 3: Levels of Education and Access to Finance Boxes Box 1: Overview of the Financial Sector in Tanzania... 7 Box 2: Overall Reform Agenda in the Pensions Sector Box 3: Institutional Arrangements for CPFL in Selected Countries Box 4: Consumer Protection Challenges for Pension Fund Members Box 5: Models of Alternative Dispute Resolution Mechanisms Box 6: Tanzania s Financial Education Framework ii

6 Abbreviations and Acronyms ADR APR ATM BAFIA BoT CPFL EC EIR EU EURIBOR FCC FES FICOs FIWG FSDT IMF IAIS IOSCO MFC MFI MoU MoF NGO POS PPP RITA ROSCA SACCO SCCULT SECO SHGs SSRA TAMFI TBA VICOBA VSLA Alternative Dispute Resolution Annual Percentage Rate Automatic Teller Machine Banking and Financial Institutions Act Bank of Tanzania Consumer Protection and Financial Literacy European Commission Effective Interest Rate European Union Euro Interbank Offered Rate Fair Competition Commission Financial Education Secretariat Financial Cooperatives Financial Inclusion Working Group Financial Sector Deepening Trust International Monetary Fund International Association of Insurance Supervisors International Organization of Securities Commissions Microfinance Company Microfinance Institution Memorandum of Understanding Ministry of Finance Non-Governmental Organization Point of Sale Public-Private-Sector Partnership Registration, Insolvency and Trusteeship Agency Rotating Savings and Credit Association Savings and Credit Cooperative Organization Savings and Credit Cooperative Union League of Tanzania Swiss State Secretariat for Economic Affairs Self-Help Groups Social Security Regulatory Authority Tanzanian Association of Microfinance Institutions Tanzania Bankers Association Village Community Bank Village Savings and Loans Association iii

7 Preface 1. The Diagnostic Review for Consumer Protection and Financial Literacy (CPFL) provides a detailed assessment of the institutional, legal and regulatory framework in three segments of the financial sector: banking, microfinance 1, and pensions. The review was undertaken at a specific request for technical assistance in the field of financial consumer protection made by the Ministry of Finance (MoF) of Tanzania in November The review consists of two volumes. Volume I summarizes the key findings and recommendations of the review and Volume II presents a detailed assessment of each financial segment compared to the Good Practices for Financial Consumer Protection. 2. The CPFL Review is part of the World Bank Program on Consumer Protection and Financial Literacy, which seeks to identify key measures in strengthening financial consumer protection to help build consumer trust in the financial sector and expand the confidence of households to wisely use financial services. 3. CPFL Reviews against Good Practices have been conducted by the World Bank in both middle as well as low income countries. These include Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Kazakhstan, Kosovo, Latvia, Lithuania, Malawi, Mozambique, Nicaragua, Pakistan, Romania, the Russian Federation, South Africa, Slovakia, Tajikistan, Tanzania and Ukraine. 4. The main objective of the Review is to assess the legal/regulatory and institutional frameworks for financial consumer protection in a country, with reference to international practices. The Review addresses the following issues: 1. Institutional Arrangements, 2. Legal and Regulatory Framework, 3. Disclosure, 4. Business Practices, 5. Dispute Resolution Mechanisms, and 6. Financial Education. The sectors covered were banking, microfinance and pensions with insurance and securities to be considered at a later stage. 5. The Review is based on compliance with a set of Good Practices for Financial Consumer Protection 2 which were developed by the World Bank in They provide a set of good practices using international benchmarks, such as the principles released by the Basel Committee, IOSCO and IAIS, as well as the OECD recommendations for financial education and awareness on pensions, insurance, and credit products. The Good Practices also incorporate provisions of directives, laws, regulations and codes of business practices from the EU, United States, Australia, Canada, France, Ireland, Malaysia, Mexico, New Zealand, Peru and South Africa. 1 As regards to the microfinance sector, the review covered all formal (banks providing microfinance services, microfinance companies, FICOS) and semi-formal (SACCOs, credit only MFI s, NGOs) microfinance institutions. In addition, despite the constraints presented by the standard methodology used for this type of assessments (e.g. mainly focusing on the review of laws and the legal and regulatory framework for financial consumer protection), the Review also highlighted key aspects to consider for improving the situation in the informal sector (i.e. VICOBAS, ROSCAs) given its importance in terms of outreach in the low income and most vulnerable population segments

8 Executive Summary 6. Consumer protection and financial literacy (CPFL) are essential to increasing responsible access to financial services in Tanzania while ensuring that expanded access benefits consumers and the economy as a whole. Given the relatively low levels of financial inclusion in Tanzania a number of efforts are currently underway to ensure that more people are brought into the financial system. While increased access to finance can result in significant economic and societal benefits, it can be neutral or even harmful if consumers are not able: (i) to exercise their rights as consumers; (ii) to select the financial products that suit them best and (iii) to be protected from fraud and other market abuses. 7. Hence, a stronger, more coherent CPFL environment is a vital ingredient of the overall financial inclusion agenda. There is a significant need for a strengthened financial consumer protection in Tanzania, as the current framework is characterized by fragmented institutional arrangements, dated legislation, as well as limited requirements and guidelines on disclosure, dispute resolution and fair business practices. 8. CPFL can help provide for a greater uptake of financial services and help manage risks. A sound financial consumer protection framework can help increase usage and viability of new innovative payment services, as well as the more traditional financial services, through building trust in the use of such services. At the same time the risk of harmful impacts for consumers and financial institutions, such as consumer over-indebtedness and mis-selling scandals, can be avoided with a robust consumer protection framework. 9. In addition, a sound CPFL framework helps regulators better understand and accommodate the level of understanding of consumers, especially vulnerable segments of the population. The main challenges faced in Tanzania are the large share of the population living in rural areas, compounded by prevailing low levels of financial literacy. All consumers, especially the poor and vulnerable who may not be perceived as income generating customers, deserve to be treated fairly. It is therefore crucial for regulators to focus on those risks that are most harmful and affect more vulnerable segments of the population. 10. Current institutional arrangements regarding CPFL involve a multiplicity of regulators with limited enforcement capacity. The MoF is in charge of the overall financial sector policy and development issues. The Bank of Tanzania (BoT) regulates and supervises banks and financial institutions, the Registrar of Cooperatives is in charge of savings and credit cooperative organizations (SACCOs), while the Social Security Regulatory Authority (SSRA) is the new regulatory agency for the pension sector. The Fair Competition Commission s (FCC) role is to promote effective competition and protect consumers from unfair and misleading market conduct. In addition, there are a number of regulatory agencies and government authorities involved in regulating and supervising microfinance institutions (MFIs) 3. Overall, the monitoring and enforcement of the existing financial consumer protection rules need improvement because of a limited number of specialized staff and insufficient resources. 11. It is important to continue to strengthen the capacity of BoT, SSRA and the Registrar of Cooperatives in financial consumer protection to ensure improved monitoring and enforcement of market conduct regulations. Given the prevailing tiered structure in the microfinance sector, the responsibility of coordinating, overseeing, and enforcing consumer protection for non-deposit taking 3 See Table 3 for further information. 2

9 semi-formal MFIs 4 should be delegated to a central government body with adequate powers and institutional capacity to ensure enforcement, possibly BoT or MoF. In addition, it would be advisable to create a coordination mechanism that provides more clarity on the roles and responsibilities of the MoF, BoT and all other players. A comprehensive memorandum of understanding (MoU) related to financial consumer protection signed by the BoT, other financial regulators and the FCC could clarify the rights and responsibilities of all relevant institutions. Internal arrangements within BoT could be strengthened further through a coordinated approach, as well as the placement of the planned financial consumer protection (FCP) unit outside the scope of prudential supervision. 12. A basic legislative and regulatory framework exists for financial consumer protection in Tanzania. However, these provisions lack clarity and detail. Further detailed and streamlined financial consumer protection provisions are needed in the Banking and Financial Institutions Act (BAFIA) and the Social Security (Regulatory Authority) Act 2008, as well as in specific regulations issued by the respective regulatory and supervisory authorities. A unified regulatory approach for formal and semiformal MFIs should be developed to ensure that clients are treated equally in terms of having adequate access to basic information on the products that they consume, and are not subject to deceptive and abusive sales and collection practices. With regards to the informal microfinance organizations, consideration should be given to supporting and promoting ongoing efforts to introduce consumer protection and financial education principles in their operation. 13. There are limited disclosure requirements coupled with a lack of transparency on pricing of financial products and services. All institutions should be required to provide their clients with a standardized Key Facts Statement summarizing in clear language key terms and conditions of the products they offer. Financial institutions should also be encouraged to display in all their branches a list of the effective interest rates, other charges and the total cost of financial products to consumers, including comparable costs across institutions. Disclosure methods and formats should also take into account the levels of consumer literacy and the predominance of local languages such as Swahili in certain population groups. 14. In some sectors, comprehensive industry guidelines or codes of conduct would help ensure that financial institutions treat consumers fairly and responsibly. The Business Code of Ethics for banks should be finalized and actively implemented. It is also recommended that the BoT monitors compliance with the Business Code of Ethics and publicize its findings. Industry codes of conduct should focus on a variety of issues ranging from information disclosure to complaints handling procedures and fair business practices. Efforts should be made to unify and promote the adoption of key principles in the provision of microfinance products for all MFIs. 15. Institutional responsibilities for complaint handling lack clarity and existing dispute resolution mechanisms are unknown to their consumers. There are no guidelines or standard procedures established in the regulations of many financial regulatory agencies on how financial institutions should receive and handle consumer complaints. There is no mandatory monitoring or followup on complaints submitted or on the responses provided to consumers. Most consumers do not know how to file complaints until they need to make one. Internal complaint handling procedures should be further strengthened by requiring financial institutions (1) to have detailed complaint handling procedures in place and to ensure that these procedures are disclosed to every consumer and shared with the relevant government regulatory agency, and (2) to centralize data on complaints received and share that data with the relevant government regulatory agency. Consideration should also be given to the establishment of a financial services alternative dispute resolution (ADR) scheme, based on an assessment of the most appropriate institutional fit for Tanzania. 4 These include financial NGOs and credit-only MFIs. See Table 3 for further information. 3

10 16. A variety of financial education initiatives are ongoing, including the implementation of a financial education strategy, but further steps need to be taken to ensure efficient implementation. The private and public sectors have a number of initiatives geared toward financial education. An overall national financial education strategy has been developed. The banking sector organizes trade fairs, and the pension and microfinance sectors engage in a number of initiatives to address the low levels of financial literacy of their consumers. The establishment of a financial education secretariat will ensure a coordinated approach to financial education nationwide and could motivate the development of financial education programs focused on reaching low-income earners and the rural population. It is encouraged that the public and private sectors align themselves towards achieving financial literacy standards. Table 1: List of Recommendations Recommendations Responsible Term 5 Priority Institutional Arrangements Establish a coordination mechanism for financial consumer protection between all relevant stakeholders. Strengthen the CPFL capacity of the BoT, the SSRA and the Registrar of Cooperatives to ensure improved monitoring of financial institutions compliance with legal requirements and enforcement in case of violations of market conduct regulations. Conduct an assessment of the optimal organizational structure for the Financial regulators, FCC, MoF BoT, SSRA, Registrar of Cooperatives ST MT Very High Very High BoT ST Very High new financial consumer protection unit. Banking Establish a financial consumer protection task force within the BoT. BoT ST Medium Microfinance Delegate the responsibility of coordinating, overseeing and enforcing consumer protection for non-deposit-taking MFIs to a single central government body with adequate powers and institutional capacity to ensure enforcement, possibly the MoF or the BoT. Pensions Reduce and centralize the number of institutions regulating pensions in one primary agency responsible for financial consumer protection. Legal and Regulatory Framework Ensure that regulation on mobile payments entails requirements on effective disclosure in agent operations and dispute resolution mechanisms, as well as addressing other consumer protection issues unique to this financial service. Strengthen and clarify the legal framework for financial consumer protection in all three sectors through incorporation of further detailed and streamlined financial consumer protection provisions in the BAFIA and the Social Security (Regulatory Authority) Act 2008 as well as in specific regulations issued by the respective regulatory and supervisory authorities. Address potential overlaps between general consumer protection provisions and sector-specific legislation by (i) signing a detailed MoU between financial regulators and FCC and (ii) streamlining financial consumer protection provisions in the medium term. Microfinance Develop a unified regulatory approach to ensure that all clients of formal and semi-formal MFIs are treated equally in terms of having adequate access to basic information on the products that they consume, and are not subject to deceiving and abusive sales and collection practices. Government MT/LT High Government, SSRA LT Medium BoT ST/MT Very High BoT, SSRA, Registrar of Cooperatives, Government Financial regulators, FCC, MoF Government, BoT, Registrar of Cooperatives MT MT LT High Medium High 5 ST, short term, indicates that action can be undertaken in 0 6 months. MT, medium term, indicates 6 months to1 year. LT, long term, indicates 1+ year(s). Lead agency(ies) where applicable highlighted in bold. 4

11 In the case of informal microfinance organizations, it is recommended to support and coordinate ongoing efforts in introducing consumer protection and financial education principles in their operation. Government, regulators, associations, NGOs MT/LT Medium Pensions Consolidate the existing legal framework into one law that will Government, SSRA MT Medium centralize the consumer protection regulation of the pension funds. Disclosure Require Key Facts Statements for all basic consumer finance products. Financial regulators ST Very High Ensure the disclosure of a list of interest rates and charges in all Financial regulators ST High branches. Develop and implement existing BAFIA information disclosure Financial regulators MT Medium definition and require the application by all financial institutions of a standard methodology to disclose a total price or cost of financial products to consumers ( effective interest rate ). Pensions Issue a set of guidelines by the SSRA related to the disclosure of SSRA ST High material facts by a pension fund in annual reports and point of sale documents. Business Practices Consider need for new rules requiring financial institutions to assess Financial regulators MT High affordability of credit products. Develop industry codes of conduct focusing on disclosure, complaints, product appropriateness, and other areas of business practices. Industry associations MT Medium Microfinance Enhance fair treatment of microfinance consumers through strategic and targeted regulation of product features, affordability assessments and the calculation of interest rates on a reducing balance basis. Pensions Introduce business practice guidelines by the SSRA for the pension sector in a number of key areas, such as sales and advertising rules and fund portability rules. Dispute Resolution Mechanisms Require financial institutions to have detailed complaints handling procedures in place and to ensure that these are disclosed to every consumer. Consider options for establishing an independent ADR structure for retail financial services. Require that all financial institutions centralize data on complaints received and share the data with the relevant government regulatory agency. Financial Education Establish the financial education secretariat and initiate implementation of the financial education strategy. Consider developing tailored financial education programs focusing on reaching low income and rural populations, including those with low levels of literacy. Introduce financial education programs for schoolchildren. Encourage mobile payment providers and their agents to educate consumers about their rights and responsibilities and how to protect their own privacy when using mobile payment services. Ensure that the SSRA literacy campaign is closely aligned with the overall national financial education strategy. Microfinance regulators MT High SSRA MT High Financial regulators ST Very High Government, financial LT Very High regulators, industry associations Financial regulators MT High BoT and other stakeholders BoT, MoF, MoE, others MoE, MoF, BoT, others BoT and other stakeholders LT ST MT/LT MT ST Meidum Very High Medium Medium Medium SSRA MT Medium 5

12 I. Context for CPFL in Tanzania Importance of consumer protection and financial literacy in Tanzania 17. CPFL are key to increasing responsible access to financial services in Tanzania while ensuring that expanded access to financial services benefits consumers and the economy as a whole. While increased access to finance can result in significant economic and societal benefits, it can be neutral or even harmful if consumers are not able: (i) to exercise their rights as consumers, (ii) to select the financial products that suit them best, and (iii) be protected from mis-selling, fraud and other market abuses in violation of financial service providers statutory and regulatory obligations toward them. As a result, the use of financial services (for example savings and new technologies such as mobile banking) by new and existing consumers is held back and consumers are less able to benefit from financial services. In addition, the risk of harmful effects to consumers and financial institutions from consumer over-indebtedness and mis-selling scandals increases. 18. Despite a slight improvement in access to finance, Tanzania has relatively low levels of financial inclusion. The Global Findex Database 2011 suggests that only 17.3% of adults in Tanzania have an account at a formal financial institution. Compared to other countries in Southern and Eastern Africa, Tanzania has one of the highest rates of financial exclusion (see Table 2). According to the FinScope survey, the percentage of the population served by formal institutions (banks and financial institutions) increased from 9.1 in 2006 to 12.4 in Despite this improvement, 56% of the Tanzanian population has no access to financial services. Table 2: Access to Financial Services in Selected Southern and East African Countries Adults with an Account at a Formal Financial Institution (% of citizens aged 15+) South Africa 53.6 Kenya 42.3 Mozambique 39.9 Botswana 30.3 Nigeria 29.7 Zambia 21.4 Uganda 20.5 Tanzania 17.3 Malawi 16.5 Sub-Saharan Africa 24.1 Low income 23.7 Source: Global Findex The increased usage of delivery channels has contributed to a growth in the use of financial services. Banking institutions branch networks continued to grow in By the end of 2011, they had 503 operating branches or agencies, 1,117 operating ATMs, and 2,546 point-of-service (POS) devices as compared to 473, 995, and 1,304 at the end of 2010, respectively. Electronic money products are becoming widely available and have the potential to bring many new consumers into the financial sector who previously did not have bank accounts. 6

13 20. In particular, the usage of mobile payments has had a significant impact in facilitating access to financial services in Tanzania. The total number of mobile phone payment accounts exceeded 29 million by mid 2013 compared to 10.5 million in Between 2010 and 2011, the volume of transactions of mobile payment services increased by more than 450%, reaching TZS 5,563 billion. The number of mobile phone subscribers rose to almost 24 million in 2011 from around 20 million in The current growth rates and increased access to mobile technologies among Tanzanian households suggest even further potential of expansion of the electronic money market. Box 1: Overview of the Financial Sector in Tanzania The financial sector in Tanzania is still at an early stage of development. Despite significant existing challenges, the institutional elements of an emerging and formal financial sector are in place: bank and non-bank deposit-taking institutions, credit providers, insurance companies, pension funds and a nascent industry of capital market firms that are providing an expanding range of products and services available in the market. Banks dominate the financial system, accounting for 74% of total financial assets. The banking sector s total assets increased from TZS 13,721.2 billion in June 2011 to TZS 15,150.6 billion in June 2012 while deposits grew by 9.2 percent to TZS 12,267.2 billion. The number of banking institutions increased from 49 in 2012 to 51 in March The microfinance sector in Tanzania relies largely on semi-formal and informal agents to operate. By December 2011, out of the 48 formal financial institutions in the country, only 20 were engaged in deposit-based microfinance operations. A relatively large number of informal agents are currently filling an important gap in the provision of formal financial services (savings and credit) for the lower income segment and in rural areas. SACCOs play an important role in the provision of microfinance services throughout the country. As of March 2013, there were 5,559 registered SACCOs in mainland Tanzania, of which 55% were in rural areas. They comprised 1,153,248 members and represent approximately 25% of clients in the financial sector (including formal and semi-formal organizations). Similarly, there were 71 financial NGOs providing credit services with some 690,000 clients, representing 10% of clients in the financial sector. It is estimated that 3 million people in Tanzania benefit from the existing semi-formal and informal agents in the microfinance sector. By the end of 2011, financial NGOs and micro-credit companies (MFCs) recorded an outstanding loan portfolio of TZS 119 billion. Mandatory pension funds have grown in size over the last five years. There are five mandatory pension funds on the mainland and one mandatory fund in Zanzibar. They are estimated to cover approximately 6.5% of the country s workforce and are the largest institutional investors on the Dar es Salaam Stock Exchange. Pension funds cover 3.5% of the population 6.5% of the workforce and are mainly comprised of civil servants and military personnel. 21. The large share of the population living in rural areas and prevailing low levels of financial literacy are the main challenges to address when designing a consumer protection framework for the microfinance sector. Thus, key priority actions on consumer protection in Tanzania should focus on the following: (i) the development and implementation of a code of conduct for microfinance that follows international best practices and (ii) ensuring transparency and fair pricing of services for microfinance consumers. 22. The pension system currently lacks sustainability which poses risks of default on benefit payments for members. A major concern regarding the pension system in Tanzania is that pension funds are not sustainable and, based on their current assets, may not be able to pay out as promised to members. Given the statutory requirement that the government make up for any shortfalls in the pension program out of the consolidated fund, this could place a significant strain on the state budget. Bringing the pension system to a sustainable path goes together with the development of a sound financial consumer protection framework for pension fund members. 7

14 Financial Literacy 23. Available information on the Tanzanian context highlights the need for strengthening financial literacy. The limited understanding of basic financial concepts, lack of awareness of formal financial products and the financial inclusion or access to finance data show the relevance of financial education. 24. The lack of basic financial knowledge implies a lack of understanding of financial products which limits the use of formal financial services and increases the risk of consumer rights abuses. Financial consumers do not fully understand the financial products available to them (see Figure 1) and end up either not using them at all or signing up out of necessity for products for which they do not know their rights. Most people know what a loan and a bank are, but 40% of people do not know what a savings account or a SACCO is, and 70% do not know what interest on savings means. Price barriers and a lack of understanding of financial products on the market are also notable deterrents. Results of a recent survey on the use, barriers and opportunities related to mobile money in Tanzania suggest that consumers have insufficient understanding of mobile services. Among the top three reasons for not using m-money, 13 percent of nonusers cited lack of awareness about the services and 12 percent named insufficient understanding of m-money. 6 Figure 1: Level of Awareness of Basic Financial Concepts Source: FinScope Survey Almost three quarters of the population live in rural areas where access to finance faces various barriers. FinScope 2009 results show that the excluded, non-monetary and informal categories dominate in rural areas. In 2009, access in rural areas amounted to 8.3% compared to 22.1% in urban areas. This pattern was also reflected in the concentration of bank branches in urban areas combined with a high level of economic informality in rural areas. Poor physical infrastructure in rural areas compounded by prevailing low levels of financial literacy are main constraints for the use of financial services. 6 Mobile Money in Tanzania: Use, Barriers and Opportunities, The Financial Inclusion Tracker Surveys Project, February

15 Figure 2: Access to Finance in Rural and Urban Areas Source: FinScope Survey Access to finance is particularly low for women in Tanzania. Tanzania s population is estimated to be nearly 47 million with about 5% more women than men. The Global Findex Database 2012 suggests only 14 percent of females have an account at a formal financial institutions compared to 21 percent of the male adult population. This is partly due to the fact that women outnumber men in rural areas where access rates are particularly low. 27. Lack of substantial income constrains the demand for and use of financial services. According to the World Bank, in 2011, 35.7 percent of the population lived below the poverty line (less than $1.25 a day). FinScope 2009 showed that various barriers exist to using formal banking services, economic barriers the most prevalent. According to the survey results about 69% of the population receives income from agriculture related sources, 11% from the informal sector and 6% from formal employment (an increase of 2% from 2006). Respondents indicated that they did not have enough money to require banking services and that banks had too many conditions and were not conveniently located. Table 3: Sources of Income of Tanzanian Population Total Mainland Zanzibar Total population ,349,432 21,682, ,740 Mainland/Zanzibar 97.0% 3.0% Source of income Agriculture related 68.50% 33.60% 69.60% Family & friends 31.40% 51.60% 30.70% Running own business 13.90% 10.20% 14.10% Informal employment 11.40% 18.80% 11.20% Formal employment 5.70% 7.40% 5.70% No income 5.10% 7.30% 5.00% Other 8.60% 10.80% 8.60% Source: FinScope 2009 NOTE: Total percentages add up to more than 100%, as some people have more than one source of income 9

16 28. The high percentage of population lacking education beyond primary and the correlated high levels of financial exclusion, especially of the youth, present a troubling situation for financial literacy. Results from the FinScope 2009 survey show that only 17% of the population has secondary education, 2% post-secondary and 1% have university education. The higher the level of education, the greater the likelihood of being formally or semi formally included. Those who have no education are mostly excluded (74%) while 92% of university graduates are formally included (see Figure 3). Evidence shows that there is an increase in financial exclusion of youth between the ages of by 1.2 million from 2006 to 2009 (particularly for youth between years of age). It is estimated that about 50% of the population is under the age of 15, which amplifies the problem. Figure 3: Levels of Education and Access to Finance Source: Finscope 2009 II. Framework for Financial Consumer Protection in Tanzania Institutional Arrangements 29. The overall institutional framework for financial consumer protection in Tanzania for the banking, microfinance and pension sectors is fragmented because of a lack of clearly defined roles and responsibilities among institutions as well as limited enforcement capacity. The MoF is in charge of the overall financial sector policy and development issues. The BoT regulates and supervises banks and financial institutions, while the SSRA is the new regulatory agency for the pension sector. The FCC is an independent government body established under the Fair Competition Act to promote and protect effective competition in trade and commerce and to protect consumers from unfair and misleading market conduct. The powers of the FCC include accepting and resolving consumers requests and complaints, issuing rules and orders that set forth the obligations of institutions regarding their treatment of consumers, and monitoring the performance of various kinds of institutions in complying with their statutory and regulatory obligations. In addition, there are a number of other regulatory agencies and government authorities involved in regulating and supervising MFIs (see Table 4). Currently, the monitoring and enforcement of the existing financial consumer protection rules require improvement because of a limited number of specialized staff and insufficient resources. 30. A coordination mechanism for financial consumer protection between relevant stakeholders is lacking. There are no formal agreements such as MoUs or legal provisions guide coordination and 10

17 cooperation between the various institutions mandated to implement, oversee and enforce consumer protection and financial system regulation and supervision. However, the BoT is currently championing the effort to establish a Financial Regulators Forum comprising all seven financial regulators and the MoF. Although activities of the FCC in the financial sector have so far been limited because of its broad scope of responsibilities and limited resources 7, the commission plans to be more active in the area of financial consumer protection. 8 Coordination between the FCC and the relevant financial regulators has so far been limited. Banking Sector 31. While the BoT has responsibility for enforcing the entire body of banking and financial institutions legislation, so far only a few legal and regulatory provisions mandate the BoT to explicitly deal with financial consumer protection. The Bank of Tanzania Act of 2006 mandates the BoT to regulate banks and financial institutions to ensure the integrity of the financial system and to promote sound credit and banking conditions. Provisions of the BAFIA and its underlying Microcredit Activities Regulation of 2005 grant the BoT the responsibility (i) to supervise, coordinate and control banks and other financial institutions, including non-bank financial institutions, MFCs, and financial cooperatives (FICOs); (ii) to prohibit certain unfair lending and collection practices; and (iii) to protect the rights of depositors and creditors. 32. The BoT is cognizant of the need for a stronger financial consumer protection framework. However, coordination between different initiatives seems to be lacking. Currently there are several ongoing initiatives aimed at establishing an adequate financial consumer protection system within the BoT, with a view to support and contribute to the overall stability of the financial sector and ongoing financial inclusion initiatives. The Directorate of Strategic Planning & Performance Review was tasked by the Board of Directors to work on creating a financial consumer protection unit. It is understood that this Unit is intended to be responsible for consumer protection supervision (but not, for example, for financial education). A draft proposal foresaw the new unit to be established as a separate department within the Directorate of Banking Supervision. 9 However, in the final stages of drafting this report advice was recived that it has been accepted that the Unit should In parallel, the Directorate of the Secretary to the Bank is considering establishing a consumer complaint help desk under the roof of the BoT. At the same time, in 2011, the BoT established a financial inclusion working group (FIWG), including members from different directorates 10 involved with promoting financial inclusion, which has consumer protection and collection of consumer information as one of its priority areas of action. However, internal coordination between the ongoing initiatives needs to be improved because the scopes of the initiatives overlap. Microfinance Sector 33. Current rules and regulations have established a tiered system of regulation and supervision of MFIs resulting in a fragmented framework for financial consumer protection (see 7 Currently, only three staff members work on general consumer protection issues. 8 FCC is currently preparing a regulation on standard contracts that will require financial institutions to submit their standard forms to the commission for review and registration. 9 The draft proposal on the Establishment of a Financial Consumer Protection Unit in the Bank outlines the responsibilities of the new department, including developing FCP policies, regulations and guidelines, supervision and enforcement of FCP regulation compliance, handling consumer complaints and conducting financial education. In addition, the department is responsible for providing advisory services on financial consumer protection matters. 10 Directorates involved include the Directorate of Economic Research & Policy, Directorate of Strategic Planning & Performance Review, Directorate of Financial Markets, Directorate of Banking Supervision and Directorate of National Payment Systems. 11

18 Table 3). MFIs in Tanzania are defined in three categories: (i) formal, (ii) semi-formal, and (iii) informal. Formal MFIs include deposit-taking institutions (i.e., banks with microfinance windows and microfinance companies) that have a formal licensing and supervision structure conducted by the BoT. Semi-formal MFIs are legal entities registered by different government authorities; but their business is either regulated by a non-financial regulator (as is the case with SACCOs) or not regulated at all (such as credit-only NGOs or companies). SACCOs are registered by the Ministry of Agriculture, Food Security and Cooperatives. Financial NGOs are registered by the Registration, Insolvency, and Trusteeship Agency (in the case of a trust), the Ministry of Home Affairs, and the Ministry of Community Development, Gender and Children. Credit-only companies are registered by the Business Licensing Authority. The third category of MFIs covers self-regulated informal institutions that are not registered or licensed, such as savings and credit associations (SACAs), village community Banks (VICOBAs), rotating savings and credit associations (ROSCAs) and village savings and lending associations (VSLAs). Table 4: Regulatory and Supervisory Framework for Microfinance Institutions Type of Institution Formal Institution Banks providing microfinance services Permitted Activities Deposit taking Wholesale microfinance lending Loans License Registration License, regulation and supervision and Responsible Authority Bank of Tanzania (Banking and Financial Institutions Act, 2006) Microfinance Companies Deposit taking Loans FICOS Member savings deposits Loans License, regulation and supervision Bank of Tanzania Semi-Formal SACCOs Credit-only MFIs Financial NGOs Informal Institutions SACAs Village Community Banks (VICOBAs) Village Savings and Loans Associations (VSLAs) Rotating Savings and Credit Associations (ROSCAs) Self-Help Groups (SHGs) Member savings Loans Loans Compulsory savings as loan collateral Loans Member Savings Loans Registration, regulation and supervision Registration Registration Self-regulated Ministry of Agriculture/Registrar of Cooperatives (Cooperative Act, 2003) Ministry of Industry and Trade Business Registration and Licensing Authority (BRELA); Companies Act, Ministry of Home Affairs; Society Ordinance Cap 337 of 1954 Ministry of Community Development, Gender and Children); NGO Act, 2002 Registration, Insolvency, and Trusteeship Agency (RITA); Trustees Incorporation Ordinance, Cap , Written Laws (Miscellaneous Amendments) No. 10 of 1999 and Trustees Incorporation Act of 2002 (Cap 318) None 12

19 Pension Sector 34. The Social Security (Regulatory Authority) Act, 2008 was enacted to introduce a coordinated, central regulatory structure for the pension sector in Tanzania. Prior to 2008, the pension sector had multiple regulators and regulatory structures. Each pension fund reported to a different Ministry, many of which were not specialized in the financial sector. The Act makes the protection and safeguard of the interests of pension fund members one of the explicit functions and duties of the SSRA, which was created in the Act and was established in mid Since then, the SSRA has been putting in place its regulatory policies, procedures and staff and in its first several years of operation has made significant progress in establishing a sound, coordinated regulatory system for the pension industry. Box 2: Overall Reform Agenda in the Pensions Sector The most urgent consumer protection issue facing pension fund members in Tanzania is the weak financial position of the existing schemes, which poses the risk of default of benefit payment for members. The net implicit pension debt is extremely high with regard to the level of coverage of the schemes, all of which, without reform, will require assistance from the government in future. The most urgent issue to be addressed is the position of the PSPF, which is not only insolvent from an actuarial perspective, but will shortly turn cash flow negative and have to start selling assets in order to pay benefits unless the government repays the PSPF for benefits paid on its behalf (dating from pre 1999 when the fund was non-contributory) which are generating substantial arrears. The government has initiated a repayment of some of the outstanding debt, but the amount promised is not sufficient to cover the current liabilities of the Government as they arise let alone deal with the arrears which were estimated to be more than USD 600 million at the end of The failure of the government to intervene will result in the PSPF defaulting on benefit payments which, in turn, will precipitate a crisis in the pension sector. The issue is already receiving attention in the Tanzanian press. In addition to these immediate stabilization needs, consumer protection within the pension sector requires the longer term sustainability of all schemes to be addressed. Contributions at the current rates will not be sufficient to cover benefit payments over the longer term, due to a combination of generous benefits, fragmented market structure, limited returns on assets and expected demographic changes. Parametric reforms involving a combination of changes to the benefit formula (accrual rates, indexation policy, introduction of a defined contribution component, limitations on early withdrawals etc.) will be required. Currently, the different funds are spending considerable resources to try to gain new subscribers, that is, in the context of under-funded defined benefit schemes they are trying to gain new members to be able to pay the old ones. In addition, the rising marketing costs further undermine the funds' financial situations. Along with addressing the financial position of the funds, further harmonization of the legal and regulatory framework covering the different plans is urgently required. The Ministry of Labor and the SSRA have developed a comprehensive program for the pension system reform (the draft Social Security Reform Program ). The program includes a detailed analysis of the main issues in the pension system (for example, unsustainability of current mandatory schemes, fragmented social security system, narrow coverage, low levels of awareness by members of the public on social security issues and limited investment opportunities for schemes). Development and implementation of these plans should be encouraged. 35. Nevertheless, there still exist overlaps of financial consumer protection responsibilities and jurisdictions in the pension sector. All of the mandatory funds were created prior to the SSRA, and each of the mandatory funds under the terms of the statute creating the funds had reporting obligations to a specific government Ministry that had oversight over the fund. 11 In 2008, the SSRA was created as the 11 1) National Social Security Fund (NSSF) under Ministry of Labour, Employment and Youth Development; 2) Parastatal Pension Fund (PPF), under Ministry of Finance and Economic Affairs; 3) Local Authority Pensions Fund (LAPF) under PMO s Local Government Authority; 4) Public Service Pension Fund (PSPF) under Ministry of Finance and Economic Affairs; 5) 13

20 primary regulator for pension funds, including the mandatory funds. In 2012, the enabling laws for the mandatory funds were amended to clarify the regulatory role of the SSRA. However, the 2012 amendments did not completely sever the relationship of the mandatory funds with the Ministries, and residual reporting requirements for the mandatory funds to their relevant Ministries remain. In addition, under the 2008 Act and 2012 amendments, the BoT has the right to review and regulate, among other things, the investment activity of a mandatory fund. The FCC has not been active in this area, but it also may assert regulatory authority regarding the marketing and sale of pension funds to new employees. This could result in a multiplicity of regulations regarding each of the statutory funds and differences in the way each is regulated based on the different establishing laws and the effects of other regulatory entities besides the SSRA. Key Recommendations 36. The unclear delineation of responsibilities between the FCC and the BoT and other financial regulators in the area of financial consumer protection should be addressed. A coordination mechanism is needed to facilitate the dialogue between institutions. A clear consensus around the appropriate rights and responsibilities of the BoT, other financial regulators and the FCC concerning financial consumer protection should be reached by the signing of a comprehensive MoU. A platform of interaction between the FCC and the financial regulators could be regular meetings between the FCC and the planned Financial Regulators Forum for effective information sharing and coordination of actions regarding cross-sectoral activities. 37. It is important to strengthen the capacity of the BoT, the SSRA and the Registrar of Cooperatives in financial consumer protection. Given the current capacity constraints the FCC faces in terms of resources and financial sector expertise, early consideration should be given to strengthen the role of the BoT, the SSRA and the Registrar of Cooperatives in financial consumer protection to ensure improved monitoring of financial institutions compliance with legal requirements and enforcement in case of violations of market conduct regulations. In the medium term, considerations should be given to formalizing BoT s activities in the area of consumer protection by amending the Bank of Tanzania Act. Banking Sector 38. A coordinated approach is needed within the BoT to implement the proposed financial consumer protection initiatives. Consideration could be given to the establishment of a financial consumer protection task force, potentially created as a subgroup under the Financial Inclusion Working Group, to provide for a strategic and coordinated approach to ongoing reforms and initiatives related to the strengthening of BoT s internal financial consumer protection framework. 39. The optimal organizational structure for the new financial consumer protection unit should be closely analyzed by the BoT. A detailed assessment regarding the setup of such a unit should be conducted, including staffing requirements and skills, and the role of the unit in prudential supervision. Placing consumer protection in the same central bank department as prudential supervision creates potential conflicts with the traditional and long-standing prudential supervisory roles and a dedicated unit for consumer protection should be designated or established instead. International experience shows that if a supervisory agency adopts consumer protection as part of its mandate, business conduct supervision Government Employees Provident Fund (GEPF) under Ministry of Finance and Economic Affairs; 6) Zanzibar Social Security Fund (ZSSF) under Zanzibar Ministry of Finance and Economic Affairs. 14