Role of Commercial Banks in Poverty Aleviation in Tanzania

Topics: Poverty, Poverty threshold, Poverty in the United States Pages: 28 (6298 words) Published: May 15, 2012

CHAPTER ONE

1.0 INTRODUCTION

According to the World Bank reports about 1.1 billion people live in extreme poverty for less than US$ 1. The extreme poverty being in the developing countries of which 9% are from East Asia and the Pacific and 41% are from Sub-Saharan Africa. Tanzania remains one of the 10 poorest countries in the world. Poverty remains widespread and deep, with half of Tanzanians living under conditions of deprivation, concentrated in the rural areas.

Commercial Banks contribute to economic growth through their financial intermediation role. Banking sector in Tanzania has experienced fundamental changes over the last decade following banks and other financial institutions reforms starting from the early 1990s. However, what is still concealed is the extent to which banks are efficient in Tanzania. The impact of commercial bank finance in the economic growth and development of a state cannot be overemphasized this is not a new concept.

One of the core businesses in financial institution particularly commercial banks is lending to help business people get rid of poverty. According to Muktar (2009), credit has been recognized as an essential tool for promoting small entrepreneurs . The government encourages commercial banks to lend the fund to individuals to extend their projects (businesses) to a level until they are able to reduce the level of poverty and have their basic needs.

1. BACKGROUND OF THE PROBLEM.

Commercial banks can be a critical element of an effective poverty reduction strategy. Improved access and efficient provision of savings, credit, and insurance facilities in particular can enable the poor to smooth their consumption, manage their risks better, gradually build their asset base, develop their micro enterprises, enhance their income earning capacity, and enjoy an improved quality of life. The issue of commercial banks to the Tanzanian economy has been of great importance. The role of Commercial banks have had important contributions to Tanzania economy. The main objective of commercial banks has been to maximize profit for his share holders. They are source of income through loans, and employment to the majority of Tanzanian people.

It is generally accepted that without permanent access to commercial bank finance, most poor households would continue to rely on meagre self-finance or informal sources of finance, which limits their ability to actively participate and benefit from development opportunities.This is one of the sub sectors which contributes greatly to job creation especially in these days when formal employers are no longer in a position to absorb such large number of job seekers. Moreover, commercial banks supplier’s goods and services to people.

It is often argued that people who live in developing countries might improve their living standards by becoming micro entrepreneurs and that financial institutions like commercial banks should support their initiatives with small loans. This is true because well established and sustainable micro and small enterprises in many societies contribute to the growth of national income in the country, more employment opportunities, better standard of living and hence to the reduction of poverty. However, according to the International Finance Corporation 60% to 69% of the population in many African countries have no access to conventional financial institutions considering low level of economic development in Tanzania, commercial banks are increasingly becoming more important terms of income generation and provision of goods and services.

Due to the declining level of the public sector, the role of commercial banks in promoting economic growth and development, offering increased employment and reducing income disparities has been widely recognised. In Tanzania, micro and Small Enterprenuers contribute 12% and 34% of rural and urban employment respectively as well as up to 32% of the Gross...

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