TANZANIA Diagnostic Review of Consumer Protection and Financial Literacy Volume I Key Findings and Recommendations November 2013 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 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. 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 2013. 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 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 ............................................ 10 INSTITUTIONAL ARRANGEMENTS ............................................................................................. 10 KEY RECOMMENDATIONS ......................................................................................................... 14 LEGAL AND REGULATORY FRAMEWORK ................................................................................... 16 KEY RECOMMENDATIONS ......................................................................................................... 18 III. Consumer Disclosure ............................................................................................................ 19 KEY FINDINGS ........................................................................................................................... 19 KEY RECOMMENDATIONS ......................................................................................................... 20 IV. Business Practices ................................................................................................................. 21 KEY FINDINGS ........................................................................................................................... 21 KEY RECOMMENDATIONS ......................................................................................................... 23 V. Dispute Resolution Mechanisms............................................................................................ 24 KEY FINDINGS ........................................................................................................................... 24 KEY RECOMMENDATIONS ......................................................................................................... 25 VI. Financial Education .............................................................................................................. 27 KEY FINDINGS ........................................................................................................................... 27 KEY RECOMMENDATIONS ......................................................................................................... 29 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.......................... 12 i 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................................................................... 10 Boxes Box 1: Overview of the Financial Sector in Tanzania..................................................................... 7 Box 2: Overall Reform Agenda in the Pensions Sector ................................................................ 13 Box 3: Institutional Arrangements for CPFL in Selected Countries ............................................. 15 Box 4: Consumer Protection Challenges for Pension Fund Members .......................................... 22 Box 5: Models of Alternative Dispute Resolution Mechanisms ................................................... 26 Box 6: Tanzania’s Financial Education Framework ..................................................................... 28 ii Abbreviations and Acronyms ADR Alternative Dispute Resolution APR Annual Percentage Rate ATM Automatic Teller Machine BAFIA Banking and Financial Institutions Act BoT Bank of Tanzania CPFL Consumer Protection and Financial Literacy EC European Commission EIR Effective Interest Rate EU European Union EURIBOR Euro Interbank Offered Rate FCC Fair Competition Commission FES Financial Education Secretariat FICOs Financial Cooperatives FIWG Financial Inclusion Working Group FSDT Financial Sector Deepening Trust IMF International Monetary Fund IAIS International Association of Insurance Supervisors IOSCO International Organization of Securities Commissions MFC Microfinance Company MFI Microfinance Institution MoU Memorandum of Understanding MoF Ministry of Finance NGO Non-Governmental Organization POS Point of Sale PPP Public-Private-Sector Partnership RITA Registration, Insolvency and Trusteeship Agency ROSCA Rotating Savings and Credit Association SACCO Savings and Credit Cooperative Organization SCCULT Savings and Credit Cooperative Union League of Tanzania SECO Swiss State Secretariat for Economic Affairs SHGs Self-Help Groups SSRA Social Security Regulatory Authority TAMFI Tanzanian Association of Microfinance Institutions TBA Tanzania Bankers Association VICOBA Village Community Bank VSLA Village Savings and Loans Association iii 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, microfinance1, 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 2012. 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 Protection2 which were developed by the World Bank in 2006. 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. 2 http://responsiblefinance.worldbank.org/~/media/GIAWB/FL/Documents/Misc/Good-practices-for-financial- consumer-protection.pdf 1 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 semi-formal MFIs4 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 semi- formal 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 follow- up 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 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 Term5 Priority Institutional Arrangements Establish a coordination mechanism for financial consumer protection Financial regulators, ST Very High between all relevant stakeholders. FCC, MoF Strengthen the CPFL capacity of the BoT, the SSRA and the Registrar of BoT, SSRA, Registrar MT Very High Cooperatives to ensure improved monitoring of financial institutions’ of Cooperatives compliance with legal requirements and enforcement in case of violations of market conduct regulations. Conduct an assessment of the optimal organizational structure for the 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 Government MT/LT High 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 Government, SSRA LT Medium one primary agency responsible for financial consumer protection. Legal and Regulatory Framework Ensure that regulation on mobile payments entails requirements on BoT ST/MT Very High 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 BoT, SSRA, Registrar MT High protection in all three sectors through incorporation of further detailed of Cooperatives, and streamlined financial consumer protection provisions in the BAFIA Government 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 Financial regulators, MT Medium provisions and sector-specific legislation by (i) signing a detailed MoU FCC, MoF 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 Government, BoT, LT High and semi-formal MFIs are treated equally in terms of having adequate Registrar of access to basic information on the products that they consume, and are Cooperatives not subject to deceiving and abusive sales and collection practices. 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 In the case of informal microfinance organizations, it is recommended to Government, MT/LT Medium support and coordinate ongoing efforts in introducing consumer regulators, protection and financial education principles in their operation. associations, NGOs 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, Industry associations MT Medium product appropriateness, and other areas of business practices. Microfinance Enhance fair treatment of microfinance consumers through strategic and Microfinance MT High targeted regulation of product features, affordability assessments and regulators the calculation of interest rates on a reducing balance basis. Pensions Introduce business practice guidelines by the SSRA for the pension SSRA MT High 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 Financial regulators ST Very High procedures in place and to ensure that these are disclosed to every consumer. Consider options for establishing an independent ADR structure for Government, financial LT Very High retail financial services. regulators, industry associations Require that all financial institutions centralize data on complaints Financial regulators MT High received and share the data with the relevant government regulatory agency. LT Meidum Financial Education Establish the financial education secretariat and initiate implementation BoT and other ST Very High of the financial education strategy. stakeholders Consider developing tailored financial education programs focusing on BoT, MoF, MoE, MT/LT Medium reaching low income and rural populations, including those with low others levels of literacy. Introduce financial education programs for schoolchildren. MoE, MoF, BoT, MT Medium others Encourage mobile payment providers and their agents to educate BoT and other ST Medium consumers about their rights and responsibilities and how to protect their stakeholders own privacy when using mobile payment services. Ensure that the SSRA literacy campaign is closely aligned with the SSRA MT Medium overall national financial education strategy. 5 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 2009. 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 2011 19. 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 2011. 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 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 2010. 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 2010. 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 2013. 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 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 2009 25. 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 2013. 8 Figure 2: Access to Finance in Rural and Urban Areas Source: FinScope Survey 2009 26. 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 16 + 22,349,432 21,682,692 666,740 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 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 16–34 by 1.2 million from 2006 to 2009 (particularly for youth between 16–24 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 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 resources7, 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 directorates10 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 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 License and Type of Institution Permitted Activities Responsible Authority Registration Formal Institution  Deposit taking  Wholesale Banks providing microfinance microfinance services License, regulation lending Bank of Tanzania (Banking and Financial and supervision  Loans Institutions Act, 2006)  Deposit taking Microfinance Companies  Loans  Member savings License, regulation FICOS deposits Bank of Tanzania and supervision  Loans Semi-Formal  Member savings Registration, Ministry of Agriculture/Registrar of SACCOs  Loans regulation and Cooperatives (Cooperative Act, 2003) supervision Ministry of Industry and Trade – Business  Loans Credit-only MFIs Registration Registration and Licensing Authority (BRELA); Companies Act, 2002.  Ministry of Home Affairs; Society Ordinance Cap 337 of 1954  Ministry of Community Development, Gender and Children); NGO  Compulsory savings Act, 2002 Financial NGOs as loan collateral Registration  Registration, Insolvency, and  Loans Trusteeship Agency (RITA); Trustees Incorporation Ordinance, Cap 375 1956, Written Laws (Miscellaneous Amendments) No. 10 of 1999 and Trustees’ Incorporation Act of 2002 (Cap 318) Informal Institutions SACAs Village Community Banks (VICOBAs) Village Savings and Loans  Member Savings Self-regulated None Associations (VSLAs)  Loans Rotating Savings and Credit Associations (ROSCAs) Self-Help Groups (SHGs) 12 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-2011. 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 2012. 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 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 should be separated from prudential supervision and have adequate specialized staff and resources to perform its specialized responsibilities effectively and avoid conflicts of interest (See Box 3 for further information). Box 3: Institutional Arrangements for CPFL in Selected Countries There are several approaches to how countries organize consumer protection in the financial sector. Whereas some countries establish one or more specialized regulators for financial consumer protection (the so-called twin-peak model), others establish a general consumer protection agency to deal with financial products and services and other products. A third group of countries chooses to have only one authority in charge of prudential and market conduct supervision. The optimal model in any given country will depend on country-specific characteristics such as the size and structure of the financial system, its stage of development, specific regulatory and supervisory activities, skills and institutional capacity, and prevailing political traditions. In many small and low-income countries, resource constraints require a flexible and practical approach to developing consumer protection capacity and oversight. Experience shows that the single-agency approach to consumer protection might be most feasible for low-income countries. Country-specific experience from Portugal, Armenia, Mozambique, Ireland and Malaysia showcases how national central banks have successfully taken over this responsibility: In Portugal, Banco de Portugal is not only responsible for prudential regulation but also in charge of regulating and supervising the conduct of credit institutions in their dealings with consumers and of financial education. The specialized Banking Conduct Supervision Department is separate from prudential supervision and responsible not only for the regulation and supervision of the conduct of credit institutions in their dealings with consumers, but also for the promotion of financial literacy. The Banking Prudential Supervision and the Banking Conduct Supervision Department have equal status within the organizational structure of the bank. Armenia is a good example of a small country in which an integrated central bank supervision of all financial institutions provides for the implementation of a holistic financial sector development and regulation framework. As in Portugal, market-conduct supervision policy is developed independently from prudential supervision. Prudential supervision is carried out by the financial supervision department and market conduct supervision by the consumer protection and market conduct (CPMC) division, which is part of the financial system stability and development department. In Mozambique, the Banco de Moçambique (BdM) is the regulatory and supervisory authority for credit institutions, financial companies and the microfinance industry. As in the previous examples, BdM engages in prudential oversight of the financial sector through its banking supervision department (BSD) and has set up the Department for Strategic Planning, Communication and Image that is in charge of consumer complaint handling and financial education. However, BSD is also responsible for misleading advertisements and unwarranted fees and charges, which means that the separation of prudential regulation and consumer protection supervision is not yet fully set up. Ireland and Malaysia also use a single-agency approach to financial consumer protection. In Ireland, the central bank has control over prudential and market-conduct supervision, however, all statutory consumer information and education functions are outsourced to the National Consumer Agency. In Malaysia, the Central Bank (BNM) is in charge of consumer protection because the consumer protection agenda supported its formal mandates—financial stability and financial inclusion—best. 15 Microfinance Sector 40. Given the prevailing tiered structure in the microfinance sector, the responsibility of coordinating, overseeing, and enforcing consumer protection for non-deposit taking MFIs should be delegated to a central government body with adequate powers and institutional capacity to ensure enforcement. Within the existing microfinance regulatory framework, clients of semi-formal and informal MFIs are less protected than those of banks or microfinance companies supervised by the BoT. Because consumer protection has a strong regulatory focus, which will be more effective if —at least for semi-formal12 institutions—it is closely coordinated and implemented by a central government body. While the ministries may continue to perform their current registration and licensing roles, the responsibility for supervision and oversight in terms of financial consumer protection should be placed with a designated central government body such as the MoF or the BoT. Pension Sector 41. The institutional and regulatory structures for consumer protection in the pension sector needs to be integrated into one regulatory framework. The relevant laws should be modified so that the SSRA becomes the primary regulator for financial consumer protection with the sole duty of consulting with the relevant Ministries, the FCC and the BoT on matters related to the mandatory and supplementary pensions funds. The 2012 amendments to the Social Security (Regulatory Authority) Act already provide for this to some extent. The SSRA should also be given the power to issue regulations for the pension funds created and regulated under this act. Legal and regulatory framework 42. A basic legislative and regulatory framework is in place for financial consumer protection in Tanzania; however, the provisions dealing with the protection of consumers of financial products and services lack clarity and detail. BAFIA and the Microfinance Companies and Microcredit Activities Regulation 2005 include general provisions on fair lending and debt collection practices, including the mandatory disclosure of prepayment penalties and the prohibition of unilateral modification of loan conditions. The Microfinance Companies and Microcredit Activities Regulation also establishes an obligation to disclose interest rates, commissions and fees. In addition, there are several regulations and guidelines issued by the BoT that entail provisions regulating consumer protection.13 The Social Security (Regulatory Authority) Act provides a short list of unsafe and unsound practices in Article 29a, but does not deal with many of the most common practices such as failure to disclose material facts, false advertising, high-pressure sales tactics and misappropriation of members’ contributions. The Fair Competition Act contains consumer protection provisions relating to misleading or deceptive conduct; bait advertising; accepting payment without intending or being able to supply products or services ordered; harassment and coercion; and redress mechanisms (see also Section I on Institutional Arrangements). 12 Except for SACCOs, which are already regulated and supervised by the Registrar of Cooperatives. 13 The recent Guidelines on Agent Banking Institutions, 2013 require that an approved banking institution offering agent banking services must put in place a proper complaints redress system capable of efficiently and quickly redressing consumer complaints. The draft Electronic Payments Schemes and Products Guideline requires banks that are applying to operate an electronic payment scheme to provide for a transparent legal framework and efficient dispute resolution mechanisms. The Credit Reference Bureau Regulation obliges a credit reference bureau, prior to licensing, to present a credible complaint handling procedure to ensure that questions, concerns and complaints of credit information subjects and data providers are treated consistently in a timely and efficient manner. 16 Banking Sector 43. The current consumer protection regime for banking contains a number of gaps and inconsistencies. Of particular note are the absence of requirements for transparent, clear, and comparable disclosure of key terms and conditions; applicable interest rates, fees and charges; a standard method for calculation of interest; regular account statements; and a minimum 10-point font for complex disclosures in clear and comprehensible language. Furthermore, there is no requirement for a Key Facts Statement and the requirements for giving notice of changes to terms and conditions, fees and interest rates are insufficient. 44. The BoT has put substantial efforts into creating an adequate legal framework for mobile payments. However, existing (draft) regulations could benefit from further detail. While such services have filled a critical need for consumers they also raise important issues of consumer protection. There are eight mobile operators, of which four have launched mobile money platforms. The most predominant service is domestic money transfers. Significant progress has been made in the recent past by the BoT in establishing a sound legal and regulatory environment for the protection of financial consumers of such services. The Guidelines for Issuance of Electronic Payment Schemes entail several consumer protection provisions such as the requirement to establish internal dispute mechanisms. However, the provisions are broad in scope and lack legal certainty. A draft regulation on mobile payments developed by the BoT will establish a regulatory framework for mobile payment systems in the country, creating an environment for innovations in financial services while minimizing associated risks for consumers. Mobile-payment service providers will be required to prepare fair terms and conditions for consumers in a manner that allows consumers to know their rights and obligations. Terms and conditions are required to be transparent and easily available to users, and mobile operators will be required to have a redress mechanism in place to address disputes and consumers complaints. Finally, the draft mandates that the pricing of the cost for services offered shall be published and transparent to the public. Microfinance Sector 45. The lack of a common regulatory framework for the provision of microfinance services in Tanzania hampers the development of a sound framework for financial consumer protection. Consumer protection in the microfinance sector is particularly challenging given the fragmented structure of the sector across different types of institutions. This situation generates a complex institutional framework, making it difficult for financial consumers to know, understand, and execute their rights and obligations when using microfinance products. With the exception of deposit taking institutions that provide microfinance services—currently supervised by the BoT—the microfinance sector in Tanzania lacks a framework with a set of minimum rules for consumer protection. Although incomplete, the rules established in the BoT regulations for MFIs define a set of ‘fair lending practices’ that mimic that of banks. For the other semi-formal MFIs, there is no uniform framework or coordinated institutional arrangement for consumer protection. A new Microfinance Law is currently being prepared covering all microfinance institutions that are currently not regulated nor supervised by the BoT. The law will provide provisions for licensing and a uniform regulatory framework of credit business in the country as well as for an authority designated for credit only MFIs. 46. Given their large number and small size, it would be difficult to effectively regulate and supervise the operation of informal microfinance providers. However, ongoing initiatives aim at introducing CPFL principles in informal microfinance activities. Although scattered across the country and sometimes with limited outreach, several initiatives are currently being carried out by local and foreign NGOs to strengthen financial literacy and introduce consumer protection principles in the different microfinance models that exist in Tanzania. Consumer advocacy NGOs are also working on developing training programs in targeted sectors, but the impact is limited due to constrained resources. 17 The federation of VICOBAs has also been carrying out financial education and training programs for its members. Pension Sector 47. The legal and regulatory framework for pension funds is fragmented. There are five mandatory pension funds in Tanzania that were created by statutes from 1978 to 2005. The establishing laws created a regulatory structure that, although similar, were unique to each mandatory fund. In addition to these preexisting laws, the SSRA was created under the Social Security (Regulatory Authority) Act in 2008 and put into place in 2011. The SSRA regulates the mandatory pension funds and any supplementary funds or other pension funds covered under the Act. As a result, the mandatory funds are subject to overlapping legal regimes. Amendments to the mandatory fund establishing acts and the Social Security (Regulatory Authority) Act have tried to harmonize these provisions, but additional work is needed according to market participants. Finally, the BoT and the FCC also have a regulatory role in the pension funds in the areas of supervision of investment practices and sales practices, respectively. Key Recommendations 48. The legal framework for financial consumer protection in all three sectors needs to be clarified and strengthened while ensuring consistent enforcement of existing provisions. To ensure an adequate basic framework for financial consumer protection, further detailed financial consumer protection provisions should be introduced through the issuance of regulations and guidelines under the existing legislation or amendments of the sector specific laws with relevant provisions. Furthermore, detailed financial consumer protection provisions should be included in the BAFIA and in specific regulations and guidelines issued by the respective Ministries and regulatory and supervisory authorities. In addition, laws establishing the mandatory pension funds and the Social Security (Regulatory Authority) Act should be amended to give the SSRA the primary authority to regulate the sector. Additional regulations and guidelines are needed to tackle remaining issues on disclosure, sales, and collection practices. Contracts form the basis for enforcement of legal rights by credit providers and protection of rights for consumers. In environments of low literacy, consumers are often reliant on friends or family to explain the terms and conditions. Strict contractual standards would have a positive impact on business conduct while assisting the judicial system in interpretation and enforcing responsible conduct. 49. Potential overlaps between general consumer protection provisions and sector-specific legislation need to be addressed. As a first step, a comprehensive MoU signed by BoT and other financial regulators and the FCC in respect to financial consumer protection could clarify the rights and responsibilities of all respective institutions. In the medium term, it would be advisable to streamline financial consumer protection provisions to provide for clear responsibilities and avoid duplication of efforts. In addition, further amendments to the mandatory pension fund establishing acts and the Social Security (Regulatory Authority) Act are needed to harmonize overlapping legal regimes. 50. It needs to be ensured that regulation on mobile payments—as currently underway—sets minimum operational and conduct standards that protect customers, particularly low-income consumers. In addition, it will be important to set further detailed rules regarding (i) minimum standards for internal dispute resolution channels and procedures and (ii) effective disclosure of terms and conditions associated with mobile payments as well as agent operations (see sections on consumer disclosure and dispute resolution mechanisms for further detail). 18 Microfinance Sector 51. A unified regulatory approach should be developed 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. The new Microfinance Law will create a unified framework for microfinance regulation and supervision, bringing microfinance companies and NGOs, under the same regulatory umbrella. Specific provisions on disclosure, fair business practices and dispute resolution mechanisms should be included in the new Law. It would be logical to closely align the development of the new regulatory framework for credit only institutions with the further strengthening of legislation for formal MFIs and SACCOs in order to ensure that clients of all MFIs are treated equally. 52. 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. This could be done by channeling the support of the different federations and associations at the central or district level. Given the significant number of groups and informal savings and credit associations, especially in rural areas, authorities could work through targeted financial education campaigns to raise consumer awareness of their rights and to deter abusive business practices of money lenders. III. Consumer Disclosure Key Findings 53. Due to an incomplete legal framework, the type and amount of information that financial institutions present to their clients varies by institution. BAFIA and the Microfinance Companies and Microcredit Activities Regulation include provisions requiring the mandatory disclosure of prepayment penalties and the prohibition of unilateral modification of loan conditions. The Microfinance Companies and Microcredit Activities Regulation also mandates an obligation to disclose interest rates, commissions and fees. The NGO Act and the Cooperatives Act do not provide any disclosure requirements for financial NGOs and SACCOs. 54. There is a lack of transparency in the pricing of financial offerings. The BAFIA provides the definition of an effective interest rate14, which is in practice not implemented. No official standard formula exists for comparing credit product prices, such as an effective interest rate (EIR) or an annual percentage rate (APR), and there are no disclosure obligations for additional costs such as administrative fees or insurance. This prevents consumers from effectively comparing the different credit products available to them. 55. Online and remote mobile transactions often take place in an “on the go” context with limited access to terms and conditions that might affect consumers’ decision making. In addition, concerns of limited disclosure due to mobile devices’ small screens and limited processing capacity, and battery life need to be addressed. Moreover, it is often not clear what type of information agents should provide to consumers, and when, during the payment process, they should be doing so. 14“Effective interest rate” means the true cost of funds for a borrower from a bank or financial institution, which may be higher, equal to or lower than the nominal interest rate depending on the method used to calculate the amount of interest due or accrued. 19 Pension Sector 56. Disclosure requirements for pension funds are also limited. The only legal provision related to the disclosure of a mandatory or supplementary pension fund’s activity is the requirement in Article 28 Social Security (Regulatory Authority) Act that a mandatory fund should prepare an audited annual report. Section 16 of the Social Security Regulations provides the same for supplementary funds. Article 28 specifies that the SSRA can stipulate the information required to be in the report in addition to the standard financial statement, although it has not yet issued guidelines regarding the contents of the annual report for mandatory funds. Section 16 of the regulations only requires limited disclosure by supplementary funds. 57. There are no guidelines for disclosure made to a prospective member at the time he or she chooses which pension fund to enter. Disclosure requirements on the regulatory status of the pension funds and marketing people (who are currently employees) are also lacking. As a result, the disclosures made by the various pensions vary in content and focus. In particular, there is no disclosure of the long-term effects of early withdrawals from the fund or using the funds in the fund as collateral for home mortgages. The disclosure of the regulatory status of the pensions and their marketing people would ensure that prospective members have the ability to research the standing of the funds, particularly supplementary funds, as well as the knowledgability of the marketing people. Key Recommendations 58. Disclosure is key for a strong financial consumer protection framework. It is essential to provide consumers with clear, understandable, timely and standardized information on financial products and services in order to allow them to shop around and to find the product or service that best meets their needs. The provision of clear, standardized and comparable information to consumers can also be an effective mechanism to promote competition, bringing down the cost of financial products and services. At the same time demand side efforts on financial education are needed to ensure that consumers understand the products and services that are being offered to them (see financial education section for further information). 59. All institutions should be required to provide their clients with a standardized ‘ Key Facts Statement’ summarizing in plain language the key terms and conditions of the products that they offer. Authorities may want to establish guidelines on the list of key elements and information that should be included in the ‘Key Facts Statement.’ The language and definitions should be tested to ensure that the provided information is easy to understand for the average client, and should be available in Swahili. 60. As an immediate step, financial institutions should be encouraged to display a list of the interest rates and charges in all their branches. Interest rates may be displayed on a nominal monthly basis, but providers should be required to disclose an effective annual interest rate next to the nominal interest rate. Effective interest rates should be used in all advertising, marketing and sales materials. At the minimum, regulators should require all institutions to provide written contracts specifying the interest and fees. 61. In addition, financial institutions should be required to disclose a price or cost of financial products to consumers that includes all costs and is comparable across institutions. Financial institutions should be required to disclose an effective interest rate or APR and to use that percentage in all advertising, marketing and sales materials. Future BoT regulations or guidelines should specify the standard methodology to be applied by all banks and other financial institutions, and the BoT should then 20 monitor compliance in using it across all credit providers. Effective deposit interest rates should also be calculated with a formula defined by BoT. 62. It is recommended to further strengthen effective disclosure in mobile payment transactions. Key information on terms and conditions associated with mobile payments should be provided to consumers in a clear, timely, and transparent manner. Disclosures in agent operations should include requiring price disclosure at agent premises, prohibiting agents to charge fees other than those disclosed by the provider, prohibiting agents to condition the delivery of the financial service to the purchase of products or services in its establishment and requiring disclosure of the agent’s regulatory status. In addition, information on delivery times, rights of withdrawal and available dispute resolution and redress mechanisms should be disclosed to consumers prior to making a transaction. Pension Sector 63. A set of disclosure requirements is necessary to provide a uniform and comprehensive set of information to be given to prospective clients of pension funds. The SSRA should issue a set of guidelines related to the disclosure of material facts by a pension funds. In addition to the financial statements, the annual report should contain actuarial reports on funding levels for defined benefit plans. Members and affiliates should be advised of the condition of the plan in a short and clear written report. Moreover, all pension management companies (which will be registered in the future) should disclose information regarding their financial position and profit performance. Investment reports of pension funds should match or exceed best practices in mutual fund reporting. The regulatory status of a fund or marketing employee should also be disclosed. In addition, disclosure should be made of the long-term effects of early withdrawals and the use by members of their funds in a fund as collateral for a home mortgage. IV. Business Practices Key Findings 64. There are ongoing initiatives in the financial sector related to the development and adoption of Codes of Conduct. The Tanzania Bankers Association (TBA) has drafted a Business Code of Ethics but it has never been finalized or actively implemented. The Tanzanian Association of Microfinance Institutions (TAMFI) has developed a Code of Conduct in coordination with its members, which may voluntarily adopt such code in running their businesses. The Code of Conduct follows international guidelines and best practices, but the main drawback of this initiative is the limited number of MFIs that are represented by the TAMFI. Members of the Savings and Credit Cooperative Union League of Tanzania (SCCULT) have not developed a code of conduct as of yet. However, SCCULT has worked on developing manuals and other training materials to support its members in understanding and strengthening their skills in the microfinance business. Other microfinance companies and financial NGOs have adopted a list of key principles or good practices in microfinance to conduct their business, but this has been done on an individual basis. 65. There is no regulation requiring financial institutions to ensure that a financial product or service offered to consumers is in line with their needs. While Tanzanian banks appear to assess a consumer’s credit worthiness before significantly increasing the amount of debt assumed by a consumer, there is no clear guidance or regulation requiring them to ensure that any credit product or service offered is affordable and suitable to the consumer. This is also the case for microfinance institutions. 21 Microfinance Sector 66. Predatory lending practices affect clients in the unregulated microfinance segment. Anecdotal evidence provided by different stakeholders suggests that some financial NGOs and credit-only companies may indulge in abusive lending practices. Most institutions in the regulated segment claim that they provide their clients with the key basic data on the terms of the product, interest rates and fees and the contract and repayment schedule. In addition, some SACCOs and credit-only institutions have introduced financial literacy trainings for their members and clients, or additional pre-requisites for loan disbursement such as the attendance to relevant trainings. Nonetheless, interviewed stakeholders highlight the fact that most MFI clients do not fully understand the basic concepts or associated costs of the products that they are getting. MFI clients are often driven by their urgent financing needs rather than by assessing the affordability or suitability of their borrowing. 67. It is common practice for MFI companies and financial NGOs in Tanzania to charge interest rates on a flat rate basis instead of on declining balances. In using flat rate methods, interest is charged on the initial loan amount, and the calculation does not take into account the declining outstanding principal after periodic payments have been received. This method of calculation results in higher effective interest rates on debt obligations, and consumers often lack awareness about this issue. Pension Sector 68. In the area of pensions, business practice guidelines are missing in a number of key areas. There are no guidelines on sales practices or advertising by pension funds. As a result, there are no specific parameters defining proper conduct in selling or advertising pension funds, which results in a wide range of practices. See Box 4 for further information on consumer protection challenges for pension funds members. Box 4: Consumer Protection Challenges for Pension Fund Members Prior to 2008, employees were assigned to one of the five mainland Tanzania statutory pension funds based on their place of employment. The enrollment in the pension plan was mandatory and not subject to negotiation. However, in 2008, the Social Security (Regulatory Authority) Act brought the regulation of the pension fund industry under a new regulator: the SSRA. The act also eliminated the obligation of a government employee to go to the plan of his employer and instead allowed new employees to choose between any of the five mandatory pension funds. In this regard the pension funds are different than other financial products in that they are mandatory for employees, but the employees may choose between the five schemes. As a result of this change in choice, some have questioned the need for five different schemes due to their overlapping character. In addition, this change introduced, for the first time, competition between the five statutory funds for the employees who were required to be members of one of the funds, which significantly changed the relationship of the statutory funds and its members. Funds now have to “sell” themselves to prospective members and the advertising, sales practices and financial conditions of the fund became more important factors in the membership numbers and growth of the funds. Competition Risks and Challenges from a Consumer Protection Angle The competition between the different pension funds raises significant financial consumer protection issues concerning the sales practices and the information disclosed to new employees. The creation of voluntary supplementary pension funds only added to the consumer protection concerns in the pension sector. The same concerns about disclosure and sales practices exist in persuading an employee to join one of the supplementary funds. This new environment will need to be dealt with by the SSRA to regulate and oversee these disclosure and sales practices. 22 69. There are no guidelines on the professional competence of salespeople for pension funds. Each pension fund trains its own frontline employees, and all pensions have developed a standard of care regarding their interaction with the public. However, there are no guidelines setting forth the parameters of permissible conduct by the salespeople and the content of the information, both written and verbal, given to prospective members. 70. There are no regulations or guidelines on the portability of benefits and contributions when a member of a pension fund changes jobs. The rules around the portability of pension benefits could benefit from clarification given that individuals now have the choice of which social security fund to join.15 One of the biggest complaints from pension fund members is that they are not able to move their pensions when they change jobs. In an increasingly mobile economy, this is critical to the proper functioning of the pension system because it allows an employee to aggregate all of his pension contributions and qualifications in one fund. This facilitates the payment of benefits at retirement or withdrawal from the pension. Key Recommendations 71. Many banking associations around the world have adopted codes of conduct to inform the public of the services and standard of services to be expected from the industry . The industry can play an important complimentary role in ensuring a sound financial consumer protection framework. Codes of conduct have been adopted and enforced by many countries, such as Australia, Canada, New Zealand and the United Kingdom, as well as Hong Kong and South Africa. These codes are principles- based and their compliance is monitored e.g. by the regulatory authority in the case of Hong Kong or subject to the jurisdiction of the ombudsman, in the case of South Africa and Australia. 72. Industry codes of conduct focusing on information disclosure, complaints, product appropriateness, and other areas of business practice should be supported. The draft of the Business Code of Ethics should be finalized and actively implemented. The BoT and the authorities responsible for microfinance activities outside the supervision of the BoT should continue to support efforts to develop a code of conduct for the microfinance industry following international good practices Models such as those promoted by the Smart Campaign might be considered as a basis for such codes. It is also recommended that the BoT and/or the industry association monitor compliance with the Business Code of Ethics and publicize its findings. Furthermore, the adoption of key principles in the provision of microfinance products for all different types of MFIs should be promoted. As a follow-up, the authorities of respective microfinance sub-sectors should request an annual report on compliance with such codes of conduct. Financial institutions should be required to assess the financial capabilities, situation and needs of their retail customers before agreeing to provide them with credit. Issues of over-indebtedness, affordability and responsible lending has increasingly become a subject of debate in the aftermath of the financial crisis. The recently conducted World Bank Global Survey on Consumer Protection and Financial Literacy found that 48 economies (54% of participating economies) had requirements for lenders to assess the ability to repay, and 40 economies (compared to 20 in 2009) had explicit limits in 15Article 30 of the SSRA Act provides that it shall be the right of a member to choose which fund they can join and Article 54 (2) expressly provides that the Minister may make regulations escribing conditions and procedures for portability of benefits' rights of a member from one scheme to another 23 place such as debt-service-to-income ratio and loan-to-value ratios.16 In addition, regulations should require all formal and semiformal microfinance providers to report credit information to the credit bureau in order to improve the assessment of credit worthiness of microfinance clients. Microfinance sector 73. The fair treatment of consumers - especially but not exclusively in the microfinance segment - needs to be more stringently enforced. Strategic, targeted regulation of product features may be appropriate in cases in which certain features are clearly detrimental to microfinance consumers or prone to abuse, such as flat interest rates, punitive prepayment or post-delinquency penalties. Microfinance good practices call for microfinance providers to calculate their interest rate on a reducing balance basis. Issues of ensuring the affordability of credit products also need to be considered (this also applies to the banking sector). Pension sector The SSRA should introduce business practice guidelines for the pension sector in a number of key areas. Guidelines are necessary for the preparation of the annual report, the sales and advertising practices of pension funds and the qualification of salespeople. The Minister should issue regulations, and the SSRA should issue guideline,s as to the portability of pensions when a member changes employers. The authority should proceed as quickly as possible to put them in place. V. Dispute Resolution Mechanisms Key Findings 74. There is no legal requirement for financial institutions to put a defined procedure for consumer complaints in place. Consumer complaints and resolution of disputes are handled separately by each institution, and on a case-by-case basis. There are no guidelines or standard procedures established in the regulation on how to receive and handle consumer complaints. Although it is not regulated, most banks have an internal dispute resolution mechanisms in place. The majority of complaints relate to ATM fraud, long queues, and loan application process. Most complaints about services and products provided by MFIs and SACCOs are received through a complaints box installed in branches, through branch managers, or through the respective industry association or the Registrar of Cooperatives. There is no mandatory monitoring or follow-up on the types of complaints submitted or on responses provided to clients. Most clients are not aware about how to file complaints, which is why the number of complaints received are relatively low. Information received during the interviews highlighted that complaints often refer to the quality of service, and on a less frequent basis to the high interest rates or terms of a loan. 16 As part of the implementation of the Consumer Credit Directive, a number of EU countries expanded guidance on assessing affordability and suitability of financial products. For example in Bulgaria, Czech Republic, and Greece, financial institutions are required to consult relevant databases such as credit information registries to obtain information on existing commitments of the loan applicant. In Ireland, for variable interest rate loans, lenders are required to conduct a stress test on the consumer ability to repay due to a change in interest rate. In Japan, the Money Lending Business Act provides that no new loans may be made when the existing amount outstanding exceeds one-third of the borrower’s annual income. For further information see: http://responsiblefinance.worldbank.org/~/media/GIAWB/FL/Documents/Publications/Global-Consumer-Protection -and-Financial-Literacy-results-brief.ashx 24 75. Institutional responsibilities for complaint-handling lack clarity while the existing external dispute resolution mechanisms are unknown to consumers. While the BoT has no explicit statutory power to handle complaints from consumers about their financial institutions, it has, for some time, dealt with a limited number of individual consumer complaints (1-2 complaints/month). After following up with the respective financial institutions, consumers are provided with a response letter. Currently, there are no internal procedures in place on how to handle complaints. However, the BoT is working on the set- up of a helpdesk for consumer complaints. Although the FCC has explicit power to deal with complaints, it has so far only dealt with two complaints related to financial services since its establishment in 2003. Pension Sector 76. The Social Security (Regulatory Authority) Act has detailed provisions for dispute resolution, including the creation of a Social Security Tribunal. A member of a pension fund who is aggrieved by the decision of a fund must appeal that decision to the Authority within 30 days of the decision. The Authority has 30 days to make a decision about to the appeal and notify the member of its decision. If a member is aggrieved by a decision of the Authority, the member can appeal to the Tribunal, which has jurisdiction to hear any appeal. The Tribunal is currently in the stage of being created with the selection and appointment of a high court judge as chairman. 77. The SSRA has received a number of complaints that were resolved through its internal processes. So far, no complaints have gone to the Social Security Tribunal on appeal. In 2010–2011, the SSRA received 120 complaints from members that were resolved. The subjects of the complaints were wide ranging from the failure of an employer to make contributions for a member to the pension fund to delayed payouts of pension funds on retirement. In addition, there have been numerous complaints regarding the inability to transfer funds when an employee changes jobs and the failure to inform the employee of the status of his or her pension after a change in employment. Key Recommendations 78. Financial institutions should be required to develop detailed complaints handling procedures and provide their clients with the necessary information on how to deal with complaints and any dispute resolution in a written contract. They should be required to file and record all complaints and to report them to the authorities. A regular report (i.e., monthly or quarterly) should be prepared and sent to the respective regulatory government agency. Industry codes of conduct should be developed entailing guidelines on internal dispute resolution procedures (see section IV for further information). 79. In the long term, consideration could be given to the establishment of a financial services ADR structure, based on an assessment of the most appropriate institutional set-up for Tanzania. The analysis should take into account issues of independence, sustainability, accessibility for consumers, and capacity to make binding decisions to ensure the effectiveness of the system. Several institutional options can be considered, based on successful international examples. Whichever model is adopted, it should be clear that the relevant activities (e.g., to award compensation to a consumer) are within the functions and powers of the relevant entity (see Box 5 for further information). 80. Following the adoption of the draft regulation on mobile payments further detailed rules regarding minimum standards for internal dispute resolution channels and procedures will need to be developed. One of the most significant concerns for users of mobile payments is how to resolve disputes in the case of disputed payments, transactions and loss of mobile phones. It is therefore important to ensure that existing rules for internal dispute resolution apply to and work properly for mobile services delivery channels. Building upon the draft regulation further detailed procedures for 25 responding to complaints should be developed which ensure that all information regarding a complaint is gathered and investigated and the response is communicated within a set time limit and in plain language. Furthermore, the establishment of a centralized call center by each mobile payments provider in charge of responding to customer inquiries and complaints would be beneficial. Box 5: Models of Alternative Dispute Resolution Mechanisms To further improve access to justice for citizens, governments often take extra steps to provide alternative dispute resolution (ADR) systems that allow for an out-of-court-decision to be taken when parties fail to arrive voluntarily to a conclusion to a complaint. Generally, there are three models of ADR systems:  ADR bodies established by financial services associations: Decisions by such an ADR are not legally binding but the findings are usually voluntarily respected by financial institutions as part of a self-regulation of the market, sometimes with financial companies even publicly declaring to be bound by the ADR's decisions. In countries such as Germany, an industry-based ADR structure for each part of the financial sector has proven effective. However, in the case of an ADR structure established by a professional association, attention should be paid to potential conflicts of interest. Consumers may also perceive the ADR as someone who will always decide in favor of the financial institution and against the consumer.  Statutory independent ADR bodies: In this approach, the ADR has functions and powers set up by national laws and members appointed by a government authority. For example, the United Kingdom established a scheme to function as an independent institution, while Armenia legally requires financial institutions to join a central bank-approved ADR scheme with binding rules for all member institutions. A single statutory ADR would make it easy for consumers to identify to which agency they should submit their inquiries and complaints. While this model has the advantage of clearly defined objectives and mandates, the challenge is to provide the new ADR with sufficient authority and resources.  An ADR structure established within the regulatory and supervisory agency: A third model is the set- up of a financial ADR structure within a regulatory and supervisory agency. For example, in the case of Bosnia Herzegovina, a banking system ADR has been established as an independent organizational unit within the Banking Agency of the Republic of Srpska. While this model has the advantage of using existing institutional arrangements to build upon, the challenge is to ensure the independence of the ADR structure and avoid conflicts of interest. 81. It is advisable to consider a sequenced approach when establishing an ADR mechanism in Tanzania. Different local capacities and resource constraints may make it impossible for a county to implement its most desirable ADR system. Under such circumstances, a country may still implement a sequenced approach, keeping in sight its ultimate goal. Below is a suggestion of a sequencing approach that a country may follow to go from a situation in which there is no ADR available for financial consumers to a situation in which a single financial ADR is set up. Two key stakeholders in this approach are the financial sector regulator(s) and the financial industry associations. Stage 1: Building a complaint-report culture in the financial industry and the population  Financial regulator: i) requires financial providers to comply with complaint-handling rules, to submit complaints statistics and to inform consumers on complaints procedures and focal points and ii) develops consumer awareness campaign highlighting the consumer’s right to file complain to focal points of financial institutions.  Financial industry association: i) issues and publicizes a code of conduct including standards on complaint-handling for their members and ii) asks for members’ statistics on complaints, analyzes trends and includes results of analysis in reports for its members. Stage 2: Developing an intermediate arrangement for financial dispute resolution 26  Financial regulator: i) sets up an internal unit in charge of providing orientation to consumers regarding financial disputes and receiving and analyzing complaints; ii) expands the complaints handling function into a dispute resolution function; and iii) develops a consumer awareness campaign on these functions.  Financial industry association: i) sets up mechanisms to enforce code of conduct and to handle consumer complaints, ii) transforms the mechanisms into an ADR scheme; and iii) develops a consumer awareness campaign on these functions. Stage 3: Consolidating the financial dispute resolution system  Financial regulator: develops coordination mechanisms with other regulatory ADR schemes.  Financial industry association: develops coordination mechanisms with other industry ADR schemes.  Financial regulators and financial industries combine their ADR schemes into a single financial ADR scheme. Microfinance Sector 82. Complaint-handling procedures for non-deposit-taking MFIs should be restructured. If a special unit or centralized government agent is designated to coordinate and oversee financial consumer protection for non-deposit-taking MFIs, a special function given to this unit should be to coordinate, receive and analyze the complaint reports received through the different government institutions. Microfinance consumers should be given the information and right to escalate the dispute if the case is not resolved at the MFI level. Pension Sector 83. The procedures outlined in the Social Security (Regulatory Authority) Act are extensive but it may be too expensive for a single member to pay the full cost of the application to the SSRA and the appeal to the Tribunal. Issues that members may have regarding their pension funds may often involve small amounts of money–too small to bring an action in court. Lawyers and court fees would be so high that it is not worth the effort to file a complaint. The SSRA should consider creating an ADR mechanism that provides legal assistance to people filing complaints and helps reach a quick resolution to the complaint. VI. Financial Education Key Findings 84. Financial consumer protection is important, but it is not sufficient on its own. Demand side efforts on financial education are needed to complement a sound financial consumer protection framework. For example, regulations designed to ensure that financial institutions disclose, clearly and fairly, the key features of their products and services may have little impact on consumer behavior if they do not understand why it is important to read disclosure documents or are not able to understand, and to put into context, information contained in these documents. Similarly, a financial inclusion initiative is unlikely to be successful if the people who are intended to benefit from the initiative do not understand the potential benefits to them or do not understand how to make sensible use of the products or services in question. 27 85. Financial education enables consumers to make well-informed decisions about the products and services that best fit their needs. As financial products and services become more sophisticated and households assume greater responsibility for their financial affairs, it becomes increasingly important for individuals to manage their money well, not only to help secure their own and their family’s financial well-being, but also to facilitate the smooth functioning of financial markets and the economy. A well- educated consumer is able to understand consumer disclosures, the risks and rewards, and their legal rights and obligations. Based on this, a financially literate consumer will be able to make informed decisions on their choice of financial products and services. Such empowered consumers can play an active role in shopping for the best financial products and services—and the best providers—that meet their needs. 86. As part of its financial inclusion strategy, the government has taken important steps in the area of financial education. An overall financial education framework has been developed in consultation with all the government stakeholders and market agents, including the industry and consumers (see Box 6). In addition, a nationally representative financial literacy survey will be conducted in 2013 as a follow-up of the 2006 and 2009 FinScope surveys. Box 6: Tanzania’s Financial Education Framework Based on a study conducted in 2009–1017, a draft National Financial Education Framework was created for Tanzania. The development of the framework was an initiative of BoT, supported by the Financial Sector Deepening Trust (FSDT). The framework identifies market segments and interest groups as well as channels/stakeholders through which financial education objective can be achieved: Stakeholders and proposed Channels Priority market segments roles Government: set the agenda, BoT  Educational system: schools,  Adult population to provide leadership and adult education and o financially excluded coordination entrepreneurship programmes o emerging markets targeting youth (small entrepreneurs) Private sector: research, design,  Employee based programs o ‘formal’ market fund and implement financial  NGOs, churches, mosques and (growing middle class) education programmes village leaders  Youth  Mobile phones o School going age Civil society (covering many sub-  Classroom based training - enrolled in an sectors, such as youth, education, programs and seminars educational institution entrepreneurship and agricultural  Print media: newspapers, articles - excluded from development): form partnerships and blogs educational system with government and the private  Mass advertisements using o students (tertiary sector billboards, television and radio education)  Trainers, counselors and Donors: focus on training of community leaders trainers and the provision of technical assistance to prevent dependency 87. However, progress in the implementation of the financial education framework has been slow. A study conducted in 2010 envisaged the formation of an independent board reflecting a public- 17 Framework for financial education in Tanzania by Marketworx Africa (pty) Ltd (2010). 28 private-sector partnership (PPP) with a permanent secretariat as the executive arm responsible for facilitating and coordinating financial education on a national level. It was agreed among stakeholders that the BoT would champion the initiative by facilitating the proposed secretariat. The financial education secretariat (FES), facilitated by BoT, will be a mechanism through which the financial education framework and other related initiatives are coordinated at a national level with support from stakeholders and interest groups. The FES will be charged with the coordination of the public financial education campaign, the training of trainer campaigns, financial capability advocacy as well as the development and implementation of a communication strategy. Created interest groups comprising representatives from the government, the private sector (individual organizations and sector-level bodies), civil society and donors were suggested as financial education implementation bodies. However, progress in the establishment of the institutional mechanisms and the implementation of the strategy has been limited. Banking Sector 88. The banking industry has launched several financial education initiatives. Most banks have contributed to financial education books for schoolchildren and taken an active part in trade fairs and banking day’s events. At these events, banks prepare workshops and distribute financial sector brochures. The Tanzania Institute of Bankers focuses on the education of retail banking staff. Microfinance Sector 89. There are a variety of financial education initiatives targeted at microfinance consumers. In addition to providing microfinance services, a significant number of MFIs and SACCOs educate their clients with the provision of basic financial training. In addition to these individual initiatives, the industry associations (i.e., TAMFI and SCCULT) and the consumer advocacy association have worked with donors and NGOs to strengthen efforts in this area. However, given the fragmented nature of the microfinance business in Tanzania, the large fraction of the population living in rural areas, and the limited resources that individual stakeholders can dedicate, progress is slow and results may not be immediate. Pension Sector 90. A number of public and private sector initiatives are currently ongoing to address the low financial literacy levels of Tanzanians. Although no studies have been done on the financial literacy of pension fund members or the pension literacy of the public, it is commonly understood that the literacy of Tanzanians regarding pension funds is lacking. The pension funds have attempted to remedy this with education programs aimed at new members and existing members. The SSRA developed a financial literacy strategy in the area of pensions that combines training for unions and their members, training for journalists, appearances on TV and radio talk shows, seminars for existing pension members and stakeholders, training for legislators, and distribution of informational brochures regarding the pension system to the public. The financial literacy strategy is well developed and geared for effectiveness. However, the implementation of the strategy is restricted by budget constraints. Key Recommendations 91. The establishment of the financial education secretariat which will drive and coordinate financial education activities will be an important step to ensure an institutionalized and systematized approach to financial education. This will be crucial to coordinate the implementation activities at the level of different interest groups, individual stakeholders and strategic partnerships. It will 29 play an important role in ensuring that duplication of efforts is avoided and interest groups as well as other stakeholders work closely together. Experience from other countries such as Brazil, Malaysia, the United Kingdom and Armenia, which successfully implemented financial education strategies, should be taken into account. In addition, financial industry associations could be encouraged to develop financial education activities and materials and coordinate financial education programs among their members. 92. Financial education programs should focus on reaching low-income and rural populations, including those with low levels of literacy, and therefore consider different communication channels. Results of the FinScope 2013 survey should serve as a baseline to further prioritize and tailor ongoing and planned financial education initiatives. In particular, industry efforts in developing training materials, operational manuals, brochures and information for MFI clients should be supported to expand their outreach. Techniques to consider could involve community radio and local programs of national radio, including programming in local languages, information presented in cartoon form rather than text, training of “knowledge duplicators” such as teachers and journalists, and strengthened curriculum content in schools to teach children and adults about earning, spending, sharing, and saving money. Mobile phones are a popular communication tool that also may be used to display financial education messages. 93. Given the high levels of financially excluded youth, it would be beneficial to introduce financial education programs for schoolchildren. Children start developing their attitudes to money from a young age, so there is advantage in beginning to provide financial education at an early age in order to help children to develop responsible attitudes. A practicable approach could be to incorporate financial education into one or more existing subjects, rather than to try to persuade the education authorities to add a new subject (financial education) into the curriculum. 18 Financial education could also be provided to children through extra-curricular activities, such as savings clubs, after-school financial education clubs, debates, schools challenges, drama, children's television programmes and games. 94. Mobile payments providers and their agents should be encouraged to educate customers about their rights and responsibilities and how to protect their own privacy when using mobile payment services. With the dynamic nature of mobile payments, ongoing education is critical to advance the knowledge of consumers of new innovative financial services, increase understanding of basic security requirements, and to address any areas of concern that arise as business models evolve. It is recommended that special measures are taken to address illiterate and first-time users as they are particularly vulnerable to abuse. The use of ‘teachable moments’ e.g. at the time of first usage of mobile payments as well as text messages sent via mobile phones can fascilitate the provision of simple and repeated financial education messages. Well-designed consumer care services also provide an effective tool to keep consumers informed and protected. Moreover, financial education via mobile phone channels can help increase the uptake and effective usage of financial products and services more broadly. For example, text message reminders have proven to have a positive impact on the use of deposit accounts for savings.19 18 Brazil introduced a three semester long high school pilot financial education program, which was recently evaluated (Bruhn and others 2013). It was shown to significantly improve students’ f inancial knowledge, attitudes and behavior and is in the process of being rolled out on a national basis. Similarly, students that participated in the program significantly improved spending and savings behavior compared to the control group. 19 Field experiments conducted in Peru, Bolivia and the Philippines showed that reminders increased the likelihood of reaching a savings goal by 3 percent and the total amount saved in the reminding bank by 6 percent. See Karlan, Dean, Margaret McConnell, Sendhil Mullainathan and Jonathan Zinman. 2010. "Getting to the Top of Mind. How Reminders Increase Saving." NBER Working Paper 16205, National Bureau of Economic Research, Cambridge, MA. 30 Pension Sector 95. Financial education campaigns encouraging increased pension fund coverage need to be careful to not be misleading until such time that the existing schemes are placed on a sound financial footing. In the short term, an influx of new members would increase contributions into the funds, thereby improving their cash positions in the short-term, but over the longer term, without reform, the benefit payments to these new contributors will exacerbate the already parlous financial positions of the funds. 96. A survey assessing the public’s pension fund literacy would be helpful in framing a specific strategy for literacy regarding mandatory, supplementary and yet to be created private pension funds. More knowledge by the public about the value of pension funds to avoid poverty in old age will be necessary to expand coverage of the pension system from the current approximately 3.5% to 20% of the population, which is a goal of the government. 97. The SSRA literacy campaign and other private sector initiatives should be closely aligned with the overall financial education strategy. To the extent possible, funding for the SSRA financial literacy campaign should be increased to allow for the implementation of the SSRA’s literacy strategy. The literacy campaign should be closely aligned with the overall financial education strategy. In addition, mandatory pension funds should coordinate their financial literacy programs with the SSRA to increase their combined scope and reach. 31