Business Plan To Start Up A Microfinance Institution In .

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Business planPrivate and confidential“FOR STARTING A MICROFINANCE INSTITUTION IN TANZANIA”Dar-es-SalaamJune 20091

Table of ODUCTION AND BACKGROUND .3Executive Summary.3Mission and Goals . 3Macroeconomic Economic Situations in Tanzania .4MARKET AND CLIENTS .5Market .5Microeconomic Background .5Clients .7Business Environment Analysis .9Competitors .9Opportunities and Threats .11CORRABORATION AND PARTNERSHIP .12Global Network . 12Cooperating Partnerships .12Regulatory Policies .13Transformation into a Microfinance Company (MFC) .14INSTITUTIONAL ASSESSMENT . 15Credit and Savings Program .15EEA's Marketing Channel .17Board and Management .20Roles and Responsibilities of the Board Managements . 22Institutional Responsibility and Capacity .22Risk Management and Controlling .28Financing Strategy . 28FINANCIAL PROJECTIONS .32APPENDIXES1. List of Global Advisory Board .362. Job Descriptions . 373. Characteristics of the Target Audience . 372

1. INTRODUCTION AND BACKGROUND1.1. Executive SummaryEmpowerment Enterprises of Africa (EEA) was incorporated as a non-profit organizationunder the laws of the United Republic of Tanzania in 2008. Its headquarters are located inthe capital, Dar-Es-Salaam. The organization was formed with the purpose of providingsocial and financial solutions to the poor. The existent business plan provides a rationalframework for the microfinance part of EEA.The Company was founded by Dr. Jasson Kalugendo and Jerry Twombly who, alongwith Dirk Sander, are actively managing the company. EEA has already started a microlending pilot project in Dar-City and has scheduled to roll it out to 200 families inGongolamboto (underserved area in Dar-Es-Salaam city), by the end of 2009, incollaboration with other stakeholders. The EEA intends to use Grameen Bank model,developed by Nobel Peace Award winner, Muhammad Yunus.EEA intends to reach out to 10,000 poor families in Tanzania with microloans in the nextfive years in Gongolamboto, Kinyerezi, Chanika and Kigamboni. Achieving this goalEEA will expand its business in 2013 to Dakawa, Morogoro Region. EEA managementphilosophy is to gain self sufficiency within five years. For that purpose, the managementrestricts the fundraising portion with a declining percentage of 100% in year one down to55%, in year two, 50% in year three and 30% in year four. In 2014, EEA does not expectto require any more grants.This document won‘t be possible without the hardworking of Dirk Sander, a holder ofMBA in Accounting and Controlling. Dirk has invested a great deal of his time andresources to develop this important document because of his passion to those who liveunderserved conditions in Tanzania. EEA Governing Board is grateful to his support.1.2. Mission and GoalsEEA exists to empower people economically while ensuring that those who live inpoverty, particularly vulnerable women and children, are served in body, mind, and spirit.The springboard of EEA is compassionate micro-finance lending that includes a range ofsupport services for its members through multiple local programs in strategic rural andurban areas of Tanzania, and will eventually spread to other countries in Africa. By 2025,EEA expects to empower the entire population of one million Tanzanians to move out ofextreme poverty through strategic goals:a) Microfinance. This includes urban and rural lending, community owned banking,and asset development strategies.b) Community Investment. This comprises consumer-owned businesses, socialbusinesses, and social investment.3

c) Entrepreneurial of Entrepreneurship. This involves small-business development,hands-on learning, technical know-how culminating in self-employment, and lifeskills development.d) Dynamic social network. This involves sharing resources, local and globalinterdependence, and mobilization of social networks.As a Microfinance Institution, EEA intends to increase opportunities for the poor toaccess financial services by providing financial services to low income entrepreneurs,mobilizing deposits from members and non-members and then loaning a certainpercentage of these funds to urban and rural producers, traders and small scale farmers.EEA‘s core values are enhancing their clients‘ self-determination, serving as an ongoingfinancial resource for members, and achieving significant outreach and financial selfsufficiency.1.3. Macroeconomic Situation in TanzaniaThe United Republic of Tanzania is situated in East Africa and part of the Sub-Saharanarea with a total surface of 945.087 square kilometers and a population of 40,3 million(Mainland and Zanzibar). The country gained its independence in 1961. In 1990, themainland of Tanzania initiated a political transformation process to a multi-party system.Between 1999 and 2002 the economy picked up by an average of 6 % and by 2007 thegrowth rate (7.1 %) was comparable to the early years of independence – (URT - UnitedRepublic of Tanzania, 2008).The inflation rate has been relatively stable during the last seven years with an average of7% but it has increased significantly during the last 6 months, with a growth up to 11.3%in April 2009 (BOT, 2009). The population living below the poverty line (income isunder one dollar a day) was 35.7 % in 2000/01. About 80 % of the population in Tanzanialives in rural areas with agriculture being their main activity (Morrissey et al., 2005). In2002, the agricultural sector in Tanzania contributed around 45% to the GDP (GrossDomestic Product), of which subsistence farming accounted for 20 and 81% of GDP andtotal employment in Tanzania, respectively. The sector has maintained a steady growthrate of 3% and is said to be a major accelerator of economic growth. Despite the sector‘scontribution to the economy, its growth rate is seen as insufficient to improve thelivelihood of the rural people as the rural areas account for around 80% of the 17 millionpeople living below the poverty line (Wangwe and Lwakatare, 2004). In 2000/01, 39% ofthe population living in rural areas in Tanzania was below the basic needs poverty line,compared to around 26 % in urban areas excluding Dar-Es-Salaam.The impacts of a socialistic one-party government system led to a decline of oldtraditions, melting of social ties, and timidity to engage in self-employment orentrepreneurship. These were some of the primary reasons for the poverty. The mainpolitical objectives in the last decade have been, therefore, the development of a nationaleconomic growth and poverty reduction strategy initiated by the World Bank and IMF(International Monetary Fund). Tanzania enjoys political stability though the physicalinfrastructure and functioning executive, legislative, education, health, and juridicalsystems are poorly developed. Recently, the government has policies and regulations inplace to maximize the utilization of domestic and international resources in a strategy toreduce poverty and eliminate social problems in the country.4

A very serious problem for Tanzanian society is the HIV/AIDS epidemic. The countryhas high rate of infection with around 6% of population ages 15-49 carrying the disease(WBCR, 2009). According to the Health Sector Performance Profile report provided bythe Tanzanian government, the costs of treating AIDS cases could easily consume half ofthe country‘s health budget, a factor that slows down the country‘s strategic efforts onpoverty alleviation.2. MARKET AND CLIENTS2.1. MarketAccording to a study of PRIDE (Promotion of Rural Initiative and DevelopmentEnterprises), a major microfinance oriented NGO, ―it is estimated that there are close toeight million small and micro entrepreneurs who need financial services, and the numberis growing by 4% percent annually, the majority of whom are found in the rural areas‖(PRIDE, 2009). That is 20% of the country‘s population, mainly dealing in the informalsector.At the beginning of their microfinance activities, EEA is focusing on the urban informalsector. This sector contributes 43% of the country GDP. Also it contributed 35% to thetotal urban labor force (URT, 2003). In Dar-Es-Salaam Region, the informal sector offersabout 65% of the city's labor force (URT, 1995). Nearly two of three urban householdsown informal enterprises (URT, 2003).EEA decided to boost informal sector by providing financial services to their actors.Although there are contradicting views regarding the relationship between poverty andthe informal sector, without it, the poverty situation of the affected families would havebeen much worse (Orlando, 2001). At the beginning, EEA selected four underservedtarget areas for their credit program to informal micro entrepreneurs. All are situated inIlala, one of three districts of Dar-Es-Salaam Region.Furthermore, EEA is chiefly committed to empowering the communities in rural areasbecause of the fact that their access to financial services is extremely limited. The initialcommunity to be reached during the pilot phase is Dakawa, a village in the MorogoroRegion, 300 km away from the EEA Head Quarter in Dar-Es-Salaam City. For furtherdetailed information regarding demand, market penetration and opportunities, see section3.1 Competition.2.2. Microeconomic BackgroundGongolambotoGongloamboto is one of the wards of the Ilala Municipal with an estimated totalpopulation of 15,000 people. The Ilala Municipal belongs to Ilala one of three districts inDar-Es-Salaam. The district includes an estimated 783,687 people found in 65 wards and102 sub-wards (URT – Dar-Es-Salaam City Profil 2004). The area of Ilala is 273 km² and5

is about 20 km away from Dar-City, where much of the commerce, banking and nationaloffices are located.Despite the high urbanization rate of Dar-Es-Salaam Region (93.9 % – Morogoro, 2007)and the narrow to the capital, the Ilala District is defined as an urban agriculture sector.Only a quarter of an entire population is involved in non-agriculture, mainly in theInformal Sector (95 % – URT, 2008). Typical small scale businesses include: streetvendors, shop sales workers, and crafts men. Majority of people work in petty cashbusinesses in which they can buy only the food of the day. Although the poverty rate isonly the half of the country average, Ilala residents do not have savings for retirement,medical expenses, life insurance, or plan for sending children to school.Agriculture activities are based on small and large scale crop farming mostly using poorhand equipments. GDP per capita for Dar-Es-Salaam is to be USD 437 with 35% of thepopulation earning an average low income of USD 24 per month (URT - Dar-Es-SalaamCity Profile, 2004).From Gongolamboto EEA will expand their business later to Chanika with 23,000 andKinyerezi with 5,800 resident, and the forth area in Ilala will be Kivukoni with anestimated population of 50,000.1DakawaDakawa is a small village that is located along the Morogoro – Dodoma highway. Thevillage is found in Mvomero district which is among the six districts of Morogoro region.The regions country size is about 73.000 km2 with a total population size of 1.7 Millionpeople. Morogoro GDP is 5.39%, so that the region ranked eighth out of 21 regions(URT, 2006). The per capita GDP of Morogoro Region is USD 311. The relatively wellgrowing economy is reflected in a surplus of 4.1 % in-migration (Morogoro RegionalCommissioners Office, 2006).The total human population in the Mvomero district was estimated to be 280,475 peoplein 2006 (URT, 2007), and this accounts for a population density of 37.9 persons/km2.This is relatively low as compared to the average of the Mainland. About 40% of thepopulation is in the reproductive age (15-44 year old). Mvomero‘s urbanization level isvery low. Only 11.5% of the district population is living in urban areas (MorogoroRegional Commissioners Office, 2006). The main industry of the labor force depends onagriculture (90%).1Kivukoni has a special status, because of its high population density and the fact that 15 MFIs includingNMB have their offices and branches within this ward. Half of the underserved micro-entrepreneurs in thefour target areas are living and working in Kivukoni. The microfinance market is a growing sector andattracts more competitors. Because of a relatively proper infrastructure and their high population density,Kivukoni is one of the most attractive markets in the Dar-Es-Salaam Region - foremost for commercialBanks that can easily expand their business to this ward. This is a significant market risk for new playerswith minimum initial infrastructure like a start up. That is why EEA‘s implementation plan puts Kivukoniin forth priority.6

The major economic activity in Mvomero district is crop farming, employing 81% of thetotal labor force. But only 2.1% of the crop farming production is sold (National SampleCensus of Agriculture 2002/2003). Banana, cassava and maize are among the major foodcrops grown in the District. Sugarcane, coconut and sesame are among the major cashcrops. Coconut and sesame are sold generally by the smallholders. Due to the rainfallseasons between November and May, half of the crop selling farmers store crops for threeto six months. There is a high variation of the price within the region that indicatesinefficiencies of the crop marketing system. For instance, the price for sesame varies byTsh 500 between Kilosa and Morogoro District. Other occupations that employ asignificant number of the labor force include livestock, crafts, small business, streetvendors, professional jobs and other elementary occupations.Smallholders are the main keepers for chicken, cattle, goats, and dairy cattle in Mvomero.The largest proportion of all livestock kept is chicken (55.5%), followed by cattle (22.6%)and goats (18.6%). The proportion of dairy cross cows accounts for approximately 50%of dairy products in the region. Dakawa village, which is situated in the MvomeroDistrict, is 40 km away from Morogoro Municipal. There are about 7,000 residing inDakawa. Despite the fact that Dakawa is more than two times larger than the average ofthe villages in Mvomero District, the distribution of occupation of the labor force and theindustry is comparable with the district figures.Special market opportunities in DakawaThe Rural Livelihood Development Company (RLDC) is engaged to boost organic cottonfarming in the Morogoro Region. RLDC is a NGO funded by the government of Tanzaniain cooperation with Swiss Government through Swisscontact. RLDC is looking forMicrofinance Institutions (MFI) extending micro-credit schemes to small-holder farmersso that they can afford to purchase agricultural inputs and improve efficiency inmarketing agricultural produce. For that purpose, EEA will customize their loan productprogram to meet the specific needs of agricultural small scale business. For instance, aloan product with a grace period and weather insurance could be an appropriate option.2.3. ClientsCustomer profile is based on survey results explored by Finscope, ―a comprehensivenational household survey focused on the financial services needs and usage across theentire South and Southern African population‖ (Finscope, 2007). The TRIODOS Bankhighlighted following characteristics of the potential microfinance clients:Population57% of the adult population is less than 34 years, and mainly rural-based (72%). Inaddition, there are approximately 14 Million people under 16 years.Financial accessA large segment (54% overall; 45% of urban, 57% of rural) of the adult population has noaccess at all to financial services, either formal or informal (overall, 9% have a formalbank account (11% men, 5% women, 16% urban, 4% rural), 2% have access to semiformal finance [NGOs, Saving And Credit Co-Operative Societies – SACCOs] and 35%have access to informal finance like ROSCAs/ASCAs and moneylenders – these7

categories are mutually exclusive). Only 20% of the population has access to formal bankin a 1 hour walking distance.Financial literacyThis is generally low, and lower still for women and for people living in rural areas (92%of the population has heard of loans, but 84% do not understand how interest rates work,or collateral, guarantors, opening an account etc.; 27% have never heard of a savingsaccount). Beyond loans and savings, financial literacy is close to nil (e.g. on insurance,Automatic Teller Machines). Nevertheless, 82% of the total population indicated that theywould like to know how to open an account in a financial institution. This indicates ahuge need for more as well as better communication regarding financial services with thelarger population.Sources of incomeOnly 4% of the population is employed in the formal sector. Most people make a livingfrom agriculture, either by selling food crops (36%), cash crops (12%), cattle/livestockproduce (9%), or livestock (11%). Others run an informal small business (28%), not(directly) related to agriculture. A large majority of people (61%) go without cash incomeat times. Many (28%) depend on getting money from family and friends.Use of credit and loan facilitiesOf those that borrow, most (38%) turn to family and friends. An additional 33% get loansfrom kiosks, 23% borrow in-kind (e.g. livestock). Only 4% said that they have a loanfrom a bank (5% of men, 1% of women). SACCOs and MFIs (Microfinance Institutions)serve only a small percentage of all borrowers (9% and 6% respectively).Use of savings facilitiesMost people with money do not save it with a bank or financial institution. Of those whosave, four out of ten favor saving in-kind (even more so in rural areas) and three out often say they keep money in a secret hiding place (similar for urban and rural). Anotherinteresting aspect is that of the people with a bank account (9%), many save with orborrow from informal providers (48%), SACCOs (26%) or MFIs (15%) (Regardingmoney lender

EEA will expand its business in 2013 to Dakawa, Morogoro Region. EEA management philosophy is to gain self sufficiency within five years. For that purpose, the management restricts the fundraising portion with a declining percentage of 100% in year one down to 55%, in year two, 50% in year three and 30% in year four. In 2014, EEA does not expect

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