Why these alternative finance mechanisms require attention

Dar es Salaam. While banks remain a dominant financing option, economic experts say other alternative modes should be explored to facilitate the implementation of development projects.

Access to sufficient financial resources to implement development projects has been a big challenge among developing countries, although there are unexplored options.

Some of those methods include impact investing, diaspora bonds, crowd-funding, social or development impact bonds, private equity, blended finance, and matching funds. Each method has its own implementation procedure, but in Tanzania, they have not yet been

Experts say the government has not denied such alternative financing instruments, but there have not been bold initiatives from the institutions to take advantage of such opportunities.

Speaking to The Citizen, a finance and banking analyst from the University of Dar es Salaam, Dr Tobias Swai, said financing sources such as social and development bonds have been active in Tanzania.

However, he said initiatives such as diaspora bonds have not been developed in the market.

“There have not been bold initiatives from the institutions to utilise such opportunities,” he said.

He added that neither the private sector nor government parastatals have developed projects that can attract such sophisticated funding sources. Dr Swai added that there is a need to create strong institutions in governance and ensure accountability of the funds, having quite good track records to protect the investors’ money.

“We’ve had several uncontrolled crowdfunding programmes, and proponents of such schemes have faced court charges for misappropriation of funds and failing to deliver on promises..”

According to him, the initiative to issue social bonds through semi-government-owned financial institutions such as banks is a good start.

According to him, projects such as Building a Better Tomorrow, which is currently undertaken by the ministry of Agriculture, may form an important start for initiating good projects to be funded by such financing instruments.

Last year, NMB Bank issued the Jasiri Bond, a type of social bond and the first gender-based financial instrument to list on the Dar es Salaam Stock Exchange and cross-list to the Luxembourg Stock Exchange. Commenting on that, an economist from the University of Dodoma (Udom), Dr Lutengano Mwinuka, said there is great productivity and opportunity for the government not only to save money but to implement small to large development projects.

He added that another unique opportunity is the high possibility of implementing projects, even those with a high risk for the government.

“We really need guidelines, systems, and a friendly environment for the implementation of these methods. Some of these methods have been mentioned in the implementation of the current Five-Year National Development Plan (2021/22-2025/26),” he said.

According to him, the speed of using these methods through public-private partnerships will help implement development projects in the country.

He cited the example of Ethiopia, which managed to build its electric dam only by using diaspora bonds.

An economist at Mzumbe University, Dr Daudi Ndaki, said crowdfunding is a revolutionary financial tool that has been transforming the landscape of entrepreneurial funding worldwide, and Tanzania is no exception.

The potential of crowdfunding in Tanzania is tremendous, with a booming population of young, tech-savvy individuals.

“The country is ripe for a surge in entrepreneurial activity,” he said.

“As Tanzania continues to foster its entrepreneurial ecosystem, crowdfunding platforms have a pivotal role to play. By providing a democratic, transparent, and accessible avenue for funding. They can propel a new generation of Tanzanian entrepreneurs towards success,” he insisted.

‘Cautions needed’

The principal economist at the Bank of Tanzania’s (BoT) Directorate of Economic Research and Policy, Dr Lusajo Mwankemwa, stated that the Bank, as an advisor to governments on fiscal policies and debt management, is also looking at all financing options, including the possibility of diaspora bonds. It is the bank’s obligation to explore and evaluate the viability and implications of all financing alternatives and to advise the government accordingly.

“I want to assure you that BoT, as a government advisor on economic and fiscal policies, has been critically looking at the issue of alternative financing because we have the responsibility to ensure that our customer, the government, is borrowing at affordable costs from both domestic and foreign markets for effective implementation of development projects,” he said.

Dr Mwankemwa stated that there is still a lack of awareness about the matter, but if the government decides to pursue the arrangement, the bank, in collaboration with other government agencies, will have to educate the people, particularly the diaspora community, so that all Tanzanians, including those who are outside the country, will have the opportunity to contribute to the development of their home country.

On the other hand, a financial analyst and assistant manager in the Directorate of Financial Markets, Mr Fidelis Mkatte, highlighted the inevitability and benefits of alternative financing in today’s world; however, he cautioned that it is crucial to approach these new financial instruments with discretion.

For instance, Mr Mkatte pointed out the potential of municipal bonds as an alternative financing method to relieve the government’s burden of supporting local councils.

By doing so, funds can be directed towards other projects. While acknowledging the advantages, he emphasised the need for careful consideration, particularly in terms of managing these instruments.

Mr Mkatte emphasised the importance of being cautious and evaluating the specific borrowing needs and environment before embracing alternative financing options.

He further pointed out that not every option is suitable without thorough examination.

He recognised the value of various alternatives like infrastructure bonds, Islamic financing, green bonds, Gender bonds, and other Environmental, Social and Governance (ESG) options, but stressed the significance of assessing the conditions and affordability of these loans.

He advocated for the continued development of the local domestic market while proceeding with caution.