i ST. AUGUSTINE UNIVERSITY OF TANZANIA SCHOOL OF LAW The The The The Legal Legal Legal Legal Validity Validity Validity Validity Of Of Of Of Informal Informal Informal Informal Loan Loan Loan Loan Securities Securities Securities Securities (Collateral (Collateral (Collateral (Collateral Securities) Securities) Securities) Securities) In In In In Securing Securing Securing Securing Commercial Commercial Commercial Commercial Loans: Loans: Loans: Loans: A Casa Casa Casa Casa Study Study Study Study Of Of Of Of Kagera Kagera Kagera Kagera Region Region Region Region A Dissertation Dissertation Dissertation Dissertation In In In In Partial Partial Partial Partial Fulfillment Fulfillment Fulfillment Fulfillment Of Of Of Of The The The The Requirement Requirement Requirement Requirement Of Of Of Of The The The The Award Award Award Award Of Of Of Of The The The The Degree Degree Degree Degree Of Of Of Of Bachelor Bachelor Bachelor Bachelor Of Of Of Of Laws Laws Laws Laws Of Of Of Of St. St. St. St. Augustine Augustine Augustine Augustine University University University University Of Of Of Of Tanzania. Tanzania. Tanzania. Tanzania. Laurian Laurian Laurian Laurian Benan Benan Benan Benan June 2014
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ST. AUGUSTINE UNIVERSITY OF TANZANIA...viii TABLE OF STATUTES Bankruptcy Act 1542 (Uk). Debtors Act 1869 (Uk). Loans Recovery Act (Cap. 6.04) Of The Laws Of Malawi. The Bank Of Tanzania
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The undersigned certifies that he has read and hereby recommended for acceptance by St.
Augustine university of Tanzania, a dissertation titled; TheTheTheThe legallegallegallegal validityvalidityvalidityvalidity ofofofof informalinformalinformalinformal loanloanloanloan
It has been a traditional approach to the most business men and money lenders that borrower/
lender must advance a loan security3 to the creditor as the way of assuring commitment that
he will pay the debt, (has it is agreed). Since times loan security has been interpreted to mean
formal evidence that a property has been deposited or bond or the like interested into a person
on behalf a person in order to secure fulfillment of his obligation.4
This approach therefore has been a turning point in categorization of loan as secured and
unsecured loan;5 secured loan has been the dominant and preferred category since the lender
is assured from the risk that may cause the borrower to default to repay the loan. However, in
recent day due to the growth of multilateral economic system and different financial
techniques, loan security is no longer necessary this is financially termed as secured lending6
since it involves collateral loan security.
In south Africa, unsecured lending seems to grow rapidly and preferred by most financial
institution reported, the guardian7…the market for unsecured loans which are not barked by
collaterals grown rapidly in recent years… unsecured credit rose by nearly a quarter…to 453
rand ($45billion )from a year ago. In Tanzania at minimal level Tanzania, financial
institutions despite the high need from Tanzanians of lower have reflected this modern
financial lending system and middle economic level has the hope of improving their capital.
The true legal position in Tanzania is not clear to whether the financial law in Tanzania
promotes or discourage this modern loan taking in many cause the financial laws seems to
reflect the traditional category that the borrower must show a certificate of either land, house
3 Defined by Encyclopedia Britannica (online).
4 Court interpretation in Jiwanlal vs. Rame Shwarlal, AIR (1967)SC 1118.
5 www.lescobank.com/loan visited on 29TH November 2013.6 The GUARDIAN 29th November, 2013, news tatled “sourth africa banks ease pace of unsecured lending”7 Ibid.
Chipeta and Mkandawire, (1991).11 The institutions involved in this sector can be classified
as individuals, associations, business firms, and governmental and non-governmental
organizations. The common feature of lenders in this business is that they accept securities,
which are not subject to registration or, licensing procedures, or to monetary and financial
policy control.
11ChancellorChancellorChancellorChancellor CollegeCollegeCollegeCollege UniversityUniversityUniversityUniversity ofofofof MalawiMalawiMalawiMalawi and NationalNationalNationalNational BankBankBankBank ofofofof MalawiMalawiMalawiMalawi respectively in their article“FINANCIAL INTEGRATION AND DEVELOPMENT IN SUB-SAHARAN AFRICA: INFORMAL FINANCESECTORIN MALAWI”
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Legally, literature seems to suggest that both customary and modem law recognize informal
finance and provide adequate protection to both informal lenders and informal borrowers.
under tribal law both the loans and the guarantor's obligations are enforceable, In practice
courts are rarely used by moneylenders recover loans the existence of informal lending
activities Is acknowledged through the 1934 Loans Recovery Act12 for unregistered lenders
and the Cooperative Societies Act13 for registered Societies14
In Tanzania there is no a specific statute which cover this business but only provisions under
different statutes, which provides for some elements15 together with the number of
regulations16. The position under The B O T Act is that, the primary objective of the Bank
shall be to formulate, define and implement monetary policy direct to economic objectives of
maintaining …growth of the national economy.17 This provides the better position for
Tanzanian economic system incorporate unsecured lending system for the growth of national
economy through the functions of the Bank. But none of the legal binding provision which
require the banking institution to accept borrows with no formal securities mainly from rural
area.
The very limiting provisions are provided under section 25(4) of the banking and financial
institutions Act18 which provides that for person to qualify for large exposure accommodation
must have a security against cash, or granted by an international bank. This is a remarkable
disqualification of individual in informal business who has no such securities to receive loan.
Despite the presence of big relationship and interconnection between informal business
12 (Cap. 6.04) of the Laws of Malawi13 (Cap. 47.02) of 1946. for registered14 supra15 THE BOT Act, no4 of 2006, the banking and financial Act, Act no 5 (2006) and the corporative societies Act,no 20 of 2003.16 The banking and financial institutions (management of risk assets) regulations, 2008, GN No 374 of 2008.And the banking and financial institutions (Tanzania mortgage refinance company) regulations, 201117 BANK OF TANZANIA ACT, no4 of 200618 Act no 5 (2006)
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sectors, and micro finance sector has they both deals with meddle and lower capital subject
for unsecured loan.
COSMASCOSMASCOSMASCOSMAS STEPHENSTEPHENSTEPHENSTEPHEN (2012)(2012)(2012)(2012)19191919 observed, “Most micro-finance institution requires the
aspirants of loan to provide collateral security in order to be given loan. For the poor people,
this a big obstacles the most fail to provide the required collateral security and so they are
assured to miss the loan” This overturn the burden of providing unsecured loans from micro
finance sectors even though financial sector considers to be its concern since most of its
programs use techniques and products adapted to the circumstances of low income clients.
Particular techniques may vary widely. A variety of collateral substitutes and repayment
incentives can be used so that loans are not secured in conventional sense but are adequately
protected against risk”. The policy gives the best position with no any implementation since
both the BOT Act and the financial institutions Act 21 does not provide a clear position.
The policy if it would have reflected by said laws it would have solved the problem has it
seems to consider the importance of this lending system in Tanzania where the most nationals
have no formal security. The policy also go father to provide that; one of the main differences
between micro-finance loans that is not secured in a conventional manner. It will be
necessary to develop methods of supervision to allow such lending to take place…22
This marks the duty of the government to implement its policy. “Bank shall ensure the
integrity of financial system and support the general economic policy of the government and
19 FacultyFacultyFacultyFaculty ofofofof BusinessBusinessBusinessBusiness Administration,Administration,Administration,Administration, St. Augustine University of Tanzania20 At page 1321 supra22 The national micro-finance policy of 2000.
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promote monetary credit and banking conducive to the development of nation economic.23
The question remains on how this legal requirement has been implemented by the BOT, and
the striking force of the government to the BOT to implement its duties towards the unsecured
lending system has it is identified by, The national micro finance policy of 2000.
SHEKHAR(2009)SHEKHAR(2009)SHEKHAR(2009)SHEKHAR(2009)24242424 Acknowledges the different forms of lending money by using informal
security lending money is recognized in the following ways “usually indigenous bankers lent
money on promissory notes or receipts signed by the borrowers acknowledging the
loan……,They also lend money against bonds written out in stamped legal formals states all
the conditions of the loans in detail…’’ This form are not experienced in the financial system
of Tanzania only because the law is silent and thus banks decided to take an advantage that
each lending transaction must be secured by mortgage of certificate of house, land or other
immovable properties. A number of advantages for this system have been appointed
including role played banks using this form to poor reserved areas by formal financial system
such as development of equity banking and friendliness business between banks & bankers
and the spread of cooperation principals among the rural mass & growth of cooperative
27 THE BOT Act, no4 of 2006.28 The banking and financial Act, Act no 5 (2006).29 Cited above.30 Oxford advanced leaners english dictionary.31 http://www.investopedia.com/terms/c/collateral.asp, visited on 03rd June 2014.32 http://www.ehow.com/about_4608402_non-collateral-loans.html, visited on 03rd June 2014.
The most known forms of loan security is said to be secured either in formal or informal,
modern or traditional, secured or non secured, collateral or non-collateral. it can father be
categorizes lending system depending on its area of application as public or private security,
written or non written security, or even systematic and non systematic lending. Also
registered and none registered secured.36
33 http://mkombozibank.com/?page_id=163, visited on 3rd June 2014.34 Also known as the ILO definition of the informal sector.35 Roadmap Study of the Informal Sector in Mainland Tanzania (ILO UNIDO), DAR ES SALAAM, APRIL 2002.36 Exucutive Director, FADCCO community radio interviewed on 4th sep. 2013.
From the above distinguished forms, only two inclusive types of loan can identified, that is
formal/secured loans and informal/non secured loans. This will automatically determine what
type of security has to be advanced as a loan security. formal loans are said to be traditional,
public, registered and systematically secured in written form. while informal loans are said to
be modern, non collateral, private and non systematically secured, normally in oral form or
even partly written.
BUKALIYA, R.37points out that, “the loan can take the form of secured and unsecured
loans... secured loans, these are form of loans where the lender has specific right to take over
specified asset of a borrower in case of default on interest payment or capital payment”.
Example of this form is mortgage on registered land and buildings, but unsecured loans
lender/bank grant loans without any specified and registered security or guarantee normally
considered low risk. The interest rate is usually higher to cover the additional risk compared
to unsecured loan which are also termed as household loans
BBC-SWAHILI38 reported from Beijing-CHINA the new way of securing loans. Lenders
were seen boding their expensive ring, bags, gold and watches to lenders who are not even
known to them and without any written document and they are given sum of money as loan in
advance.
“wanakuja hapa na kuweka lehani mikoba yao ili kujipatia fedha na kuikomboa baadaye….”
Said one of the business men from Beijing. This is system of lending in Beijing is a good and
significant example of informal loan security in modern way, as it is free from technicalities,
it is simple and a person can acquire loan within a short period of time.
Financial leasing as been recently termed among simple and beneficial forms of securing
loans in Tanzania39 under this program the lender on one side, the borrower and the seller of
working machine or equipment are involved to secure loan advance in relationship created
37 ZimbabweZimbabweZimbabweZimbabwe OpenOpenOpenOpen UniversityUniversityUniversityUniversity , The African Symposium: An online journal of the African EducationalResearch Network38 BBC-Swahili, television program, on 25th sep. 20013 at 9.00pm39 TBC1, BOT special program on financial leasing, on 24th Feb. 2014 at 10.00pm.
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under privit to contract, This form carries both informal and formal elements, we can say that
Loan security in both company law, financial law, and business law is understood as a
guarantee from the borrower that he will repay back the sum lendered, on time and condition
thereof. As to this factor lending business is created and differentiated from mere contractual
relationship.
Risk of loan is considered as the central reason as to why financial loans must be secured, that
the lender is assured, that certainly he as to receive profit whatever default or delay to repay,
and therefore in financial words lending is also investment
ROBERTS, M.41 he as termed security as a consideration in investment contract or other
valuable consideration made in the expectation of receiving a financial return solely from the
efforts of others. It is agreed that the more the risk to repay the loan the more the security
value is. In normal contracts a person can raise a defense of non performance of the contract
that was due to some reasons such as sickness, death, non natural acts and the like of such
nature, in lending business agreed parties do not contemplate any reason to subside the
repayment of a debt. If the debt is not paid then, lender acquires the right over the property
pledged, to compensate the sum advanced as a loan42. A person who duly secured would have
the protection of the law in priority over unsecured creditors43
Security is an insurance against foreseen and unforeseeable circumstances44 the lender/bank
avoid the full consequences of the customers/borrowers bankruptcy or liquidation. If is not
40‘’ Ukodishaji lasilimali ni mfumo wa kumuwezesha mkopaji kuodhi maliinayodhaminiwa na mkopeshaji…’,pointed by prof. HISSA JAIRO, from BOT.41 In his book conteporally business law, university of North Carolina, west publishing co. St. Paul.42 ALPHONCE, M.A AND URIO, J.F; ASPECTIS OF BANKING AND MICRO-FINANCE LAW.43 The decision of house of lords in, Salomon v Salomon & Co Ltd [1897] AC 22.44 Cited above, footnote No.7 above.
Lending business started a long time ago, it is believed that seeds and animals was lent out on
interest as early as c. 5000 BC, Among the Mesopotamians, Hittites, Phoenicians and
Egyptians, interest was legal and often fixed by the state48. In middle Ages, Major thinkers
throughout history Plato, Aristotle, Thomas Aquinas, Adam Smith viewed lending as moral
and not something that the lender should expect profit from the borrower. They believed that
changing interest is exploitative and immoral, and they thought that loan should also be
secured by moral agreement or moral trust.
The start of the 16th century brought about agrarian revolution; exploration of Trade routes
opened the New World, and expanded to the Far East, all these factors brought unprecedented
wealth to Europe. This made the lending business inevitable. Individuals and institutions that
45 In compliance with the decision in SalomonSalomonSalomonSalomon vvvv SalomonSalomonSalomonSalomon &&&& CoCoCoCo LtdLtdLtdLtd [1897][1897][1897][1897] ACACACAC 22.22.22.22.46 The Banking and Financial Institutions Act, 2006. UnderUnderUnderUnder itsitsitsits sectionsectionsectionsection 3,3,3,3, provides that banking business” meansthe business of receiving funds from the general public … and to use such funds, in whole or in part, for loans orinvestments for the account of and at the risk of the person doing such business.47 In compliance with view of LORDLORDLORDLORD ATKINATKINATKINATKIN in; JOACHIMSONJOACHIMSONJOACHIMSONJOACHIMSON VSVSVSVS SWISSSWISSSWISSSWISS BANKBANKBANKBANK CORPORATIONCORPORATIONCORPORATIONCORPORATION(1921)48 Johnson,ohnson,ohnson,ohnson, PaulPaulPaulPaul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1, pp.172.
This chapter has covered the aspects of theoretical overview, and various mode and
techniques recognized and used, in lending business has been pointed out. How and to what
extent such financial practice is applied in Tanzania is the matter of practical experience
which shall be covered in the next chapter.
51 [1897] AC 2252 Reported The East Africa, January 1-7, 200153 The GUARDIAN, 29TH may 2013,news titled “southsouthsouthsouth AfricaAfricaAfricaAfrica banksbanksbanksbanks easeeaseeaseease pacepacepacepace ofofofof unsecuredunsecuredunsecuredunsecured lendinglendinglendinglending”
Article 8(1) (b) and (c) of the constitution54 imposes the obligation to in hence welfare of the
people to the government, and the duty to be accountable to them. How can the welfare of the
people in Tanzania be enhanced is through informal lending55, provided that most Tanzanians
are integrated in informal sector and holds no formal security at all.
Bank does not finance informal business because the effect of giving or financing informal
business depends on the power of law, but since the government is not willing; it remains to
depend on the bank business arrangements, and depends to the chance of profit. As to this
assertion it evidences the lacuna of law in administering informal loans.56
54 THE CONSTITUTION OF THE UNITED REPUBLIC OF TANZANIA OF 197755 Also accepted by the government under the micro-finance policy of 2000.56 The loan officer, NMB-KAYANGA brunch, as interviewed on 3rd august 2013
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As there is no specific enactment to administer collateral loan security, and due to the fact that
there is great demand and profit in this business, deferent laws with same related provision are
used to cover the gap and it includes, the law of contract, non-governmental organizations act,
companies act, the corporative societies act, financial leasing act, and sometime customary
practices are used and sometimes it is not even clear as to how the lending is governed
In grating loans to business man in informal sector, bankers, micro-finance Company, NGOS
and SACCOSS, secures their capital advanced as loans to their customers by formal
agreement.57 Section 25(1) (b) of the law of contract Act58 is normally of a great importance,
has at a time of advancing a loan the lender performs is part of a contract and furnish his
consideration while the borrower promises to perform is part in future time and such customer
has not furnished his consideration. It is clear an agreement made without consideration is
void, unless it is a promise to compensate, wholly or in part, a person who has already done
something for the promisor.
It’s true that it is more risky for the render to relay on a contract as it was discussed in
previous chapters, but to for such circumstances which go beyond the normal contractual
relations, specific registrations are enacted. For instance, section 5(2) of the financial leasing
Act59 provides that for avoidance of doubt, a financial lease agreement shall be a special
contract… of which operations are excluded from the scope of the existing laws.
But also acknowledge that principals of the law of contract remain important in administration
of lender-borrower relationship, that “…in a financial lease agreement shall be regulated by
57 To evidence this practice, loan Officer NMB KARAGWE BRUNCH, shown the samples contracts used inadvancement of loan in different parts of the district.58 CAP 345, RE: 2002,59 The Financial Leasing Act, 2000,
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the law of contract…and parties to a financial lease agreement shall retain maximum freedom
It said to be the main statute enacted to regulate and supervise both formal and informal
banking business in the united republic of Tanzania, and interpretation of any such other law
60 TTTThe cooperative societies act, no:20 of 200361 KARAGWE WOMEN SACCOS (KAWOSA) being one of the most successive institutions, in granting informalloans in KARAGWE DISTRICT, registered under this Act.62 Chief accountant KAREGWE WOMEN SACCOS (KAWOSA), interviewed on 3rd august 201363 Cited above.
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of such function should not contravene this law.64 The Act has comprehensive coverage to all
established banks and financial institutions involved in lending business, it goes father to
recognize informal loans industry65
Section 24(2) of the Act66 the Bank may establish limits for unsecured, partially secured And
secured accommodations, so long as the total Accommodations to a borrower do not exceed
the limit of subscription, security is at discretion of financial institution. The question remains
to be under which rules to be resorted if the bank is at such discretion, the authorized person
with such duty to answer this question under section 71 of the Act is said to be the governor,67
but yet no such rule providing for informal loan security and informal lending business in
In Tanzania informal lending business is dominantly carried by microfinance institutions than
formal banking institutions, and emerged in 1990s,68 other institutions in involved in informal
lending business emerged in 2000s and they include, Limited liability Companies,
Microfinance Companies, Community Banks, Savings and Credit Societies (SACCOS),
Informal financial services providers(normally unrequested individuals), Government
programs/projects among others. The turning point of informal lending in Tanzania was
pioneered by the national microfinance policy of 2000, and the presidential fund commonly
known as ““““mabillionmabillionmabillionmabillion yayayaya kikwetekikwetekikwetekikwete”””” in the year 2006.69
64 See section 2(2) of the Act65 Under section 3, interprets out banking business, financial institutions, micro-enterprises, micro-financecompany, small holder farmers, and unsecured credit, as they are used in the business66The banking and financial Act, Act no 5 (2006).67 “The Governor may make regulations and issue directives...”68 www.tamfi.co.tz/index.php/resources/view/the_state_of_microfinance_in_tanzania69 Patricia Kimelemeta , MWANANCHI 7/7/2009
ProceduralProceduralProceduralProcedural differencedifferencedifferencedifference bank customer when he steps to ask for a bank loan must present a
valid business licence being in operation for more than six months, any loan security such as
house with a valid title, business capital operated over the area not less than three months,
valued not less than three millions and any other qualifications as the bank may think fit at a
time being. Unlike the SACCOS member, when he steps to ask for a loan guarantee of his
fellow member can stand better than any other security.
70 NMB-KAYANGA, Brunch manager interviewed on 24th July 2013.71 Loan officer NMB KAYANGA BRUNCH, interviewed on 24th July 2013.72 Jonas Mfunjo, Karagwe women SACCOS, interviewed on 3rd august 2013.73BEATUS CLOPHACE, One of our interviewee Ruita villege, in karagwe district.
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Participation,Participation,Participation,Participation, normally association members participate in lending business of their
institution mainly in determining who is to receive a loan and at what time, likewise the
institution participate in the proper use of loan, while there is a social distance between the
business of the bank and the business of its customers
It has been proved that informal loans remains to be of specific necessity not only to the rural
community but to the whole community involved in informal sector approximated to 70% of
the whole Tanzania community, and it includes;
ProfitProfitProfitProfit, as most institutions involved in the business have accounted profit not only to such
institutions but also to its customers. More than four SACCOSS are operating in Ruita village
and its members have achieved to establish small shops, to have permanent resident houses
and pay for school fees of their sons and daughters among others.
74 cited above75 One of our interviewee, in kitwe village in karagwe district.
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IncreaseIncreaseIncreaseIncrease ofofofof financialfinancialfinancialfinancial circulationcirculationcirculationcirculation and growth of micro-finance sector, and therefore
households will be subjected to banking system and enjoy banking service, hence growth of
the national economy.
IncomeIncomeIncomeIncome forforforfor investmentinvestmentinvestmentinvestment76767676, it has been proved that there is frozen capital in rural areas which is
not integrated to any banking system, and this can be possible through informal loan security
by creating liquid cash and helping people to make their investment plan. To achieve this
FADECO community Radio77 has visited and encouraged financial institution with regard
As it has been discussed in the previous chapters the community problems includes ignorance,
non-formalization of available capital into banking systems and poor investment plans. This
problem can be solved if the community members create their proper capacity of generating
79 Read from, GUARDIAN, 29TH may 2013,news titled “southsouthsouthsouth AfricaAfricaAfricaAfrica banksbanksbanksbanks easeeaseeaseease pacepacepacepace ofofofof unsecuredunsecuredunsecuredunsecured lendinglendinglendinglending”and The East Africa, January 1-7, 200180 Supra.81 The constitution of the united republic of Tanzania of 1977
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capital, improve their investing capacity and it is important to educate themselves in matters