Cash is King in Tanzania, But at What Cost?

Cash is king in Tanzania's business scene. The World Bank's Global Findex Survey (2021) shows only 5% of Tanzanians have used digital retail payments, compared to 72% in high-income countries. And according to FSD Tanzania, only 13% of adults used mobile money to pay retailers on a monthly basis as of 2023.

This heavy use of cash isn't free. It has hidden costs that eat into business profits, creating problems for entrepreneurs across the country.

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The True Cost of Cash

1. Security Expenses

Businesses need safes, cameras, and sometimes guards to protect cash. These measures cost money and don't eliminate theft risk. A study by Innovations for Poverty Action (IPA) found that 23% of merchants in Dar es Salaam had been robbed in the past year, with 77% believing digital retail payments would have prevented this theft.

2. Transport Risks

Taking cash to banks is risky and time-consuming. Business owners spend money on transport and lose time they could use to grow their business. This is harder in rural areas where banks are far away and travel options are limited.

3. Time Wasted

Handling cash takes a lot of time. Staff may spend hours counting and recounting money. If a business owner's time is worth TZS 10,000 per hour, and they spend two hours daily on cash tasks, that's TZS 7,300,000 wasted each year.

4. Errors and Losses

Mistakes happen with cash. Miscounts, theft, and fake notes cause losses. These small accidents add up over time and cut into profits.

Problems with Financial Management and Taxes

Cash makes keeping good financial records hard. It causes problems beyond day-to-day operations.

Getting credit is tough for cash-based businesses. Banks want clear income records. Without these, loans are hard to get. This limits growth, especially for small and medium enterprises (SMEs) in East Africa.

Paying taxes correctly (compliance) is also hard with cash. Why? It's difficult to track cash transactions accurately. This can lead to reporting less income, which risks fines from the Tanzania Revenue Authority (TRA).

Evans Makundi, founder of ICT firm EvMak Tanzania, summarizes: "Handling cash is very expensive for businesses compared to adopting digital payments. Cash costs businesses in many ways: more security, more theft risk, more accounting, and it takes up valuable space in the office or store."

Electronic Payments in Tanzania

Tanzanians use mobile money a lot for sending money, but not for buying things from enterprises. Firas Ahmad, an industry expert, says: "In Tanzania, over 94% of payments are still in cash, even though we have more than 45 million mobile money users."

An IPA study shows that over 60% of shop owners think digital payments could help their business. But switching isn't easy. Firas points out: "Merchants might pay 2% to 5%, while customers can pay up to 15% to 20% extra for digital payments."

Digital Solutions for Better Business

Online applications can be cheaper than cash over time. They do more than just handle payments. They help keep better records, make paying taxes easier, and save time.

Let’s look at an example:

A Dar es Salaam grocery store invests TZS 500,000 in a digital payment system. By slashing cash handling time by 75%, they could save about 5,475,000 TZS in the first year alone, even after accounting for transaction fees. This potential for savings is substantial, especially for SMEs operating on thin margins.

That's why Simplitech, a Dar es Salaam-based startup, provides a tool to help businesses make that transition. Its flagship product, Simplify VFD, is an online cash register. It automatically issues electronic fiscal device (EFD) receipts, helping businesses comply with TRA requirements and improve record-keeping.

As I wrote last year for The Citizen newspaper, Simplify VFD costs TZS 121,000 to set up and TZS 59,000 annually. It offers automated tax reports and works in both English and Swahili. Over 1000 SMEs in Tanzania already use it, with a high renewal rate of 85%, suggesting its effectiveness in addressing these challenges.

To recap, the system helps with:

• Making receipts automatically
• Creating tax reports easily
• Keeping better financial records
• Complying to tax regulations

Challenges and Moving Forward

But switching to digital payments isn't easy for everyone. Many business owners, especially in rural areas, struggle with digital tools. The initial cost can be a barrier, even if it saves money later. Reliable internet is still an issue in parts of Tanzania. Some owners worry about the security of digital financial data.

Thomas Gerald, Managing Director at Citi Land Solutions Ltd., points out another crucial factor: "I think Tanzania is lagging behind due to the high mobile transaction costs imposed by the government. Government should encourage cashless payments." His observation shows the need for supportive policies to facilitate the transition to digital payments.

Despite these challenges, change is happening. The revenue authority is pushing for more digital tax solutions. These can help increase tax compliance among SMEs.

A study I cited in my previous article found that increased compliance for SMEs could add 78 billion shillings to TRA's annual revenue, highlighting the potential economic impact of this transition.

Reuben Mwatosya, co-founder of embedded finance enabler Tembo, emphasizes: "Cash has long been replaced by digital payments in the consumer world. But this has not happened in the business world yet, where cash is still the king, especially in Africa."

In response to the challenges posed by traditional banking, Evans Makundi suggests, "There are alternative solutions, such as mobile wallets.”

For business owners thinking about going digital:

1. Start small. Try digital systems for one part of your business first.

2. Train your staff. Make sure everyone knows how to use the new platforms.

3. Talk to your customers. Explain why electronic payments are good for them too.

4. Keep good records. Digital systems help, but you still need to check your money information regularly.

Therefore, understanding the real cost of cash is important for your enterprise.

Web apps like Simplify VFD can cut cash costs, improve record-keeping, make tax payments easier, and free up time for growing the business.

We believe that by using technology, Tanzanian businesses can overcome cash problems and do better in an increasingly digital marketplace.