Investors’ Risks for Investing on Unregulated Financial Markets

In a bid to diversify their investment portfolio or seek investment opportunities with high returns, some Tanzanians’, especially the youth, have been taking investment risk on investment opportunities that have the potential of exposing them to high and unmitigated risks. In their pursuit of outsized returns some of these investors temporarily seems to have forgotten the misery that befell investors who participated in various forms of Ponzi and/or Pyramids schemes which similarly promised returns that were clearly unsustainable (if could be achieved at all), but still people fell into them.

To this day, part of these investors who lost funds in those schemes are still hoping that they will get some form of compensation someday, which may be a challenge, considering the fact that these entities were not under the supervision of any regulator, neither the Capital Markets and Securities Authority, nor the Bank of Tanzania, but these investments were also not insured in any way, which could have provided a form of relief to investors’ protection, in cases of such loses.

What is at stake? the onset of technology, which by and large have made financial transactions more efficient among other positive disruption attributes, has also come with the exposure to unregulated investment opportunities offered mainly through online platforms. While there are still discussions around the regulation of virtual/crypto and other form digital currencies and digital assets in various jurisdictions around the World, probably including Tanzania, but so far Tanzanians are quietly investing in such emerging investment areas such as Initial Currency Offerings (ICOs) and other forms of unregulated online foreign exchange and currency trading, unfortunately to their own peril.

As it stands, most of the entities offering such alternative investment opportunities may not be licensed whatsoever, which exposes investors to both high and unmitigated risks. While some of the investment platforms and activities have caught the attention of our regulators, but it has been only to the extent of issuing cautionary notices and warnings to the public, for the public to beware of the fact that such financial products and services are unregulated and may be risky. So far there is not action that has been taken to protect investors, and there may be many Tanzanians out there who are potentially exposed to such instruments which promises greater investment returns as it goes with some greater excitement for individuals with quick returns’ investment approach.

As we observe, to attract investors, most of the entities involved in these programs seem to promise outsized returns which may not be sustainable in the long run. Global trend in the unregulated digital currencies demonstrate that crypto (and other digital) based assets market is uncertain and has experienced accelerated boom and burst cycles which may expose investors to substantial losses.

At the global level, International Organization of Securities Commissions (IOSCO), the international body that brings together the world’s securities regulators, to which our capital markets regulator is a member, has identified several risks associated with Initial Currency Offerings (ICOs), for instance. These include: heightened potential for fraud as these products are mainly internet-based; cross-border distribution risks – i.e. difficulties in recovery of investors’ funds in the event of a collapse, particularly in cases where the ICO is operating outside the investment jurisdiction; information asymmetry – where retail investors’ may not be able to understand the risks, costs and expected returns arising from investments; and also liquidity risk – where cases of insufficient liquidity to support reliable trading and market-making activities may be hindered.

There are also unmitigated risks in online foreign exchange trading through platforms of unlicensed entities, where investors risks losing their investments and may not be protected by the law. While in the near future regulators (such as the BOT and CMSA) may consider coming up with tools and mechanisms for protecting investors in these global financial and capital market activities, local investors are meanwhile cautioned and advised to avoid participating in investment opportunities offered by unregulated and unlicensed entities, as there may be no recourse in the event of a collapse and/or loss of their investments.

The case for embracing the culture of paying taxes

According to recent reports by the Tanzania Revenue Authority (TRA), tax revenue collections reached Tsh. 7.99 trillion in the first half of the financial year 2018/19 i.e. from July to December 2018, a growth of 2.01 per cent compared to Tsh. 7.83trillion collected during the corresponding period previous year 2017. The Tsh.8trillion collection is about 89 percent of the expected revenue collection for the six-months period. One of the many reasons for such performance in which collections are about 11 percent behind the budget is the case of a narrow tax base (with Tanzania having a low domestic revenue to GDP ratio (less than 15 percent) compared with the Sub-Saharan African countries average of 17 percent.
To increase the tax base TRA have in the recent past embarked in a nationwide campaign for Taxpayer Identification Number (TIN) registration targeting new tax payers and locations of their businesses aimed at expanding the tax net base. The other recent initiative of widening the base has been on property tax whose rates of Tsh.10,000/- for ordinary houses, Tsh. 50,000/- for every floor of a storey building is meant to increase the outreach and bring more citizens in the taxpayers’ net.
Furthermore, H.E. President Dr. John Magufuli has recently issued a raft of new tax administration measures rallying on all of us to participate even more in the process of raising revenues and expand our country’s tax base. The President directed the tax administration officers to adopt a more accommodative tone towards the business community instead of being overly aggressive which makes it difficult for tax collections, in some cases.
What is at stake? the wide gap between the actual tax paying population and the total population has been a worrying trend in most countries over the years. Studies across board indicates that in most countries, especially in Africa, only a small portion of a given country’s population pay taxes.

In 2018, for instance, BusinessTech reported that only about 30 percent of the 56 million population paid taxes in South Africa. The BusinessTech further reported that although the remaining part of the population was contributing through Value Added Taxes (VAT), but that portion of the population was not contributing anything more in the form of tax revenues to the nation coffers. In Botswana the ratio is 32 percent; Namibia 24 percent; Mozambique 19 percent; etc. Now, the case for these countries in the Southern part of the continent is far much better in relative terms. For instance, in Kenya, part of their 46 million population that pays taxes is 3.9 million, i.e. about 8.4 percent. Data by the Tanzania Revenue Authority (TRA) last year indicates that the number of taxpayers who paid taxes in 2018 was about 2.27 million. Working with a population of 55 million Tanzanians, the number of those who filled for tax returns or actually paid taxes represented less than 4.5 per cent of our population.

In the case of other key parameter measuring tax payments i.e. Revenue to GDP, our revenue collections to Gross Domestic Product (GDP), at about Tsh.15trillion per annum, is just 12.8 per cent. We expect collections to reach Tsh.18 trillion in this financial year 2018/19 – however, if we manage to collect Tsh. 18million, this will still be about 15 percent of GDP. When compared to some countries in the Southern part, again, Botswana, Mozambique, South Africa – there tax revenue to GDP ratios are: 14 percent; 18 percent; and 26 percent respectively.

This trend can only point to one thing; the country’s economy is being driven (at least from the tax revenue resource mobilization perspective) by a very small portion of the country’s total population. This points to the dire need for us as citizens to do more. The recently introduced presumptive tax for small scale and medium-sized enterprises and hawkers and small traders’ Identity Cards, for instance, are without doubt an apt platform to give Tanzanians outside the current tax brackets an opportunity to participate in the contribution to the national coffers.

A tax, charged at a moderate rate, say 10 or 15 percent of the business permit or trade license fees, or indicated above the Tsh. 10,000 or Tsh. 50,000 paid as property tax, are good strategies towards expanding the country’s tax base. Despite its implementation challenges and eliciting mixed reactions, but such measures, are some of the easiest taxes to comply with, and to administer. What is important is that the targeted market should fully embrace these taxes and take it as an opportunity to play the civic duty for each citizen on tax payments, especially now that there are vivid cases of better use of tax payers’ money in supporting our socio-economic development, underlying the necessity of social contract.

With these efforts, and others targeting monetary policies and investment attractiveness, from the economic perspective, we have a significant potential to largely sustain ourselves and emancipate from the burden of foreign aid and assistances which sometimes carries a lot of conditionalities, to the detriment of compromising our freedom, our cultural set-ups and our political processes. The Ministry and the Revenue Authority, should keep up the spirit of exploring more tax base expansion strategies, without necessarily imposing additional taxes to the already taxed sectors and segment of the economy and/or society. That way a substantial size of the population will have an opportunity to contribute to the national coffers.