Tanzania’s largest bank

Denmark has invested millions of dollars in Tanzania’s largest bank, CRDB, which gives microloans to some of the country’s poorest. Microloans are viewed by some as the most important tool for the eradication of poverty. But it is not charity – it is business, emphasises economist and Nobel Prize winner, Muhammed Yunus

By Marlene Lyhne Sørensen

The New Fashion grocery shop is owned by Lydia Mbilinyi. She is a member of the Faraja Trust, one of the microfinancing organisations that receives loans and assistance from CRDB Bank.
Photo: Mikkel Østergaard, Danida.

When a poor woman in the village of Mafinka in Tanzania wanted to borrow money for a circular saw, she went to one of the country’s local co-operative banks and obtained a loan for the equivalent of 1,000 US dollars. Today, seven years later, she has a sawmill employing nearly 100 people which supplies timber to the entire local area.

The story is recounted by Jens Ole Pedersen, a representative of Danish International Development Assistance (Danida) and deputy managing director of Tanzania’s largest bank, CRDB.

In the early 1990s the bank was close to bankruptcy, but after an injection of some 3 million US dollars in financial support from Danida, the bank managed to survive the crisis. Today it has more than 60 branches and collaborates with about 400 cooperative banks, called Savings & Credit Co-operatives.

The bank loans money to the cooperative banks, which in turn provide microloans to their members, who are too poor to get an ordinary bank loan, because they cannot provide the necessary security.

“Microloans often have a significant effect on living conditions for the poor. They go from having nothing to having a monthly income, which puts food on the table and a roof over their heads, and provides schooling for their children,” says Jens Ole Pedersen. “The borrowers rarely have an education, but they have plenty of business talent.”

Business – not charity
Microloans gained significant ground in 2006, when the Nobel Peace Prize was awarded to the Bangladeshi economist Muhammed Yunus – the doyen of micro-credit pioneers. Yunus is the founder of Grameen Bank in Bangladesh, a gigantic grassroots bank with 2,500 branches and about eight million borrowers among the country’s poor – especially women.

But although microloans are targeted to the world’s poor, they are not to be equated with donations from well-intentioned development organisations, Muhammed Yunus expressly pointed out during a visit to Denmark this summer.

“Microloans are not charity. It is business. It is not about helping the poor, but about creating structural changes that can provide a lasting solution to the poverty problem,” says Muhammed Yunus, who advocates a business model where the yield is not measured in terms of profit, but in usefulness to society.

Jens Ole Pedersen on the other hand is clear in his view that CRDB Bank exists to earn money:

“CRDB is not a philanthropic project and I don’t think there is anything shameful about earning money. But the lending rate to the co-operative banks is relatively low, so it is the co-operative banks which make the largest profit when they lend
the money to their members in the local society. In addition the surplus stays in the co-operative banks, so that the money can be used for new investments in the area,” says Jens Ole Pedersen.

The co-operative banks determine the lending rate, which fluctuates between 18 and 30 per cent, and the loans are usually paid back within a few months.

Almost a million borrowers
Both in Bangladesh and Tanzania, impressively high repayment rates of more than 95 per cent have been achieved from poor people – borrowers who the conventional banks will not touch. The large repayment rate is gained from organising the borrowers in groups, which has promoted a collective responsibility mechanism.

“They are liable to each other, and that has developed significant financial self-regulation in the co-operative banks,” explains Jens Ole Pedersen.

With support from Danida, CRDB Bank oversees the training of personnel and boards in the co-operative banks, and the principles for running a decent and law-abiding business are especially emphasised.

“We visit the co-operative banks once a month to ensure that the principles are being complied with. It won’t do, for example, if board members are sitting there giving themselves one loan after another. They must work in the members’ interest – not in their own. If the latter is the case, the board is replaced. So far it has happened five times in seven years,” says Jens Ole Pedersen.

The bank now has a loan portfolio of about 800 million US dollars, of which 10 per cent is used for microloans.

“The microloans comprise around 800,000 people who would otherwise never be able to get a loan. CRDB Bank’s objective is to reach 1.2 million in a couple of years,” says Jens Ole Pedersen.

Customers wait at the desk in CRDB bank in Dar es Salaam.
Photo: Mikkel Østergaard, Danida.

Loans for African entrepreneurs
The interest in lending to poor entrepreneurs in developing countries is growing, and in Denmark it has triggered a growing number of new initiatives.

2007 saw the opening of the internet portal MYC4, where private individuals, companies and organisations can offer loans to companies in Africa.

“We are building a platform which points the way out of poverty not least for African women, of whom only one per cent have their own bank account. The objective is to eradicate poverty in the world by the end of 2015,” says Mads Kjær, who is chairman and one of the two initiators of MYC4.

The investments take place via MYC4’s collaboration partners in Africa, known as providers, who find, screen and approve the entrepreneurs applying for loans: for example Aisha Namakula, who has a farm in Uganda where she rears chickens which are sold to supermarkets and schools. She wants to expand her business, and is applying for a loan for chicken feed and vaccines.

The providers create a profile of Aisha Namakula with the project and the desired loan sum on myc4.com.

Investors can then go in and offer a proportion of the loan sum at an interest rate of between 1 and 25 per cent. The smallest offer is 10 euros, and hereafter the process is based on the Dutch Auction principle, which gives the borrower the lowest possible interest. Currently (August 2009) the average interest rate for investments on MYC4 is 13.1 per cent.

Equal-minded help
One of the more than 15,000 investors who have put money into entrepreneurs in Africa, is Flemming Aanæs, a Danish management consultant.

“Previously I donated money to aid agencies, but I prefer to give the money as loans. It is a more equal-minded way to help, and I can follow what the money is used for. In addition the money delivers the maximum utility effect when it gets companies to grow,” says Flemming Aanæs.

He has no expectations or desire to earn money from the African entrepreneurs, but hopes the investments are sustainable. So far he has invested about 8,000 euros in cattle farming and a goldsmith.

“I am running with a small deficit because not everyone has made their monthly repayments. I could choose to take a higher interest, but I think it is the wrong signal to send. I am not doing it to make a profit, but in the hope of helping people out of poverty,” says Flemming Aanæs.

Investment results in surplus
The UN has the goal of halving poverty in the world by 2015, and Nobel Prize winner Muhammed Yunus believes that microfinance is the most important means of reaching the goal.

“The right financial structure is a fundamental tool because it covers all the economic aspects of life. Your savings, your children’s education, technological development, earnings, employment,” says Muhammed Yunus.

Jens Ole Pedersen of CRDB Bank agrees that a well-functioning financial sector is essential for creating development.

In Tanzania, it has even turned out to be good business for Danida to invest in an ailing bank sector. CRDB Bank was recently listed on the stock exchange, and Danida is now gradually selling its shares in the bank. The original injection of about 3 million US dollars corresponded to 30 per cent of the share capital, and that share is currently estimated to be worth between 15 and 30 times more – i.e. between 50 and 100 million US dollars.

“So in addition to having created many local jobs, the investment has resulted in a large surplus, which will be used for other development projects in Tanzania,” says Jens Ole Pedersen.