Published in Eastern Africa magazine, December 2005

The Umoja Fund

Tanzanians are now suppose to take a more active part of the transformation of the country´s economy. Ordinary citizens are invited to become investors by putting their money into the domestic financial market.

The government sees this as a way of including common people in the new economy and in the longer perspective also as a way of poverty eradication. People in Tanzania need to save more, and in order to do so they need alternatives as well as sufficient returns on their savings.

Earlier this year the public in Tanzania were offered to buy units in the Umoja Fund, the first collective investment scheme in the country. Through the fund many Tanzanians have become investors and also owners of some of the country´s biggest companies. The marketing of the fund, which was managed and sponsored publicly through the Unit Trust of Tanzania, took place from May to July this year. The result was a success.

"We sold fund units for 90 billions shillings to the public, and that was twice as much as we expected", says Dr. Hamisi Kibola, who is the chief executive for the Unit Trust of Tanzania.

"We want the Tanzanians to start saving in financial assets. It is important for them, and it is important for the country", Dr. Kibola says.

And there is no doubt that the objective is about to be realised. The actual number of individuals invested in the Umoja Fund this summer was 100.000. This means, among other things, that this people will take part in the privatisation policy not only as clients, but also as owners. The total number of investors in the Umoja Fund was 105.000, and apart from private individuals many organisations and institutions, like pension funds, invested in the fund. The Umoja Fund will use the money to invest in different kind of assets on the market, from shares to government bonds and bank deposits.

One of the purpose of the fund is to increase the domestic ownership, specially among ordinary citizens, at the Tanzanian stock market. Although the Dar es Salaam Stock Exchange (DSE) has been operating since 1998, the participation among ordinary Tanzanians has been very limited. About 60.000 Tanzanians own shares listed at the DSE, which means, so far, that not even 0,5 per cent of the Tanzanians own shares. Because of the Umoja Fund the number of shareholders will enhance, although the ownership of shares through the fund will be indirect. The Umoja Fund has on behalf of its investors invested in the Tanzania Breweries (TBL) and in the Tanzania Cigarette Company (TCC). In the initial stage the Umoja shares in the mentioned companies are 2 per cent and 1 per cent respectively.

If these companies perform good, also ordinary people will benefit from the country´s higher economic growth.

Dr. Kibola also means that people in Tanzania need to diversify their savings, and the new fund will be an important tool for that purpose.

"People need to save in other things than houses", he says, and adds that he believes the

fund will turn out to be a good investment, which means a higher return on peoples savings.

The fund can also be an injection for the country´s economy from another perspective. The fund units can be used as collateral when applying for a bank loan. This means that many Tanzanians, many of them belonging to the informal sector of the economy, will through the ownership of the fund get access to the credit market. The marketing of the Umoja Fund was therefore to a large extent aimed at small savers with a limited amount of money. The fund units were sold at a 30 per cent discount, and a special loan arrangement for low income women and disable people was launched together with the sale of the fund. During the two weeks the loan offer was in force 7.000 people applied for the loan.

The discount, which was financed by the government, means that the investors have a 30 per cent return on their investments from the start. That´s more than the interest rates borrowers pay yearly when borrow money through the special loan arrangement to buy the fund. (The discount was made through an arrangement where the government bought shares in TBL and TCC on the market, transferred the shares to the fund, and then the units of the fund were sold at a price 30 per cent lower than the market value of the shares would require).

Apart from the discount, Dr. Kibola sees other reasons for the positive response from the

public.

"High confidence for our institution as well as for the bank that was practically involved in the sale of the fund, and also high confidence for the people actually managing the fund´s investments were important factors", he says.

The investments in the fund are locked in for one year. After the first year it will be possible for the savers to take out their money by selling back their units to the Trust Fund. After one year it will also be possible for new savers, among them also foreigners, to entry the fund by buying new units of the Umoja Fund. Foreign investors were excluded from the initial offer to buy fund units. It is therefore obvious that it is in the authorities interest that the savers have a decent return on their investments over the first 12 months. Most of the funds investments – Treasure bills and bank deposits - have a duration of about one year or shorter. This is an indication that the managers of the fund have the return over first year as a priority.

According to Dr. Kibola, it is very possible that, in the future, a new fund will be launch with an initial public offer similar to the one for the Umoja Fund.

"This is a way of eradicate poverty that I strongly believe in", says Dr. Kibola.

The launch of the Umoja Fund can be seen as a natural step in the current development of Tanzania´s capital market. In countries with more sophisticated markets investments fund for private savers play a very important role – important for the savers as well as for the countries as a whole.