THE ROLE OF FINANCIAL INSTITUTIONS ON SUCCESS OF SMALL AND

MEDIUM ENTERPRISES IN TANZANIA. A CASE STUDY OF

DAR-ES-SALAAM REGION
FRANK GLADSTONE MOSHI
A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR AWARD OF THE DEGREE OF MASTERS IN BUSINESS
ADMINISTRATION (MBA FINANCE) OF THE OPEN UNIVERSITY OF
TANZANIA.
2!!
CERTIFICATION
The undersigned certifies that he has read and hereby recommends for the acceptance by
the Open University of Tanzania a dissertation titled: T"# R$%# $& F'()(*')% I(+,',-,'$(+
$( +-**#++ $& S.)%% )(/ M#/'-. E(,#010'+#+ '( T)(2)('), in fulfillment of the
requirements for the degree of Masters of Business Administration !inance" of the Open
University of Tanzania
################$#########
D0. G.S M3)%-4$
%upervisor"
&ate:##################$
ii
COPYRIGHT
This dissertation is a copyright material protected under the Berne 'onvention, the
copyright Act ())) and other international and national enactments, in that behalf on
intellectual property$ *t may not be reproduced by any means, in full or in part, e+cept for
short e+tracts in fair dealing, for research of private study, critical scholarly revie, or
discourse ,ith an ac-no,ledgement, ,ithout ,ritten permission of the &ean of !aculty
of Business and Management %tudies, on behalf of both the author and The Open
University of Tanzania$
iii
DECLARATION
*, F0)(4 G%)/+,$(# M$+"' hereby declare that this dissertation is my o,n original ,or-
and that it has not yet been presented and ,ill not be presented to any other University for
similar or any other degree a,ard$
%ignature: ##############$
&ate: ################
iv
DEDICATION
This ,or- is dedicated to my parents Mr$ .ladstone A$ Moshi and his ,ife Mrs$Magreth,
my beloved ,ife %arah and our first born daughter .lory !$ Moshi$
v
ACKNOWLEDGEMENT
!irst and foremost, * than- the almighty .od ,ithout ,hose grace/ this dissertation ,ould
not have been accomplished$ %econdly, * am grateful to various %mall and Medium
0nterprises and !inancial *nstitutions ,hose contributions made this ,or- to be in the
present shape$ *t is difficult to list them all$ 1o,ever, the follo,ing deserve special
mention$
* o,e a debt of gratitude to &r$ .$ %$ M,alu-o for his devotion in supervising and for
tirelessly ,or-ing ,ith me throughout this study$ *n particularly, * than- him for his
scholarly and constructive criticism ,hich eventually turned this ,or- into a reality$
* e+press my heartfelt than-s to 2rof 3ictor M, the 1ead of !aculty of Business and
Management, &r$ 4gatuni 2, the 'ourse 'oordinator, and his team for allo,ing me to
carry out this dissertation ,or-$
*n the field * am very much indebted to all those ,ho facilitated access to data and
information$ * am deeply than-ful to the 5inondoni 'ooperative Manager Mr$ Bu-u-u
and officials of the surveyed %A''O%, 1ead of 1uman 6esource &epartment at 4MB
Mr$ Beda Mar,a, 7oan and 'redit %upervisor at A'B Mr$ &ominic- 7 4oah$ Operation
Manager at Tu8i8enge Tanzania 7imited Mr 3ictor M$ *am equally grateful to selected
%M0 o,ners operated in &ar es %alaam region$ Our interaction ,ith all of you above
during this period has been privilege and true learning e+perience$
The completion of this study ,as made possible through financial and moral support
provided by my employer, * therefore, ,ish to register my appreciation to the
management of .9B %oap *ndustries limited especially The 0+ecutive &irector Mr$
Ma-undi ., and my fello, staffs Mr$ Moshi !$A , Mr$ :atambile '$ and Mr$5essy A$0
vi
My sincere than-s go to my family for their support: my ,ife %arah and my child .lory
for their love, encouragement and sacrifice, especially ,henever * need their strength to
move for,ard$ * am also deeply grateful to my loving parents Mr$ .ladstone A$ Moshi
7ate" and his ,ife Mrs$ Magreth A$ Moshi have supported me ,ith every decision *
have made throughout my academic life and never once discouraged me from pursuing
my dreams$
7ast but not least, *am grateful to my close friend Mr$ Os,ald ;$ 5aradisi for
encouragements and for dispensing good advice ,hen needed and for inspiring me to
carry on ,hen * thought * could not during the research and ,riting of the dissertation$
vii
ABSTRACT
This study aimed at assessing the role of financial institutions on the success of %M0s in
the country$ Though the success of %M0s have been lin-ed to the accessibility of financial
services by various scholars, yet the ,ay financial institutions influence success of %M0s
has never been e+plored$ To underta-e the study ten financial institutions ,ere involved
,hich included commercial ban-s, microfinance institutions and %A''Os$ A total of )<
%M0s ,ere randomly selected from a population of )=>=? %M0s found in &ar es %alaam
region$ T,o sets of questionnaires ,ere constructed one set for %M0s o,ners and other
for the financial institution$
The responses of the participants ,ere analyzed using the statistical pac-age for social
sciences %2%%"$ The study found that financial institutions have little influence on %M0s
financing because most of %M0 o,ners or managers frequently used retained earnings or
profit self@financing" and funds from relativesAfriends to finance their business as a
source of finance$
The study recommends to financial institutions to rigorously mar-et their services to
%M0s ,hich have not subscribed to their services$ The study also recommends the
rela+ation of lending conditions so that %M0s can access loans at affordable interest rates$
The study further recommends a future research to be done that shall incorporate a ,ide
range of %M0s, ,ith a bigger sample size$
viii
TABLE OF CONTENTS
CERTIFICATION.............................................................................................................''
COPYRIGHT....................................................................................................................'''
DECLARATION...............................................................................................................'5
DEDICATION....................................................................................................................5
ACKNOWLEDGEMENT................................................................................................5'
ABSTRACT....................................................................................................................5'''
TABLE OF CONTENTS..................................................................................................'6
LIST OF TABLES..........................................................................................................6'''
LIST OF FIGURES........................................................................................................6'5
LIST OF ACRONYMS....................................................................................................65
CHAPTER ONE7 INTRODUCTION..............................................................................!
!.! B)*480$-(/$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$(
!.2 P0$9%#. S,),#.#(,$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$>
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!.:.! G#(#0)% 0#+#)0*" $9;#*,'5#$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$B
!.:.2 S1#*'&'* 0#+#)0*" $9;#*,'5#+$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$B
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!.> S'8('&'*)(*#+ $& ,"# +,-/?$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$C
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CHAPTER TWO7 LITERATURE REVIEW.................................................................B
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2.<.2.D O,"#0 I(','),'5#+ D$(# ,$ P0$.$,# S.)%% )(/ M#/'-. E(,#010'+#+ S#*,$0$$$>?
CHAPTER THREE7 RESEARCH METHODOLOGY..............................................<>
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CHAPTER FOUR7 STUDY FINDINGS AND ANALYSIS.........................................>!
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+i
CHAPTER FIVE7 CONCLUSION AND RECOMMENDATIONS...........................D:
>.! C$(*%-+'$($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$D=
>.2 R#*$..#(/),'$(+$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$D<
>.2.! G$5#0(.#(, I(,#05#(,'$(+$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$D<
>.2.2 S.)%% )(/ M#/'-. E(,#010'+#+$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$DB
>.: S-88#+,#/ A0#)+ &$0 F-0,"#0 R#+#)0*"$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$DC
REFERENCES$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$D)
APPENDICES$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$))
+ii
LIST OF TABLES
T)9%# 2.! T"# C),#8$0? $& SME D#5#%$1.#(, '( T)(2)(') $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ::
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T)9%# :.2 D'+,0'9-,'$( $& ,"# +).1%# $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ <A
T)9%# <.! T"# R#+1$(+#+ $& SME+E O3(#0+ '( R#%),'$( ,$ L$*),'$(. $$$$$$$$$$$$$$$$$$$$$$$ >2
T)9%# <.2 Y#)0 $& ,"# E+,)9%'+".#(,. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >2
T)9%# <.: D'+,0'9-,'$( $& A8# $& ,"# R#+1$(/#(, $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >>
T)9%# <.< D'+,0'9-,'$( $& S)%#+ P#0&$0.)(*# $& SME+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >B
T)9%# <.> M$,'5#+ I(&%-#(*# P#$1%# P)0,'*'1),'(8 '( D$'(8 B-+'(#++#+ $$$$$$$$$$$$$$$$$$ @
T)9%# <.@ L$)( S'2# $& ,"# R#+1$(/#(, $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @:
T)9%# <.A F-,-0# C0#/', P%)(+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @<
T)9%# <.D I.1)*,+ $& L$)( $( S)%#+C A++#,+CP0$&',)9'%',? )(/ M)04#, C$5#0)8# $ $ @@
T)9%# <.B E.1%$?.#(, G#(#0),'$( $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @@
T)9%# <.! S$-0*#+ $& SME+ &'()(*#. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @D
T)9%# <.!! I(+,',-,'$(+ S-11$0,'(8 S.)%% )(/ M#/'-. E(,#010'+#+ $$$$$$$$$$$$$$$$$$$$$$$$ A
T)9%# <.!2 S,)8#+ '( 3"'*" SME+ R#=-#+, &$0 S-11$0, $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ A2
T)9%# <.!: P0$9%#.+ '( A**#++'(8 ,$ F'()(*# $( SME+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ A:
T)9%# <.!< C$(+,0)'(,+ F)*'(8 ,"# SME S#*,$0. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ A<
T)9%# <.!> T?1# $& F'()(*')% S#05'*#+ O&&#0#/ 9? S-05#?#/ F'()(*')% I(+,',-,'$(+ A@

+iii
LIST OF FIGURES
F'8-0# 2.! C$(*#1,-)% F0).#3$04 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ <:
F'8-0# <.! F$0.+ $& B-+'(#++ O3(#0+"'1 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >:
F'8-0# <.2 D'+,0'9-,'$( A**$0/'(8 ,$ G#(/#0 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ><
F'8-0# <.: D'+,0'9-,'$( $& M)0',)% S,),-+ $& R#+1$(/#(,+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >>
F'8-0# <.< E/-*),'$( %#5#% $& SME+E $3(#0+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ >@
F'8-0# <.> M);$0 E*$($.'* A*,'5','#+ *)00'#/ O-, 9? SME +#*,$0 $$$$$$$$$$$$$$$$$$$$$$$$$$$ >A
F'8-0# <.@ R#8'+,0),'$( S,),-+ $& S.)%% )(/ M#/'-. E(,#010'+#+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$ >D
F'8-0# <.A P#0*#(,)8#+ $& B#(#&'*')0'#+ )8)'(+, ,"# N$( B#(#&'*')0'#+ $& %$)( $$$$$$$$ @!
F'8-0# <.D C0#/', R),'$('(8 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @:
F'8-0# <.B A&&#*,+ $& R#1)?.#(, $( ,"# &'()(*')% 1#0&$0.)(*# $& SME+ $$$$$$$$$$$$$$$$$ @<
F'8-0# <.! U+#+ $& L$)( $( S.)%% )(/ M#/'-. E(,#010'+#+ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ @D
F'8-0# <.!! I(,#0#+, R),#+ C")08#/ 1#0 A((-.. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ AD
+iv
LIST OF ACRONYMS
A'B A-iba 'ommercial Ban-$
B&% Business &evelopment %ervices
B0%T Business 0nvironment %trengthening for Tanzania
B0T Board of 0+ternal Trade
B!*A Ban-ing !inancial *nstitution Act
BOT Ban- of Tanzania
B607A Business 6egistration and 7icensing Authority
'AMA6T0' 'entre for Agricultural Mechanization 6ural Technology
'B4 'entral Ban- of 4igeria
'6&B 'o@operative and 6ural &evelopment Ban-
0OT! 0qual Opportunity Trust !und
0%6! 0conomic and %ocial 6esearch !oundation
!0&A !inance and 0nterprises &evelopment Agency
!*4'A !oundation for *nternational 'ommunity Assistance
!*s !inancial *nstitutions
.&2 .ross &omestic 2roduct
*'A *nternational 'o@operative Alliance
*!A& *nternational !und for Agricultural &evelopment
*!' *nternational !inance 'ompany
*7O *nternational 7abour Organization
*M! *nternational Monetary !und
M0&A Mennonite 0conomic &evelopment Associates
M!* Microfinance *nstitution
4B' 4ational Ban- of 'ommerce
4B% 4ational Bureau of %tatistics
+v
4&' 4ational &evelopment 'orporation
400' 4ational 0conomic 0mpo,erment 2olicy
4.Os 4on .overnmental Organization
4*.2 4ational *ncome .enerating 2rogramme
4MB 4ational Microfinance Ban-$
4%*' 4ational %mall *ndustries 'orporation$
2OT 2ec-ing Order Theory
26*&0 2romotion of 6ural *nitiatives and &evelopment 0nterprises
2%* 2rivate %ector *nitiatives
2T! 2rivatization Trust !und
6!%2 6ural !inancial %ervices 2rogramme
6O%'As 6otating %avings and 'redit Associations
%A'As %avings and 'redit Associations
%A''Os %avings and 'redit 'ooperatives %ocieties
%BA %mall Business Administration
%0&A %mall 0nterprises &evelopment Agency
%07! %mall 0ntrepreneurs 7oan !acility
%07!*4A %ero 7ease and !inance 'ompany
%*&O %mall *ndustries &evelopment Organization
%*&2 %ustainable *ndustrial &evelopment 2olicy
%M0 %mall and Medium 0nterprises
%2%% %tatistical 2ac-age for %ocial %cience
%UMAT6A %urface and Marine Transport Authority
TA!O2A Tanzania !ood 2rocessors Associations
TA%*%O Tanzania %mall *ndustries Organisation
TBA Tanzania Ban-ers Associations
+vi
TB% Tanzania Bureau of %tandards
T''*A Tanzania 'hambers of 'ommerce *ndustries and Agriculture
T0M'O Tanzania 0ngineering and Manufacturing &esign Organisation
T.T Tanzania .atsby Trust
T*6&O Tanzania *ndustrial 6esearch &evelopment
U6T United 6epublic of Tanzania$
U%A United %tate of America$
U%A*& United %tate Agency for *nternational &evelopment$
30TA 3ocational for 0ducation and Training Authority
3*B*4&O 3i-undi vya Biashara 4dogo
+vii
CHAPTER ONE
INTRODUCTION
!.! B)*480$-(/
*t is no, increasingly recognized that the %mall and Medium 0nterprises play an
important role around the ,orld$ %mall and medium@sized enterprises are considered to be
one of the principal driving forces in economic development$ They stimulate private
o,nership and entrepreneurial s-ills, the greater li-elihood that %M0s ,ill utilise labour
intensive technologies and thus have an immediate impact on employment generation,
they can usually be established rapidly and put into operation to produce quic- returns,
%M0 development can encourage the process of both inter and intra regional
decentralisation and they may ,ell become a countervailing force against the economic
po,er of larger enterprises$ More generally the development of %M0s is seen as
accelerating the achievement of socio@economic ob8ectives, including poverty alleviation
and help in diversification of economic activities %zabo, ())B"

%M0s development process continues to be in the forefront of policy debates in both
developing as ,ell as developed countries in creating 8obs and competitiveness$ *n
0urope, %M0 represents about ))$DF of all enterprises in E??=, in ,hich these %M0s
employs about t,o third of the ,or-force in 0urope and generate more than a half
<C$=F" of its value added$ %chmiemann, E??B"$
!urthermore, in Asian 2acific economies, the %M0s accounts about )?F of the
enterprises in ,hich they constitute the bac-bone of this region because bet,een =E and
>DF of the %M0s contribute for the employment and bet,een B? and D?F contribute for
the gross domestic product .&2" in individual Asia 2acific economies$ Also the United
%tates economic performance has been stimulated by the creation of the %M0s in ,hich
+viii
they accounted for >=F of the 8ob creation bet,een ())? and ())>$U4A0'0 %ecretariat,
())C"$ *n Africa, the %M0 sector accounts for almost )?F of all the enterprises, in ,hich
they are located in both the rural and urban areas, ,hereby they provide more equitable
distribution of income in all areas of the countries$ This means that the %M0s are the main
source of providing employment to the people and stimulate the development of the
countries by promoting the entrepreneurship and the business s-ills amongst communities
and strengthen the local production sector as ,ell as the industrial base$ Therefore the
%M0s in Africa have been considered to be a very important engine for obtaining national
development goals, such as poverty alleviation and economic gro,th$ Mo-addem, E??B"$
!or e+ample, in %outh Africa, the %M0s accounting for about >BF of the total economic
activities and D>F of private employment$ *t is also estimated that about D?F of the
formal business sector and )<F of the total business sector are considered to be the
%M0s$ *nternational *nstitute for %ustainable &evelopment, 'anada, E??>"$
1o,ever, Tanzania li-e other countries, %M0s play an important role in the process of
industrialization and economic gro,th by significantly contributing to employment
creation, income generation and catalyzing development in urban and rural areas
Olutunla,E??D"$
Other intrinsic benefits of vibrant %M0s include access to the infrastructural facilities
occasioned by the e+istence of such %M0s in their surroundings, the stimulation of
economic activities such as suppliers of various items and distribution for items produced
,ithin and outside of country, stemming from rural urban migration, enhancement of
standard of living for both employed and non employed in this sector, due to these
reasons A8ose,E?(?" states that %M0s are the pivot of economic gro,th and first point of
contact for the business ,orld$
+i+
%ince the mid@()D?s, the government of Tanzania has embar-ed on several attempts on
economic reforms ,hich essentially entailed the shift from an administratively managed
and public sector led economy to a mar-et oriented and private sector led economy$
!inancial sector reforms ,ere part of these broader economic reforms$ !or instance one of
the attempts ,as the establishment of the Ban-ing and !inancial *nstitutions Act of ())(,
,hich reintroducing competitive ban-ing that ,as abolished in ()BC$ The Act provided
the frame,or- for liberalization of the ban-ing system to increase efficiency in the
delivery of financial services through competition in interest rates, elimination of
administrative credit allocation, allo,ing the entry of both local and foreign ban-s in the
mar-et and strengthen the Ban- of TanzaniaGs role in regulating and supervising financial
institutions$ BoT,())>"$
1o,ever irrespective of the deregulation of the ban-ing sector in Tanzania, allo,ing the
authorities to eliminate distortions in the financial mar-ets and enhance the development
of money and interban- mar-ets through creating competitions in ban-ing industry in the
country, financial services to the %M0s remained a distant dream because restructuring of
the state o,ned ban-s led to a closure of CD branches throughout the country mostly in
rural areas %atta,E??E", leaving a huge gap bet,een supply capabilities of the ban-s and
the demanding needs of %M0s$
A successful financial sector reform ,as e+pected to generate a dynamic process
involving substantial changes in the countryGs real activities of production, e+change and
finance$ %ustainability of the reforms ,as e+pected to result in financial deepening,
increase in the range of financial products in order to better serve the needs of the
economy and enhance transformation of the economy$ Therefore, the government focused
on the e+pansion of financial services to lo, income people ,ho formed the ma8ority in
++
the country particularly in the rural area ,hich constitutes C?@D?F of the population and
comprise )?F of all the poor in Tanzania have not benefited from the financial reforms$
They have largely been by passed by these reforms$ 1ence microfinance ,as found to be
one strategy that ,ould provide the necessary machinery for financial deepening but only
under the condition that it is an integral part of the financial system$
*n this case the .overnment initiated an important action to the Microfinance industry by
the formulation of the 4ational Microfinance 2olicy in ())B$ 1o,ever, in E??( the
government of Tanzania in collaboration ,ith the donor community started to implement
a rural financial programme to reinstate the rural financial services 6!%2, E??E"$ This
gave rise to the current member@based microfinance institutions, no, -no,n as the
%avings and 'redit 'ooperatives %A''Os" and %avings and 'redit Associations
%A'As"$ These motives aimed at enhancing %M0s development$
Therefore, the ma8or concern of this study ,as focused solely on assessing the role of
financial institutions to,ard the successes of small and mediums sized enterprises and
came out ,ith the proposed strategies for improvements in the area of government,
financial institutions as ,ell as identifying some of the gaps in our -no,ledge related to
finance in small enterprise development$
!.2 P0$9%#. S,),#.#(,
The participation of the ma8ority of the citizens of Tanzania in the modern economy
continues to be limited$ To a large e+tent the economy still remains in the hands of
foreigners and a fe, Tanzanians$ Among the reasons that have restricted their effective
participation in the economy includes lac- of capital access to finance" to finance
productive pro8ects$
++i
!urthermore, ban-s and other financial institutions are often reluctant to lend the %M0s
due to a lac- of collateral this hampers the ability of small enterprises to raise finance,
information asymmetries ,mar-et uncertainty and higher transaction costs related to
serving distant customers have restricted the flo, to finance to %M0s U6T@4ational
0conomic 0mpo,erment 2olicy, E??)"$
The ban-ing system in Tanzania has a very limited level of penetration in the rural areas
in this case most %M0s are unreached as more than D?F population is located in rural
areas$ Most ban- branches are located in urban areas ,ith high population densities and
high mar-et activity$ !or instance, among the =< ban-s and financial institutions currently
operates ,ithin the ban-ing sector, only four commercial ban-s that have nation ,ide
branch net,or-s have established a presence in rural financial mar-ets but mainly
indirectly via lin-s ,ith financial 4.Os and %A''OGs TBA 6eport, E??D"$
To address the above problem, the .overnment of the United 6epublic of Tanzania too-
the initiative to restructure ma8or ban-s and financial institutions in ())B, ,hich included
the restructuring and do,nsizing of the 4ational Ban- of 'ommerce and the
recapitalization of the 'o@operative and 6ural &evelopment Ban- through selling of
shares to the general public as ,ell as introduction of ne, local and foreign ban-s in
,hich competition has been enhanced, resulting into improvement of quality and quantity
of financial services and products offered$ The government has also established the
4ational Micro@finance 2olicy in E???, the 'o@operative %ocieties Act in E??= and the
4ational 0conomic 0mpo,erment policy in E??>$ All these initiatives ,ere met to
enhance gro,th and development of %M0s$
&espite of the fact that, there have been inadequate financing services deliveries to %M0
sector for over a decade no,$ ;et there is no enough empirical evidence in the country
++ii
related to financial institutions contributes to the development of small and medium
enterprises in Tanzania$
Therefore, this study e+plores the role of financial institutions and services delivery on
the success of small and medium enterprises in Tanzania$
!.: O9;#*,'5#+.
!.:.! G#(#0)% 0#+#)0*" $9;#*,'5#
The broad ob8ective of the study ,as to assess the role of financial institution on success
of small and medium enterprises in Tanzania and formulate appropriate strategies for
improving their financial performance
!.:.2 S1#*'&'* 0#+#)0*" $9;#*,'5#+
*n order to achieve the general ob8ective, the research set out to achieve the follo,ing
specific ob8ectives :
i$ To evaluate the impact of loan on small and medium enterprises performance$
ii$ To identify factors that influence small and medium enterprises in deciding on
source of finance$
iii$ To assess financial based problems facing small and medium enterprises
iv$ To develop strategies that can improve small and medium enterprises to access
finance in Tanzania
!.< R#+#)0*" =-#+,'$(+
i$ :hat is the impact of loan on small and medium enterprises performanceH
ii$ :hat factors influence small and medium enterprises in deciding sources of
financeH
iii$ :hat financial based problems face small and medium enterprises in TanzaniaH
++iii
iv$ :hat strategies need to be adopted to enable small and medium enterprises to
access financeH
!.> S'8('&'*)(*#+ $& ,"# +,-/?
The study is e+pected to provide an insight of the role of financial institutions on the
success of small and medium enterprises in Tanzania$ !inancial institutions play a
catalytic role of boosting %M0s$ 4ormal %M0s use t,o source of finance/ internal or
e+ternal sources of financing$ The internal funds are al,ays insufficient to underta-e the
required level of business hence the call is al,ays made for e+ternal finance from relevant
financial institution to fill the financial gap$
Over the years the failures of %M0s have been lin-ed to the inability to access finance
from financial institutions$ This study is therefore, important on providing empirical
evidence about the role of financial institutions on success of small and medium
enterprises$ Because ,ithout such evidence no concrete strategies can be dra,n regarding
the development of %M0s$
!.@ S*$1# $& ,"# S,-/?
This study ,as limited to ban-s and other financial institutions for instance %A''Os and
microfinance, loan beneficiaries and non@beneficiaries of small and medium enterprises in
Tanzania ,ho are engaged in different economic activities$ The study ,as carried out in
three districts namely/ *lala, Teme-e, and 5inondoni$ The study focused on these &istricts
because the largest number of small and medium enterprises, ban-s and other financial
institutions are found in these &istricts$ !urthermore the study ,as confined to the three
&istricts because of time and financial constraints$
!.A L)?$-, $& D'++#0,),'$(
++iv
This dissertation is organized in five chapters$ 'hapter one provides a general
introduction to the study$ 'hapter T,o presents a literature revie,$ This chapter provides
conceptual definitions/ scholarly ,or- on support provided by financial institutions to
%M0s is revie,ed$ *n addition, the literature revie, enabled a conceptual frame,or- for
solving the problems and analyzing data to be developed$
'hapter Three describes the research methodology$ *t describes the study area, research
design, sample size and sampling techniques used, data collection techniques adopted,
data processing and analysis, limitation of the study, validity and reliability$ 'hapter !our
presents the study findings and analysis$ The chapter includes -ey characteristics of
respondents, discussions and interpretation of the findings$ 'hapter !ive presents
conclusions, recommendations and areas for further research$
++v
CHAPTER TWO
LITERATURE REVIEW
2.! I(,0$/-*,'$(
This chapter presents conceptual definitions of financial institutions and small and
medium enterprises %M0s"$ 7iterature revie, is also done on the development of
financial institutions and success of %M0s, %cholarly ,or- done ,ithin and out of
Tanzania is revie,ed$ The chapter proposes a conceptual frame,or- on problems
besetting %M0s and a possible ,ay for,ard$
2.2 C$(*#1,-)% D#&'(','$(+
E(,0#10#(#-0+7 are people underta-ing economic ris- to create a ne, organization that
,ill apply ne, technology or innovative process to generate value to others %chramm,
E??B"$
F'()(*')% I(+,',-,'$(+ (FI+): are businesses ,hose principal assets are financial assets or
claims, stoc-s, bonds and loans instead of real assets such as buildings, equipments and
ra, materials %aunders, ())>"$
SME+7 There is no universally accepted single definition of %M0s as various bodies,
organizations and institution have advanced different definitions U6T, E??="$
A**#++ ,$ &'()(*#7 is defined as getting adequate and affordable financing over a suitable
timescale Tagoe et. al. E??<"$
2.: C0','*)% R#5'#3 $( ,"# T"#$0'#+ B)+#/ $( ,"# FI+ G0$3," )(/ S-**#++ $& SME+
&evelopment analysts and practitioners have long been interested in the contribution of
development of the financial institutions, gro,th and success of %M0s$ Among the early
++vi
contributors to the theory is Ioan 6obinson ()<E" ,ho argues that J,here enterprise
leads finance follo,s meaning that finance does not cause gro,th but rather, it responds
to demands from the real sector$ 6obert 7ucas ()DD" also dismisses finance as an Jover@
stressedK determinant of economic gro,th$ On the other hand, Merton Miller ()DD"
argues Jthat the financial mar-ets contribute to economic gro,th is a proposition too
obvious for serious discussions$K .oldsmith ()B)" and Mc5innon ()C=" all sa, the
importance of the finance gro,th ne+us in understanding economic gro,th$ !inance has a
prominent role in the endogenous gro,th theory, through its positive impact on the levels
of capital accumulation and savings 6omer ()DB"$
1o,ever, recent literature suggests the emergence of a consensus on the vital importance
of financial institutions development in facilitating and sustaining gro,th$ The last t,o
decades have ,itnessed an e+plosion of empirical studies testing the finance gro,th
ne+us using cross@country and other data and ne, econometric tools$ &espite the absence
of complete unanimity of results, a number of observations, bac-ed by empirical
evidence, have emerged$ 7evine E??>" summarizes as follo,s/ countries ,ith better
functioning ban-s and financial mar-ets gro, faster because it enables the e+ternal
financing constraints that impede %M0s e+pansion to be reduced, in so doing creates an
environment for %M0sG success or gro,th$
!urthermore 7evine E??>" believes that the most important role of the financial sector in
facilitating gro,th is to reduce information, enforcement, and transaction costs$ This is
achieved through a number of specific functions that the financial sector performs,
therefore he identified five -ey functions that a financial system provides in facilitating
gro,th such as mobilizing and pooling savings, producing information e+ ante about
possible investments and allocating capital, monitoring investments and e+erting
++vii
corporate governance, facilitating the trading, diversification and management of ris-s
and facilitating the e+change of goods and services$ Through these functions, financial
sector development facilitates economic gro,th not only by promoting private sector or
%M0s development, but also by supporting the public sector to invest in infrastructure
and by enabling households to invest in human capital and benefit from consumption
'laessens and !ei8en E??B"$
According to &emirguc@5unt and Ma-simovic ())D", in a sample of =? developed and
underdeveloped countries ta-en found countries that have developed financial and legal
systems foster firmGs access to e+ternal financing and firm gro,th$ They believe that ,ell@
functioning legal and financial institutions enable firmsG ability to get e+ternal finance that
ultimately raises firmGs gro,th opportunities$
!urthermore, &emirguc@5unt and Ma-simovic ())D" argued that underdeveloped
financial system amplifies the magnitude of mar-et imperfections in terms of information
asymmetry and transaction costs ,hich prevent firms to gro,$ And at the same time
ma-es firm financially constrained, for ,hich it is comple+ or too e+pensive to get
e+ternal finance and forced to limit its investment options, and hence its gro,th$
!inancial institutions development also disproportionately affects on small firms$ Bec- et
al E??D" besides confirming the aforementioned vie,s, also suggest that financial
institutions development boosts gro,th of %M0s that rely heavily on e+ternal finance by
reducing the transaction costs and informational barriers and supports more the industries
that comprises of small firms$ Bec- and &emirguc@5unt E??D" confirm this vie, by
adding not only small firms face higher financial constraints but also these obstacles have
almost t,ice the effect on small firms relatively on large firms$ They e+amine the firmGs
++viii
characteristics that determine the faced financial obstacles and find that size, age and
o,nership predict financial obstacles best$
2.3.1 The Impeding and Interactive Issues of FIs towards
Success of SMEs.
%M0s in developing countries are considered to be too unstable by ban-s to invest in$
&ue to this instability, the ban-s consider %M0s to have high ris- and the costs to monitor
the activities of the %M0s are al,ays high$ Bhattacharya, et al$ ())C" argue that formal
financial institutions ban-s" are reluctant to lend to %M0s since investing in %M0
activities is considered by ban-s to be very ris-y$ They find it ris-y in the sense that if
invested in, in an event of unfavourable business conditions, they have lo, financial
po,er, lo, asset base, and easily go ban-rupt$
!urthermore, they argue that the collateral demanded by ban-s for a loan is based on fi+ed
assets and hinders %M0s business o,ners to acquire loans$ Also another the ma8or
setbac- that prevents %M0s to get funding from e+ternal sources is the problem of
information asymmetry$
Another impediment factor according to Otero et al ())>" ban-s also use cash flo,s and
profitability to measure the ,orthiness of a business$ This is a very e+pensive and, not a
good method to measure the credit strength of rural and peri@urban %M0s because in rural
area production and distribution influenced by social factors that are often neglected by
enterprises in developing countries$
Also another impediment is interest rates charged by a financial credit" institutions, it is
seen as having a dual role of sorting potential borro,ers or %M0s leading to adverse
++i+
selection", and affecting the actions of borro,ers or %M0 o,ners leading to the incentive
effect"$ %tiglitz and :eiss ()D(", interest rates thus affect the nature of the transaction
and do not necessarily clear the mar-et$ Both effects are seen as a result of the imperfect
information inherent in credit mar-ets$ Adverse selection occurs because lenders ,ould
li-e to identify the borro,ers most li-ely to repay their loans since the ban-sG e+pected
returns depend on the probability of repayment$ *n an attempt to identify borro,ers ,ith
high probability of repayment, ban-s are li-ely to use the interest rates that an individual
is ,illing to pay as a screening device$
1o,ever, borro,ers ,illing to pay high interest rates may on average be ,orse ris-
ta-ers$ This is due to the fact that as the interest rate increases, the ris-iness of those ,ho
borro, also increase, reducing the ban-Gs profitability$ The incentive effect occurs
because as the interest rate and other terms of the contract change, the behaviour of
borro,ers is li-ely to change since it affects the returns on their businesses$
%tiglitz and :eiss ()D(" sho, that higher interest rates induce %M0s to underta-e
business ,ith lo,er probability of success but higher payoffs ,hen they succeed leading
to the problem of moral hazard"$ %ince the ban- is not able to control all actions of
borro,ers due to imperfect and costly information, it ,ill formulate the terms of the loan
contract to induce borro,ers to ta-e actions in the interest of the ban- and to attract lo,
ris- borro,ers$
'redit rationing in credit mar-ets, adverse selection and moral hazard arise because in the
absence of perfect information about the borro,er, an increase in interest rates encourages
borro,ers ,ith the most ris-y businesses, and hence least li-ely to repay, to borro,, ,hile
those ,ith the least ris-y businesses cease to borro,$ *nterest rates ,ill thus play the
+++
allocative role of equating demand and supply for loanable funds, and also affect the
average quality of lendersG loan portfolios$ %tiglitz 9 :eiss ()D("$
An increase in interest rates negatively affects the borro,ers by reducing their incentive
to ta-e actions conducive to loan repayment$ This ,ill lead to the possibility of credit
rationing$ Bell ())?" demonstrates that incomplete information or imperfect contract
enforcement generates the possibility of loan default and eventually problems of credit
rationing$ The result is loan supply and implicit credit demand functions, both of ,hich
are simultaneously determined$ The role of ris- in allocation of credit through its effect on
transaction costs, therefore, becomes important in incomplete credit mar-ets$
2.:.2 C")0)*,#0'+,'*+ $& F'()(*')% M)04#,+ '( D#5#%$1'(8 C$-(,0'#+
'redit mar-ets in developing countries have mainly been characterized by the inability to
satisfy the e+isting demand for credit in %M0s$ 1o,ever, in case of the informal sector
the main reason for this inability is due to the small size of the resources it controls and
for the formal financial sector the reason is not an inadequate lending base due to
difficulties in loan administration li-e screening and monitoring, high transaction costs
and the ris- of default$ Aryeetey, ())Bb"$
!urthermore financial mar-ets are characterized by information asymmetry, agency
problems and poor contract enforcement mechanisms$ They are mainly fragmented
because different segments serve clients ,ith distinct characteristics$ Because of this,
lending units are unable to meet the needs of borro,ers interested in certain types of
credit 4issan-e $A 9 Aryeetey ,())<"$The result is a credit gap that captures those
borro,ers ,ho cannot get ,hat they ,ant from the informal mar-et, yet they cannot gain
access to the formal sources$ %M0sG o,ner that ,ants to e+pand beyond the limits of self@
finance can access to e+ternal finance$ Aryeetey et al$, ())C"$
+++i
According to Aryeetey ())C", fragmented credit mar-ets in ,hich favoured borro,ers
obtain funds at subsidized interest rates, ,hile others see- funds from e+pensive informal
mar-ets" develop due to repressive policies that raise the demand for funds$ Unsatisfied
demand for investible funds forces credit rationing using non interest rate criteria, ,hile
an informal mar-et develops at uncontrolled interest rates$ 6emoving these restrictive
policies should therefore enable the formal sector to e+pand and thereby eliminate the
need for informal finance$
:hen there is imperfect information on credit,orthiness, cost of screening, monitoring
and contract enforcement among lenders, results in mar-et failure due to adverse selection
and moral hazard, ,hich undermines the operation of financial mar-ets$ As a result,
lenders may resort to credit rationing in the face of e+cess demand$
The e+istence of informal finance resulted from the e+cess demand ,hich e+cluded from
formal finance therefore informal sector finance develops in response to the formal sector
controls$ 7oo-ing at the role of informal financial sectors in .hana, some scholars have
attempted to investigate factors that motivate the private sector to conduct financial
transactions in the informal financial sectors Aryeetey and Udry ,())C"$
The informal and formal sector offer similar products that are not entirely homogeneous,
implying that both sectors cater for the needs of easily identifiable groups of individuals
and businesses, but at the same time serve sections of the total demand for financial
services$ 1o,ever, participants from either sector may cross to the other depending on
factors li-e institutional barriers, availability of credit facilities and the ease of physical
access$
+++ii
Another important factor of both formal and informal mar-ets relates to penalties$ *n the
absence of formal contract enforcement mechanisms, both formal and informal
institutions rely on lending practices that emphasize loan screening rather than
monitoring, ,hich appears to suggest more concern ,ith adverse selection than moral
hazard$ &ifferences emerge in the methods used by formal and informal institutions$
:hereas formal lenders rely more on pro8ect screening, informal lenders rely more on the
character and history of the borro,er, particularly on personal -no,ledge of the borro,er$
7oan monitoring is rarely done by informal lenders due to the lendersG -no,ledge of
borro,ers, ,hile in the formal mar-et it is mainly due to lac- of facilities$ Transaction
costs are generally lo,er in informal mar-ets than in formal ones Udry, ())>"$
!inancial mar-ets in African countries are characterized by imperfect and costly
information, ris-s, and mar-et segmentation, resulting in credit rationing$ This is one of
the underlying factors in the coe+istence of both formal and informal credit mar-ets
serving the needs of the different segments of the mar-et$
2.:.: L$)( S*0##('(8C M$(',$0'(8 )(/ C$(,0)*, E(&$0*#.#(,
Unli-e formal finance, informal lenders often attach more importance to loan screening
than to monitoring the use of credit$ %creening practices often include group observation
of individual habits, personal -no,ledge by individual moneylenders and
recommendations by others, and credit,orthiness$ *n group lending programmes,
members are made 8ointly liable for the loans given$ The 8oint liability plus the threat of
losing access to future loans motivates members to perform functions of screening loan
applicants, monitoring borro,ers and enforcing repayment$ *nvestigations of the effect of
intra@group pooling of ris-y assets sho, that groups e+ploit scope and scale economies of
ris- by pooling ris-s and entering into informal insurance contracts, Leller, ())D"$ *n
+++iii
group lending, the financial intermediary reduces the recurrent transaction costs by
replacing multiple small loans to individuals by a large loan to a group$ This enables
financial intermediaries to ban- ,ith poor loan applicants ,ho ,ould not receive any
loans under individual loan contracts due to e+cessive unit transaction costs$
One of the most important rationales for group lending is the information and monitoring
advantages that member based financial institutions have compared ,ith individual
contracts bet,een ban- and borro,er$ The main argument in the rationale is that in
comparison ,ith distant ban- agents, group members obtain information about the
reputation, indebtedness and ,ealth of the applicant$ They are also able to use social
sanctions to compel repayment$ 1o,ever, it has been sho,n that a number of factors may
undermine repayment performance of group lending under 8oint liability$ These include
reduced repayment incentives for individual borro,ers ,here other members default, and
the incentive to borro, for ris-ier pro8ects under group based contracts$ There are strong
incentives for individuals ,ith similar ris- characteristics to form credit groups Leller,
())D"$
2.:.< D'+,'(*,'5# $& I(&$0.)% F'()(*# '( D#5#%$1'(8 C$-(,0'#+
A large part of financial transactions in developing countries occur outside the formal
financial system$ *nformal finance has been referred to all transactions, loans and deposits
occurring outside the regulation of a central monetary authority, li-e savings and credit
associations, rotating savings and credit associations 6O%'As", professional
moneylenders, relative and friends, as ,ell as cooperative societies Three types of
informal units in developing countries have been identified: savings mobilization units
,ith little or no lending/ lending units that do not engage in any savings/ and those units
that combine deposit mobilization and lending Udry, ())>"$ 1o,ever, ,hile informal
+++iv
financial units develop their mar-et niches and have different reasons for selecting a
particular segment of the mar-et, they tend to have similar fundamental practices in the
administration of credit, ,hich allo,s for a uniform analysis$ As these goals change,
informal financial units change their operational structures$ %tudies on informal finance in
Africa sho, that they ,ill do ,ell so long as the level of economic activity demands
increasing financial services for groups that cannot be reached by the formal financial
institutions 'hipeta and M-anda,ire, ())>/"$
The emergence of demand for short@term credit especially among traders and farmers ,ill
most li-ely lead to the development of an informal unit to meet that demand$ *nformal
credit therefore seems to develop in response to an e+isting demand$ Aryeetey and Udry
())>" have further observed that ,hile credit from an individual lender to a set of
borro,ers may vary in terms of ,hat pac-age each borro,er receives, the more
significant variation in the informal credit mar-et is in terms of ,hat pac-ages different
lenders are able to offer in the mar-et$ They therefore note that differences in the loan
characteristics represent different lender types$
*mportant lessons can be learned from the success of informal financial institutions$ often
the degree of fle+ibility and creativity in informal finance accounts for the high degree of
success in such institutions$ The types of services they provide mostly contrast ,ith those
offered by traditional credit programmes$ These are characterized mainly by short@term
and small loans, increasing discipline in terms of savings, 8udgement of borro,er
credit,orthiness, and information about the borro,er$ %ervice is based on fle+ible
arrangements to ad8ust to changing economic circumstances, and reducing the transaction
costs to the borro,ers ,ho respond by maintaining discipline in order to sustain their
+++v
access to credit$ The result is a dependable ,or-ing relationship bet,een the lender and
the borro,ers$
Most services of informal finance are client oriented, thus reducing the transaction costs
for customers, and ma-ing their services attractive despite the e+plicitly high interest
rates$ *nformal lenders are also able to design their contracts to meet the individual
dimensions, requirements and tastes of the borro,ers Aryeetey, ())Bb"$ This contrasts
,ith the formal lender practices, ,hich charge relatively lo, interest rates, but often
impose procedures on borro,ers that substantially increase their transaction costs$
*n the informal financial mar-ets, loans and deposits are often tied, enabling individuals
to increase their access to credit by improving their deposit performance$ This allo,s
participants to enhance their credit,orthiness through their savings and repayment record$
All these lessons emphasize the fact that financial intermediaries at the small@scale level
must be prepared to offer the financial services demanded by clients if microfinance is to
succeed %chmidt and 5ropp, ()DC"$
2.:.> D#,#0.'()(,+ $& *)1',)% +,0-*,-0# $& SME+
'redit availability to %M0s depends on the financial structures hence some important
aspects are to be considered ,hen deciding on their financial structure$ This ,as
postulated by Myers ()CC" ,ho determined the capital structure of %M0s$ The pec-ing
order theory ,as used to e+plain ,hy firms ,ill choose a particular capital structure than
the other$ The 2OT stipulates that %M0s average debt ratio ,ill vary from industry to
industry because these industries have varied asset ris-s, asset type and the requirements
for e+ternal capital Myers ()D>"$ !irms in one industry ,ill have certain aspects that are
common to most than to firms in a different industry 1arris and 6aviv, ())("$ The
decisions are made ta-ing into consideration information asymmetry, agency theory, and
+++vi
the signalling theory$ The signaling theory describes signs and the effectiveness or ho, a
venture ,ill progress in an uncertain environment$ The main idea behind this theory is
that there is an information signal that alerts the sta-eholders of ,hat is happening in the
business &eeds et al$, ())C"$ The success of a business in the future is determined by the
availability of information to the firm$ The sta-eholders of a business require signals to
find the ,ay of the asymmetry of information bet,een ,hat is -no,n and ,hat is
un-no,n Ianney and !olta, E??="$ The outsiders get to -no, about a particular venture
based on the signals it sends out$ These signals need to be favourable because it is from it
that potential investors ,ill be informed and thus sho, the intention to invest in the
venture$ The cost of equity ,ill be high ,hen poor signals are noticed by outsiders and
this ,ill restrain potential investors$ !irms get access to venture capital ,hen they have a
good good,ill 2rasad, Bruton and 3ozi-is, E???"$ .ood signals to the outsiders of a firm
can be described as equal to due diligence ,ith reduced time and input 1arvey and
7usch, ())<"$ 4e, businesses have problems in getting a favourable position in the
mar-et$ Their e+istence is determined by their size and age$ *f it continues to e+ist, it
means it is capable of maintaining its size or it is e+panding$
This of course goes ,ith time and ,hen they continue to e+ist, it means resources are
acquired or unlimited$ This process of gaining stability and to survive ma-es the firm to
gain legitimacy and thus can be trusted as a successful business since it emits positive
signals$ !irms ,ith unlimited resources at the infancy stage are easy to go ban-rupt and
die in this early stage this ,as postulated by Aldrich and Auster ()DB"/ !reeman,
'arroll and 1annan ()D="$
Myers ()D>" argued that e+ternal sources of funding have more moral hazard problems
and consequently the demand for o,n or internal finances are of paramount to the firm$
This moral hazard is e+plained by the fact that %M0s are very close entities/ that is o,ned
+++vii
and or controlled by one person or fe, people$ 2OT emphasizes/ Ang ())(" on the use
of o,ned capital rather than outside capital by %M0s and also e+plain ,hy %M0s are
denied or has a hindering factor in see-ing for e+ternal sources of finance$ :orld Ban-
E??E" reiterates the fact that %M0s are more li-ely to be denied ne, loans for their
businesses than larger firms ,hen in need$ They consider %M0s to lac- the s-ills to
manage ris- and the high transaction costs in lending to them compared to the amount
that is borro,ed 1allberg, E???"$
2.:.@ L'(4 9#,3##( *)1',)% +,0-*,-0# )(/ &'()(*')% '(+,',-,'$(+ /#5#%$1.#(,
'apital structure sho, the optimal mi+ bet,een debt and equity $There is the connection
bet,een financial institutions development and firmsG capital structure especially debt
versus equity choices &emirguc@5unt and Ma-simovic ())D"$ *n this case financial
development facilities affecting capital structure decisions through the reduction of the
costs of e+ternal finance &emirguc@5unt and Ma-simovic E??D/ 7a 2orta et al$ ())C$
6ecent financial research &egryse and Ongena E??</ 2etersen and 6a8an E??E" highlight
the importance of the availability and pricing of ban- loans$ *n particular, 2etersen and
6a8an E??E" document the importance of distance in the provision of ban- credit to small
firms, especially in a country ,here the problems of asymmetric
information are substantial$
2ollard E??=" suggests the need of conte+tualizing firm finance, analyzing ho, different
geographical configurations of financial institutions affect the access to credit for firms
operating locally$ *n general, it is suggested the idea that ban-s operating locally have
more -no,ledge and control about local firms and entrepreneurs Alessandrini and
Lazzaro ()))"$
+++viii
According to Titman et al$E??=", a principal source of the financial constraint,
influencing capital@structure, may be the e+istence of asymmetric information and the
cost of contracting bet,een companies and potential providers of e+ternal financing$
2roblems of financial constraint are potentially high in presence of a poorly developed
financial system$ A ,ell@developed financial system can facilitate the ability of a
company to gain access to e+ternal financing, providing cheaper finance to ,orthy
companies .uiso et al$ E??>"$
*n addition 7a 2orta et al$ ())C, ())D/ Bec- and 7evine E??E"$ %uggested to account for
the role of the 8udicial enforcement in shaping the operation of financial systems and
affecting financing decisions$ %pecifically, the 8udicial enforcement is important, because
the regulations governing the financial system ,or- in the interest of investors, protecting
creditors only to the e+tent that the rules are actually enforced$ &ue to the ris- of default
and the difficulty to get bac- the liquidation value of the collateral, enforcement affects
the e+@ante availability of agents to provide finance$
As suggested by 7a 2orta et al$ ())D", a good legal environment protects the potential
financiers against e+propriation by %M0s/ it raises their ,illingness to provide funds to
firms$ Thus, .iannetti E??=", the recent contributor highlighted that %M0s ,hich have
limited access to alternative source of financing due to their information opaqueness seem
potentially very sensitive to the degree of development and efficiency of the financial
system$
Also cross country research provided substantial evidence that small firms face larger
gro,th constraints and have less access to formal sources of e+ternal finance, potentially
e+plaining the lac- of %M0sG contribution to gro,th Bec- et al$ E??D"$ *nstitutional
+++i+
development helps alleviate %M0sG gro,th constraints and increase their access to
e+ternal finance$
2.<. E.1'0'*)% A()%?+'+ $& R#%#5)(, S,-/'#+
2.4.1 Empirical Studies related to other countries
2.<.!.! A&0'*)
According to 'Mline 5auffmann E??>" most African financial systems are fragmented$
The Jmissing middleK in the pattern of size of firm is matched by one in the range of
financing available$ 7ac- of funding for %M0s has partly been made up for by micro@
credit institutions, ,hose gro,th is due to the fle+ible loans they offer small businesses$
*n Angola, 4ovobanco provides loans free of ban- charges, ,ithout a minimum deposit
and ,ith informal guarantees property assets and a guarantor", as ,ell as permanent
contact ,ith loan managers$ Though adapted to local needs, ho,ever, micro@credit
institutions remain fragile and modest sized$ As ,ell as lac-ing trained staff, micro@credit
institutions face limited e+pansion because of their limited funds$ Their mainly short@term
finance means they cannot easily turn the savings they collect into medium or long term
loans$ They are also up against the cost of refinancing through the formal ban-ing sector
and have no access to refinancing either by the central ban- or by venture capital$ Micro@
credit institutions could be put on a firms financial footing by developing and adapting
long@term savings products that e+ist else,here, such as life insurance and home@saving
plans, and encouraging the setting up of specialized refinance ban-s such as MaliGs
Jsolidarity ban-K Banque malienne de solidaritM", or ,or-ing more closely ,ith the
formal ban-ing sector$
%ome countries such as 5enya financial system display a deficiency in the range of
financial instruments and lac- of coordination bet,een different financial institutions$
+l
This is consistent ,ith the argument that credits mar-ets in Africa are characterized by
inability to satisfy e+isting potential customers for instance %M0s$ !or instance, O-etch et
al ())<" conducted a study on (B financial institutions to determine the demand and
supply of credit to the %M0 sector$ The study revealed that the demand and supply for
credit have been on the increase since ())($ *t also revealed that the demand has only
been met by (BF of ,hat is required$ The study also revealed that although financial
institutions lend to prime borro,ers ,ith collateral security, there is need for these
institutions to increase their lending to %M0s$
%outh Africa passed t,o la,s in early E??< to e+pand the ban-ing system to include
savings and loan institutions second@tier ban-s" and co@operative ban-s third@tier ban-s"
,hile easing ban-ing regulations so the ne, comers could still be fle+ible in providing
loans$ 1o,ever, commercial ban-s are setting up their o,n micro@credit services in order
to remove the obstacles to access for %M0sG to finance requires that commercial ban-s,
micro@credit institutions, community groups and business development services B&%"
,or- closely together$ 2ushing for agreements bet,een financial bodies and B&%
suppliers ,ill help ma-e up for lac- of capacity and reduce costs by more efficient
division of labor$ The B&% supplier ma-es the initial choice of pro8ects on a purely
technical basis and the credit institution loo-s at financial viability$ Ma-ing loans to
intermediaries 4.Os and federations of %M0s" ,ith the 8ob of allotting funds to
members can also help cut administration costs$
*n 4igeria %M0s sector is importance to economy ,the best estimates available suggests
that %M0s comprise DCF of all %M0s operating in 4igeria, although the total number of
registered %M0s in 4igeria is also un-no,n :orld Ban- E??E"$*n this case since
attainment of independence several micro lending institutions ,ere established to enhance
+li
the development of this sector$ %uch micro credit institutions include the 4igerian Ban-
for 'ommerce and *ndustry, 4ational 0conomic 6econstruction !und, the 2eopleGs Ban-
of 4igeria, the 'ommunity Ban-s, and the 4igerian 0+port and *mport Ban-, and the
liberalization of the ban-ing sector unfortunately records indicate that the performance of
%M0% in 4igeria has not 8ustified the establishment of this plethora of micro@credit
institutions$
According to :orld Ban- in E??(, a study identified poor access to finance as the most
critical constraint on small and medium scale enterprises in 4igeria$ *n fact, <? percent of
the surveyed enterprises received e+ternal finance ,hile C) percent indicated lac- of
financial resources as a ma8or constraint$ Though the study identified poor access to
finance by %M0s, the Ban-ers 'ommittee at the initiative of the 'B4 developed an
interventionist strategy called the %mall and Medium *ndustries 0quity *nvestment
%cheme in ()))$ This scheme requires ban-s to set aside (? percent of their profit before
ta+ to fund %M0s in equity participation$ The pooled money has to be invested in %M0s
in so doing reduces the e+tra ris- of lending to %M0s$
2.<.!.2 A+') )(/ L),'( A.#0'*)
*n some countries in Asia and 7atin America continent financial institutions are not the
only source of money for %M0s$ 7arge firms are a ma8or potential source of finance$
Because big firms can do a lot to help %M0s get finance more easily by transferring
resources money and factors of production" and guaranteeing %M0 solvency ,ith
financial institutions$ 7in-s ,ith ma8or companies can also help %M0s get e+port credits,
,hich are especially important in countries ,ith ,ea- institutions, since commercial
partners are better informed than other creditors especially financial institutions" about
the ability of their customers to repay debts$ 0+port credits have been proved useful in
+lii
LambiaGs agro@food industry$ %ubcontracting is still uncommon in Africa, but has gro,n
rapidly in %outh Africa since ())D, though there is increasing s-epticism about it because
it may confine %M0s to lo,@s-ill informal activities$ 'lusters of %M0s, ,hich are very
active in Asia, enable member firms to see- finance together, provide collective
guarantees or even set up their o,n financial body$ The threat of e+pulsion from the
cluster ensures that promises are -ept, ,hich allo,s the net,or- to overcome
shortcomings in the legal system$ !requent interaction ,ith financial authorities, as ,ell
as the role that reputation plays in the cluster, can greatly increase confidence bet,een
firms and financial institutions and thus ma-e it easier to get loans and lo,er rates of
interest$
:or-ing together also means firms can get supplier credits and can borro, from each
other ,hen necessary, ,hich reduces general costs$
2.<.!.: E-0$1#
*n 0urope particularly *taly ma8ority of firms accounted more than )<F are %M0s$ :hile
the proliferation of small@scale enterprises has often been pointed to as one of the reasons
for *talyGs economic success, the limited types of e+ternal funds available to *talian
companies ma-e them prone to financing constraints$ *n *taly, once internal funds are
depleted, the ban-ing channel is often the only ,ay for *talian %M0s$
*n fact, capital mar-ets in *taly are relatively undeveloped compared not only to those in
the U%A$ Therefore, the *talian stoc- mar-et is not an important source of finance in *taly$
3ery fe, *talian companies trade publicly, not even companies that are quite large$
Although its central role in the national economy, the *talian ban-ing system ,as until
recently state o,ned, heavily regulated and scarcely competitive$ Up to the early ())?s,
+liii
the main features of the ban-ing industry in *taly ,ere the results of the regulation
introduced in ()=B in order to avoid ban-ing instability Many restrictions ,ere laid do,n
on ban-sG activity among ,hich the total control upon entry and e+it in the industry, as
,ell as on branching decisions$
2.4.2 Empirical Studies in Tanania
2.<.2.! D#5#%$1.#(, $& F'()(*')% I(+,',-,'$(+
*n ())( the .overnment initiated financial sector reforms in order to create an effective
and efficient financial system according to the former governor of the Ban- of Tanzania
6utihinda, ())="$ The principal elements of the financial sector reform included
liberalization of interest rates, elimination of administrative credit and foreign e+change
allocation, strengthening of the BOTGs role in regulating and supervising financial
institutions, restructuring of state@o,ned financial institutions, and allo,ing entry of
private ban-s both local and foreign$ As of no,, the country has =< ban-s compared to
only seven C" ban-s e+isting in ())($ TBA report, E??D"
*n the same year, the 'o@operatives %ocieties Act ,as formulated in order to provide the
basis for the development of %avings and 'redit 'o@operative %ocieties %A''Os" as
privately o,ned and organized equity based institutions$ The mainstream ban-ing system
e+panded as a consequence of the reforms at a satisfactory pace$
&espite of the proliferation of ban-ing institutions and the ,ide range of ban-ing
products and services, it seems very little attention has been paid to help %M0sG capital
enhancement and gro,th$ BoT, E??B" $1o,ever the evidence sho,ed the formal
financial institutions find it difficult to deal ,ith %M0s because of the lac- of collateral,
high incidence of defaults and high transactions costs associated ,ith issuing of small
+liv
credits 5ashuliza et al$, ())D"$&ue to this, small businesses face a daunting obstacle
,hereby only fe, have access to regulated ban-s, savings and loan associations,
investment funds$ The level of provision of financial services to the small business sector
and other sectors largely depends on the state of the financial system$ 0+isting evidence
suggests that despite the financial sector in Tanzania undergoing various development
phases, gro,ing small businesses are still constrained in terms of credit accessibility
%atta, E??E"$
!urthermore according to the study done by %hayo@Temu ())D" on the financing sources
to small businesses found that only =BF of them have made attempts for credit
application from financial institutions$ Out of these only )$< F managed to get a loan
from financial institutions$
2.<.2.2 T"# R$%# $& F'()(*')% I(+,',-,'$(+ '( F'()(*'(8 SME+
C$..#0*')% B)(4+
According to B!* Act ())( commercial ban-s have established microfinance oriented
products$ *n Tanzania the main commercial ban-s serving %M0s include A-iba
'ommercial Ban-, Tanzania 2ostal Ban-, '6&B Ban- and 4ational Micro !inance Ban-$
%atta, E??E"$ These ban-s have the most e+plicit orientation to,ards micro finance$ They
have ,ell defined strategies to e+pand their operations in this mar-et 6andha,a and
.allardo I, E??="$ *t is obvious that these ban-s do not use the famous commercial
lending models li-e the credit scoring models neither do they use the micro finance
models li-e the .rameen models$ They have their o,n perspective of serving this
segment$
+lv
'ommercial ban-s are seen to be very important for serving this segment because they
have a ,ide branch net,or- that can reach most micro enterprises$ They also operate
accounts, ,hich ma-e it possible to monitor their clients closely$ Although there are
limitations that commercial ban- encountered for e+ample/ most of them are located in
urban areas thus ma-ing it difficult to provide services to those enterprises located in rural
areas$ Other limitations of commercial ban- lending to the %M0 sector in Tanzania are the
lac- of appropriate savings instruments to mobilize savings to the %M0s and the
restrictions on ,ithdra,als, ,hich discourages savers ,ho ,ould li-e frequent access to
their savings$ Their location a,ay from many enterprises also implies high transaction
costs 4ational Microfinance 2olicy, E???"$
N$( G$5#0(.#(, $08)('2),'$( (NGOFMFI+)
!ollo,ing the economic reforms, there has been financial sector restructuring that has
encouraged more participation of private and 4.Os in %M0sN credit schemes as stipulated
in the Ban-ing and !inancial *nstitution of Act ())($ As such, ne, policy is designed
,hich is -no,n as credit pro8ect approach pioneered by .rameen Ban- of Bangladesh
,as adopted in Tanzania$ According to survey done by BoT in E??< sho,ed there is BE
4.Os$ 'entral to this development ,as the quest for provision of informal credit
guarantees, minimizing transaction costs and creating a cost effective delivery system
5uzil,a et al$, ())C"$ The approach focuses on establishing rates, ,hich ,ould ensure
sufficient amount and prompt delivery of credit and adequate profitability for the financial
intermediary$ The policy, ho,ever, has resulted into better performance in the credit
programs$ The evidence sho,s that most M!* offer credit to ,omen and youth
entrepreneurs ,ho are operating %M0s in cities ,ith a fe, operating in rural areas$
+lvi
Again 5uzil,a, E??E" e+amines the role of credit in generating entrepreneurial activities$
1e used qualitative case studies ,ith a sample survey of businesses that gained access to
credit from a Tanzanian government financial source$ The findings reveal that the output
of enterprises increased follo,ing the access to the credit$ *t ,as further observed that the
enterprises ,hose o,ners received business training and advice, performed better than
those ,ho did not receive training$ 1e recommended that an environment should be
created ,here informal and quasi@informal financial institutions can continue to be easily
accessed by micro and small businesses$
6,eyemamu et al,E??=" evaluated the performance and constraints facing of semi
formal microfinance institutions currently providing credit in the Mbeya and M,anza
regions$ The analysis of this study revealed that the interest rates ,ere a significant
barrier to the borro,ing decision$ Borro,ers also cited problems ,ith lengthy credit
procurement procedures and the amount disbursed being inadequate$ Microfinance
institutions M!*s" ,hich are issuing credit to %M0s include 26*&0@Tanzania
%0&A,M0&A,2T!, T.T! !*4'A,T;&!, 2overty Africa, %mall 0nterprise !und,
%07!*4A, 4*.2, 0OT! and 2lan *nternational Thomas, E??("
T"# V'%%)8# $0 C$..-(',? 9)(4
3illage ban-s are community ban-s based credits and savings associations$ The
community ban-s are relatively ne, financial service providers in the country$ They have
the follo,ing t,o characteristics not common to other nongovernmental M!*s$ They are
licensed by the BOT to receive deposits and are therefore involved in financial
intermediation they serve the %M0s communities ,ho are the o,ners of the institutions$
*n Tanzania for instance village or community ban-s include the Mufindi 'ommunity
Ban-s, M,anga &evelopment Ban-, 5iliman8aro 'ooperative Ban- %atta, E??E"
+lvii
G$5#0(.#(, S-11$0,#/ P0$80)..#+.
*n Tanzania, there are other M!*s, ,hich are financed by the .overnment as programme,
BoT survey identified )< programmes up to E??<$ %ome of these M!*s include/ :omen
&evelopment !und, %mall *ndustries &evelopment Organization, The ;outh
&evelopment !und and 4ational 0ntrepreneurship &evelopment !und$
http:AAen$,i-ipedia$orgA,i-iAMicrofinance "
S)5'(8+ )(/ C0#/',+ C$$1#0),'5#+ S$*'#,'#+ (SACCO+)
%A''Os are supervised by 'ooperative department of the Ministry of 'ooperative and
Mar-eting$ According to a survey done by BoT in E??< there ,ere about (BE? %A''Os
registered in Ministry country ,ide http:AAen$,i-ipedia$orgA,i-iAMicrofinance *t is
therefore the largest group of M!*s providing financial services to %M0s %ilvanus,E??("$
Among of the distinctive characteristics of %A''Os are/ the highest potential of reaching
the most people, %A''Os are relatively easy to establish and they have simple
8oining procedures less stringent %avings and loan conditions , dealing ,ith people of
,ell -no,n to them and lastly %A''Os have ,ea-nesses in operating and
administrative management, especially in the area of accounting and internal control
systems$ %ilvanus, E??("
O,"#0 I(&$0.)% F'()(*')% P0$5'/#0+
6otating savings and credit associations 6O%'As" are also an important source of
credit in the country$ They mainly provide credit to those ,ho ,ould li-ely be ineligible
to borro, from other sources$ 6O%'As have developed mostly in response to the lac- of
access to credit by %M0s, forcing them to rely on their o,n savings and informal credit
sources for their financing$ They mostly integrate savings into their credit$ 1o,ever,
+lviii
even for members of 6O%'As, not all their credit needs can be satisfied ,ithin the
associations$ This implies that there is some proportion of borro,ing and lending that is
not catered for by either formal institutions or such associations$ This is catered by
personal savings as ,ell as borro,ing bet,een entrepreneurs and other forms of informal
transactions li-e money lenders, money from relatives, friends and self help groups
4danshau, ())B"
2.<.2.: SME G0$3," )(/ D#5#%$1.#(, '( T)(2)(')
%M0s all over the ,orld are -no,n to play a ma8or role in social economy development$
This is apparently the case of Tanzania, ,here %M0s contribute significantly to
employment creation, income generation and stimulation of gro,th in both urban and
rural areas$
The importance of %M0s in economic development prompted the .overnment to
formulate the %M0s &evelopment 2olicy in E??E after several attempts done by
government, for instance a ma8or attempt in Tanzania ,as underta-en in ()BB ,hen the
4ational small industries corporation 4%*'" ,as formed under the 4ational
&evelopment 'orporation 4&'"$ Thereafter, the %*&O ,as established in ()C= by act of
parliament to plan, coordinate, promote and offer every form of services to small
industries and another attempt ,as occurring around in the ()D? during the globe
economic transformation ,hen most of governments adopted reforms from the *M! and
:orld Ban-$ Therefore the %M0s &evelopment 2olicy in E??E ensures that %M0 related
components are adequately addressed, harmonized and coordinated ,ith main focus in
creation of an enabling business environment, developing of financial and non financial
services and putting in place supportive institutional infrastructure$ The policy focuses
specifically on designing programs, reducing the cost of running %M0 sector,
+li+
strengthening %M0 infrastructure and enhancing the gro,th of %M0s through enabling
entrepreneurs to access finance from ban-s and financial institutions$ !rom this reason in
recent years, the country has ,itnessed the inclination of 'ommercial ban-s, 4on@
.overnment Organizations and other financial institutions that are doing a commendable
8ob in promoting %M0s$ Most of the financial institutions and 4.Os are mainly involved
in credit delivery, business training, providing general consultancy, supporting mar-et
lin-ages and addressing gender and environmental issues$ 1o,ever, most of the
institutions supporting %M0s are rather ,ea-, fragmented, concentrated in urban areas
and uncoordinated U6T, E??E"$
2.<.2.< C),#8$0'2),'$( $& SME+ D#5#%$1.#(, '( T)(2)(')
As postulated in the report of :orld Ban- report E??E" that there is no and universally
accepted single definition of %M0s in the ,orld$ 0very country defined %M0s differently
depending upon their purpose, ob8ective and use$ *n the conte+t of Tanzania %M0s policy
of the E??= provides that micro enterprises are those engaging up to > people in most
cases family members or employing capital amounting up to Tshs <million$The ma8ority
of micro enterprises fall under the informal sector U6T, E??="$

%mall enterprises are mostly formalized underta-ing engaging bet,een < to >) employees
,ith capital investments from Tshs <million to Tshs E??million$

T)9%# 2.! T"# C),#8$0? $& SME D#5#%$1.#(, '( T)(2)(')
'ategory 0mployees 'apital *nvestment
Micro 0nterprises (O> Up to <million
%mall 0nterprises <O>) Above <mill to E??million
Medium 0nterprises <?O)) E??million to D??million
7arge 0nterprises More than (?? More than D??million
S$-0*#7 U6T E??=" %mall and Medium &evelopment 2olicy$
l
Medium enterprises employ bet,een <? to )) people or use capital investments from Tshs
E??million to Tshs D?? million$ This is may also illustrated in table E$( above$
2.4.2.! "ontri#ution of SME sector to Econom$
G0$3," D$.#+,'* P0$/-*, (GDP)
The %M0s have sho,n great potential for ,ealth creation their aggregate contribution to
national income is estimated at bet,een =<F@>?F of .&2 !inseth, ())D"$ The %M0
sector is an arena ,here the poor not only improve their living, but also get most of their
goods and services at prices they can afford$ :ith contribution to .&2 attempts to
achieve significant e+port volume of %chumpeterian or manufactured goods are bearing
fruits Mbogoro, ())=/ 7uvanga and Musonda, ())="$ This is different from the past
,hen Tanzanian e+ports ,ere predominantly 6icardian or traditional goods$ The increase
of %chumpeterian goods in the e+port sector is a reflection of the e+tent to ,hich %M0
sector or entrepreneurial ventures are gaining a prominent role in the country economy$
Besides e+port trade statistics sho, that the share of %chumpeterian goods is on the
increase year after particularly since ())?$
The contribution of small and medium enterprises to .&2 is not restricted to e+port sector
alone for e+ample Omari, ())C" observed that C<F of the households in Tanzania
depend on small scale informal businesses$ Moreover in domestic consumer sector, ,e
,itness a ,ide range of products produced in the country$ These includes soap, domestic
appliances, pharmaceutical products ,electrical appliances, animal feeds, human food
items li-e pac-aged maize meal and rice ,soft drin-s ,artisan products li-e metal ,or-s
and agricultural farm implements$ Therefore it is observed that ,ithin the manufacturing
sector small and medium enterprises have the potential to become pillars of
industrialization Bhalla, ())("$
li
E.1%$?.#(, *0#),'$(
According to informal survey in ())( the statistic sho,ed that there ,ere ($C million
%M0 businesses ,hich employ = million people $This number is equivalent to around
E?F of the ,or- force in Tanzania$ This result sho,s that unemployment is a significant
problem to deal ,ith$ Because according to current statistics there are about C??,??? ne,
entrants into the labour force every year$ About <??,??? of these are school leavers ,ith
fe, mar-etable s-ills$ The public sector employs only about >?,??? of the ne, entrants
into the labour mar-et, leaving about BB?,??? to 8oin the unemployed$ Most of these
persons end up in the %M0 sector, and especially in the informal sector$ 400', E??)"
2.<.2.@ C")%%#(8#+ F)*#/ 9? S.)%% )(/ M#/'-. E(,#010'+#+.
&espite of this sector is indeed important$ *t is generally recognized that to face unique
challenges, ,hich affect their gro,th and profitability and hence diminish their ability to
contribute effectively to sustainable development$ These challenges are:
A**#++ ,$ F'()(*#
The lac- of access to finance ,as identified as one of the most severe constraint by small
and medium size enterprises in Tanzania$ *t ,as ran-ed the highest constraint by most
established local and foreign entrepreneurs$ *t inhibited their capacity to e+pand
technologically and upgrade their business 6ugumamu, ())C"$ Undoubtedly, this
constraint signaled the presence of critical bottlenec-s in TanzaniaGs formal financial
system and these financial institutions are considered ,ere not entrepreneur ne, friendly
since they tended to discriminate against the private sector$ 2rivate entrepreneurs in
Tanzania resorted to financing their operations from their o,n savings, support from
members, short term credit provide by supplies, advances offered by buyers or loans
from informal community based financial intermediaries 1yuha et al, ())?"$ %imilar
lii
studies in this area have sho,n that private entrepreneur in Tanzania during the ()C?s and
()D?s generated most of their investible capital sector from outside the formal ban-ing
sector$ !or those ,ho continued to apply for loans from the formal financial institutions it
,as al,ays a nightmare$ 7oan applicants ,ere required to provide fi+ed property as
collateral and the loan applied had to be at least equal to the value of declared assets$ Also
6a8ab, ())B" revealed that %M0 sector usually does not have credit history$ This criterion
poses an insurmountable barrier to all small enterprises to acquire loan from ban-s and
financial institutions$
T#*"($%$8'*)% *")(8#
According to Mbamba ()))" argued the change of technology has posed a great
challenge to small businesses$ %ince the mid ())?s there has been a gro,ing concern
about the impact of technological change on the ,or- of micro and small enterprises$
0ven ,ith change in technology, many small business entrepreneurs appear to be
unfamiliar ,ith ne, technologies$ According to his observations, those ,ho seem to be
,ell positioned, they are most often una,are of this technology and if they -no,, it is not
either locally available or not affordable or not situated to local conditions$ !oreign %M0s
still remain in the forefront in accessing the ne, technologies$
M)04#,+ I(&$0.),'$(
*n their influential document *7O in E??(, sho,ed lac- of sufficient mar-et information
poses a great challenge to small enterprises$ &espite the vast amount of trade@related
information available and the possibility of accessing national and international databases,
many small enterprises continue to rely heavily on private or even physical contacts for
mar-et related information$ This is due to inability to interpret the statistical data and poor
connectivity especially in %M0s areas$ This lac- of mar-et opportunities is a -ey
liii
constraint for %M0s in seem as a serious problem particularly in %M0s areas and this
mar-et often has very limited purchasing po,er$
E(5'0$(.#(,)% 0#%),#/
0nvironmental related constraints to business include legal or regulatory frame ,or- and
entrepreneurial culture$ The process of registration is almost difficulty because B607A
,hich is responsible for company and trade mar- registration is centralized in &ar es
%alaam$ The office also lac- adequate e+pertise and facilities :orld Ban-, E??E"$ The
legal frame ,or- also limits credit accessibility for most %M0s because the land Act()))
ma-es it difficult to use landed property as collateral due to comple+ foreclosure
procedure, including spouse consent *7O E??E"$ 'redit culture is under developed partly
due to the socialist e+perience and to the e+tent that some %M0 operator ta-e loans as
grants$
T)6 P$%'*'#+ )(/ R#8-%),'$(+
There is uneven enforcement of ta+ la,s resulting from ad hoc e+emptions for some
businesses and general lac- of transparency$ :ell established %M0, face unfair
competition from ta+ evaders including informal operators :orld Ban-, E??E", also large
businesses pay income ta+es on their profit$ 1o,ever, small businesses have to pay ta+es
,hether they ma-e profit or loss$ This is the case since for %M0s ta+es are set on the basis
of type of activity and appro+imate size rather than income$ This may limit their capacity
to gro,$ There are numerous ta+es and levies, for e+ample there are t,enty seven
different ta+es and levies that apply to various businesses and one has to -no, ,hich
apply to their particular enterprise$ This is 8ust too cumbersome especially for a small
business$ The ta+ assessment and collection system is non transparent and unpredictable,
giving opportunities for ta+ officials to e+hort bribes from small business operators
!inseth, ())D"$
liv
M)04#,'(8 S#05'*#+
Mar-eting is critical to success of enterprises/ the inability to develop mar-ets outside
their immediate locality and to compete is one of the most serious impediment to the
performance of %M0s$ 7ac- of mar-et opportunities is a -ey constraint for %M0s in
e+panding employment and improving the quality of the 8ob *7O, E??("$ Access to
mar-ets for %M0s operator is a serious problem particularly in %M0s areas ,here
seasonal products food the mar-et during harvesting time$ Most operators rely on local
neighborhood" mar-et that often the provision of mar-eting services mar-eting research,
mar-eting intermediation, facilitation of sub contracting arrangements" to sector is still
quite limited$ %ince a fe, private %M0s and 4.Os such as finance and enterprises
development agency !0&A", 2rivate sector initiatives 2%*" and Techno serve provide
mar-eting research services$ They carry out mar-et studies in Tanzania as ,ell as abroad
for %M0s or their associations$ These services ho,ever reach a very tiny proportion of
%M0s$
There are also a fe, mar-eting agencies such as the Board of 0+ternal Trade B0T",
Tanzania 'hambers of 'ommerce *ndustries and Agriculture T''*A", and Tanzania
.atsby Trust T.T"$They organize local and international fairs as ,ell as sponsoring
%M0s to participate to areas ,here there are very fe, service providers active in this field
and their outreach is also quite small relative to the need for their services$
B-+'(#++ P0#.'+#+
6ecent studies sho, that %M0s face serious problem in terms of ,or-ing premises, the
*7O, E??(" study sho,ed that as much as B?F of businesses in the informal sector
operate along the streets$ 2articularly in Tanzania businesses are concentrated in the urban
areas ,here it is difficulty for %M0s to acquire plot for constructing businesses premises
lv
because of bureaucracy, corruption and very limited number of surveyed plots$ &ue to
these reason cause more %M0s to let business premises ,hich are very e+pensive$
F'()(*')% S#05'*#+
6ecent studies *7O, E??(" have sho,n that many %M0s lac- access to finance for stating
operating and e+panding their businesses$ The estimated demand for %M0s credit ,as
E$<million borro,ers compared to about <???? borro,ers being served currently $The
largest demand for credit is in the range of Tshs <???? to <?????$ Access to formal
finance by %M0s is constrained by many factor including the fact that most formal
financial institutions still insist on traditional characteristics of borro,er some of ,hich
being capital ,collateral capacity and character ,hich e+cludes most of the %M0s$ Most
of the %M0s are poor they have fe, valuable assets they can offer as collateral$
2.<.2.A I(','),'5#+ U(/#0,)4#( &$0 P0$.$,'$( )(/ D#5#%$1.#(, $& SME+.
T"# N),'$()% M'*0$&'()(*# P$%'*?C 2
The 4ational Micro !inance 2olicy ,as introduced in ,ith the main ob8ectives of
establishing a basis for the evolution of an efficient and effective micro financial system
in the country, ,hich serves the lo,@income segment of the society, and thereby
contributes to economic gro,th and reduction of poverty$ The policy focuses at the
provision of financial services to households, small holder farmers, and small and micro@
enterprises in rural as ,ell as in the urban sector$ *t covers range of financial services,
including savings, credit and payment U6T, E???"$ All this aimed at ma-ing ban-s and
financial institutions become a useful instrument to,ards poverty reduction$ As a result of
this policy, many ban-s and other financial institutions have introduced various pac-ages
of credits and deposits$
lvi
Micro@finance addresses the financial needs of ma8or sector of Tanzanian population
through the operation of microfinance in form of %A''O% ,hich made under the
'ooperative %ocieties Act, E??= ,hich became operational in !ebruary, E??>$ *n ,hich
primary activities are to mobilize savings and furnish secured and unsecured loans or
credit to households, smallholder producers and mar-et entrepreneur, micro@enterprises in
rural and urban areas 'ooperative %ocieties Act E??= section EEb"
S-+,)'()9%# I(/-+,0')% D#5#%$1.#(, P$%'*? SIDP (!BB@ -22)
This places specific emphasis on promotion of small and medium industries through the
follo,ing measures: supporting e+isting and ne, promotion institutions, simplification of
ta+ation, licensing and registration of %M0s and improve access to financial services$ *n
addition, %*&2 encourages informal sector businesses to gro, and be formalized$
!urthermore, the policy identifies measures to enable indigenous entrepreneurs, ,omen,
youth and people ,ith disabilities to ta-e part in economic activities$ 1o,ever, under this
policy there some activities have been identified to be carried out these include:
introduction of 0+port 2rocessing Lones and continued privatization$
B-+'(#++ E(5'0$(.#(, S,0#(8,"#('(8 &$0 T)(2)(') P0$80)..#C 2<
This focused on removing regulatory and administrative constraints on private sector or
%M0s operations and ensuring that the services that government provides to the private
sector are efficient and effective$ The goal of B0%T program is to enhance gro,th and
development of the private sector, particularly %M0s and their participation in the
economy, the purpose of B0%T is to reduce the burden on doing business, including
%M0s by reforming and eradicating as many procedural and administrative barriers as
possible and to improve the quality of services provided by .overnment to the private
sector$
lvii
2.4.2.% &ther Initiatives 'one to (romote Small and Medium
Enterprises Sector.
F$0.),'$( $& A++$*'),'$(+FO08)('+),'$(+ ,"0$-8" SIDO
%*&O in collaboration ,ith other sta-eholders supported establishment of %M0
association to empo,er the private sector$ %ome of those associations include Tanzania
!ood 2rocessors Association TA!O2A", Tanzania %mall *ndustries Organisation
TA%*%O" and P3i-undi vya Biashara 4dogoG 3*B*4&O"$ These associations have been
useful in involving the members in all issues related to advocacy as ,ell as accessibility
to mar-et, information, and ra, material, pac-aging and micro credit services$
E+,)9%'+".#(, $& 5)0'$-+ I(+,',-,'$(+ .)()8#/ 9? G$5#0(.#(,
Apart from %*&O, various institutions ,ere established to support enterprise development
in Tanzania$ These institutions cater for the ,hole enterprise sector including %M0s$
These include the Tanzania *ndustrial 6esearch &evelopment Organisation T*6&O"
,hich supports local ra, materials utilisaltion/ 'entre for Agricultural Mechanization
6ural Technology 'AMA6T0'" ,hich is involved in promotion of appropriate
technology for rural development/ Tanzania 0ngineering and Manufacturing &esign
Organisation T0M&O" responsible for machine design/ Tanzania Bureau of %tandards
TB%" mandated to promote standards/ Board of 0+ternal Trade B0T" ,hich is
instrumental in promotion of e+ports mainly through trade fairs/ and the Technology
Transfer 'entre ,hich is active in proto@type development and promoting their
commercialisation$
Also a number of initiatives have been designed by the .overnment to set up funding
mechanisms and schemes to address poverty and employment related problems through
lviii
promoting %M0s$ %uch funds include 4ational 0ntrepreneurship &evelopment !und,
;outh &evelopment !und ,hich is managed by the Ministry of 7abour,;outh
&evelopment and %ports and the :omen development !und that is managed by the
Ministry of 'ommunity &evelopment and :omen Affairs and 'hildren$ Apart from these,
there are other related programmes that ,ere established through .overnmentAdonor 8oint
efforts including the %mall 0ntrepreneurs 7oan !acility %07!", 4ational *ncome
.enerating 2rogramme 4*.2", 2residential Trust !und and 'ommunity &evelopment
Trust !und$ Another initiative to,ards this direction has been the establishment of the
4ational Micro@finance Ban- 4MB", meant to cater specifically for micro enterprises$
2.> C$(*#1,-)% F0).#3$04.
This is not surprising, since financial mar-ets or institutions in developing countries vary
in a number of ,ays !or instance/ commercial ban-, microfinance and %A''Os are the
most important institutions discussed in this study$ The frame,or- identified some of
impeding factors that prohibit %M0s not accessing financial services from financial
institutions li-e lac- of collateral, lac- of entrepreneur s-ills, poor documentations,
corruption, bureaucracy and high interest rates$ These impeding factors are assumed to be
ma8or practical problems particularly in Tanzania$ &ue to the e+istence of problems in
accessibility of finance to %M0s the government induced financial reform through
financial institutions, although the pace of implementation varied, for instance
government has been insisted on reduction of interest rates, credit guarantees scheme
introduction of entrepreneurship s-ills, group lending and increase credit out reach
,creates database for %M0 business o,ners, lastly government trying to improve the
regulatory environment and creating an efficient infrastructure that has implications for
business competitiveness$ These strategies are important for enhancement %M0s
particularly in the question of financing$
li+

!urthermore, the frame,or- identified ,hether and ho, the access to credit of %M0s
business o,ners has been affected by financial mar-ets as result of reforms, for e+ample
F'8-0# E$(: 'onceptual !rame,or-
S$-0*#7 6esearcher o,n &esign
l+
I.1#/'(8 F)*,$0+.
7ac- of collateral
7ac- of entrepreneur
s-ills
2oor documentations
'orruption
Too bureaucracy
1igh interest rate
S,0),#8'#+
6eduction of
interest
Training to %M0s
*ntroduction of credit
guarantees scheme
'reate database for
%M0s
*ncrease credit
outreach
.roup lending
R$%# $& F'()(*')%
I(+,',-,'$(+
-'ommercial ban-s
@ MicrofinanceA4.Os
@ %A''Os
G$5#0(.#(, I(+,',-,'$(+7
*mpose strategies policies
and la,s$
SME+ )**#++ $&
&'()(*')% +#05'*#+
S-**#++ $& SME+ )+ )
10$/-*, $& ,"# R$%# $&
F'()(*')% I(+,',-,'$(+
I.1)*,+ $& %$)( $(
0mployment
opportunity
%ales revenues
2hysical assets
2rofitability
Mar-et coverage
!inancial assets
one of the reforms is the e+istence of microfinance in the financial mar-et as described
above ,hich is no, promising to reach a poor. This -ind of reform essentially consists of
institutional innovation on the supply side$
*n this case financial reform is li-ely possible to increase employment opportunities
,hich ,ill result in increased income and improved living standard, better payment also
,ill contribute to increased sales, financial assets, mar-et coverage and profitability
ultimately %M0s success as the product of the role of financial institutions$

l+i
CHAPTER THREE
RESEARCH METHODOLOGY
:.! I(,0$/-*,'$(
This chapter gives an overvie, of the research methodology used in this study$ The
chapter describes the study area and research design adopted$ *t then gives a detailed
description of the sample and the sampling procedure used in this study and closes ,ith
the techniques used in data collection and the methods of data analysis$
:.2 S,-/? A0#)
The research conducted involved ban-s and other financial institutions, loan beneficiaries
and non beneficiaries on ,hich their businesses ,ere located in &ar es %alaam region$
The study carried out in &ar es %alaam because it is the commercial city of Tanzania ,ith
the largest number of businesses or small and medium enterprises and great numbers of
ban-s and other financial institutions/ also it is easy to access information from targeted
population$ The city comprises of three districts ,hich are *lala, Teme-e, and 5inondoni,
According to business survey of the 4ational Bureau of %tatistics in E??C, &ar es %alaam
had )=>=? businesses ranging from micro to large and a total of =>D,<BD ,or-ers of
,hom B> percent ,ere males and =B percent ,ere females$
The distribution of businesses in &ar es %alaam region sho,s that 5inondoni &istrict had
=>,=DE business establishments or =C percent of the total businesses in the region$*t is
follo,ed by *lala &istrict ,ith =>,EC< business establishments =C percent" then Teme-e
&istrict E>,CC= business establishments EC percent"$ *n regard to the number of ,or-ers
*lala &istrict had (<=,(>C ,or-ers or >> percent share of the total ,or-ers in the region$ *t
is follo,ed by 5inondoni district ,ith (((,=D? ,or-ers =E percent" then Teme-e &istrict
l+ii
,hich had D>,?>( ,or-ers or E> percent" of the total number of ,or-ers table belo,
sho, numbers businesses and gender in every district$
T)9%# :.! N-.9#0 $& D'+,0'9-,'$( $& B-+'(#++ 9? D'+,0'*,+-D)0 #+ S)%)). R#8'$(
&istrict Business Males !emales
5inondoni
*lala
Teme-e
=>=DE
=>EC<
E>CC=
BB(>=
))>C?
<B(DB
><E=C
<=BBC
ECD<<
Total )=>=? EE(C)) (EBCB)
S$-0*#7 Business %urvey/ 4B%, E??C
:.: R#+#)0*" D#+'8(
This study used both quantitative and qualitative techniques in data collection$ The reason
to use qualitative technique ,as because it needed descriptions and other oral evidences
from the respondents$ !urthermore, most of the respondents ,ere semi@illiterate$ On the
other hand, quantitative data collection method questionnaires" ,as designed to give me
the insights of the role of financial institutions on success of small and medium
enterprises$
:.< S).1%# +'2# )(/ S).1%'(8 T#*"('=-#+
The sample for this study involved a total of (?< respondents from three districts in &ar@
es@salaam region includes )< small and medium enterprises and (? financial institutions$
Both %imple random sampling and purpose sampling technique ,ere employed to select
the (?< respondents to represent %M0s and financial institutions respectively$ Of the (?<
respondents earmar-ed for intervie,s, the study managed to cover DD respondents from
%M0s and C respondents from financial institutions E@ commercial ban-, E@ microfinance
l+iii
and =@%A''Os" this includes officers and managers$ Belo, is a tabular representation
and distribution of research respondents$
T)9%# :.2 D'+,0'9-,'$( $& ,"# +).1%#
6espondents Questionnaires
&istributed
Questionnaires
6eturned
2ercentage of
6eturned
Questionnaires
2ercentage of
4ot returned
Questionnaires
%M0 o,ners )< DD )E$B C$>
Ban-s > E <? <?
Microfinance = E BB$C ==$=
%A''O% = = (?? @
T$,)% !> B>
S$-0*#7 !ield data, E?(?
:.> D),) C$%%#*,'$( T#*"('=-#+
The study utilized both primary and secondary data$ !or the purpose of ma-ing analysis
researcher employed the follo,ing methods:
:.>.! Q-#+,'$(()'0# A/.'('+,0),'$(
Questionnaires as a tool of information ,as designed and administered on the premises of
the enterprises or businesses$ T,o set of questionnaires ,ere employed to the
intervie,ees$ The first set of questionnaire ,as purposely for %M0s o,ners and second
one for Managers of commercial ban- and other financial institutions$ The questionnaires
,ere pre tested before field ,or-$ Both close ended and open ended questions ,ere
designed to facilitate the easiest of gathering information$
:.>.2 I(,#05'#3+
*n the intervie, method respondents are as-ed questions in order to find out ,hat they do
thin- about the role of financial institutions on success of %M0s$ Most intervie,
questions ,ere unstructured$ This ,as because intervie, questions arose from
respondents ,hen there ,as a need of getting further information$
l+iv
:.>.: D$*-.#(,)0? 0#5'#3
The study revie,ed different 8ournals, articles, published and unpublished materials,
magazines, statistical reports, catalogues and the li-e that reflects the challenges that
small and mediums sized enterprises encountered in gaining access to finance$ The
documentary revie,ed again highlighted the role of financial institutions in resolving the
problem$ The documentary also assisted researcher to understand different theories and
empirical studies from related field$
:.@ D),) P0$*#++'(8 )(/ A()%?+'+
The data collected ,as coded and entered into Microsoft e+cel$ After completed to insert
questionnaires into e+cel, the researcher ,as further employed soft,are -no,n as
%tatistical 2ac-age for %ocial %cience %2%%" for analyzing the data$ The %2%% analyzed
questionnaires ,ith many questions include both close ended and open ended questions$
The pac-age used to determine frequencies in order to analyze the number of respondents
belonging to each variable$ The %2%% pac-age ,as then used to estimate the values of
un-no,n parameters of the population$ This %2%% programme therefore too- into
consideration the analyses of data to determine frequency and percentages of the
respondents and finally guide researcher to dra, tabulation and graphs$
Moreover, both quantitative and qualitative methods of data analysis have been employed
for purpose of clear understanding of the research problems under investigations$
:.A V)%'/',? )(/ R#%')9'%',?
2atton E??E" states that validity and reliability are t,o features ,hich any qualitative
researcher should focus on ,hile designing a study, analyzing the results and 8udging the
quality of the study$ 0isner ())(" further confirms this by saying a good qualitative study
l+v
can help us to understand a situation that ,ould other,ise be enigmatic or confusing/
hence a good research ,or- should hold a high degree of reliability and should be valid as
,ell$ !urthermore according to 2atton E??E" in a research ,or-, all the rights things
must be measured$ 'are should be ta-en that the appropriate item is measured validity"/
in addition, careful attention should be paid to ho, the measurement is being made
reliability"$ This study therefore too- into consideration these t,o -ey factors during the
course of the research$ This ,or- as earlier mentioned adopts a conceptual analytical
frame,or- that employs the theoretical to analyze data of the stated ob8ectives$ This ,as
done because of the paucity of firm level data on the operations of small and medium
scale firms in Tanzania$ All research questions proposed tested by the available theoretical
analysis and intuitive analysis of the historical evidence on the performance of %M0s
,ithin the period under revie,$ Also, the results from the survey conducted used to
evaluate the validity of the proposed research questions and it ,ill also be compared ,ith
historical evidence presented in the ,or- of earlier conducted researches$
!urthermore, the triangulation approach is employed in the study to enhance data validity$
Triangulation means using different methods to gather information such as semi@
structured intervie,s, focus groups and secondary sources %mith and Morro,, ())B"$
1o,ever, &enzin and 7incoln E???" cited scholars ,ho contend that Ptriangulation is not
a tool or a strategy of validation, but an alternative to validation$
:.D L'.',),'$( $& ,"# S,-/?
The absence of %M0 business o,ners in their business areas ,ere impediment for
conducting intervie,s in this study, lac- of enough researches done about financing on
%M0s in Tanzania$ Also some time collection of data coincided ,ith the daily routine
activities of respondents intervie,ed from ban-, microfinance and %A''Os to overcome
l+vi
this problem the reasecher has to go more again ,hen they ,ere not full occupied$
Another limitation of this study ,as both time and financial constraints ,hich has made
researcher not meeting deadline of presentation$

l+vii
CHAPTER FOUR
STUDY FINDINGS AND ANALYSIS
<.! I(,0$/-*,'$(
This chapter presents the study findings and analysis of data collected in the field$ The
results of the findings ,ere presented in te+ts, tables and figures$ *n order to realize the
ob8ectives of the study, the researcher assessed the role of financial institutions on the
success of small and medium enterprise in Tanzania$ The chapter provides a step by step
presentation of data collected and their implications to the ob8ectives of the study$
<.2 K#? C")0)*,#0'+,'*+ $& ,"# R#+1$(/#(,+
*n this study most of the %M0s surveyed ,ere characterized in terms of the location, year
of establishment, form of o,nership, gender, marital status, education level, type of ma8or
economic activities dealing ,ith registration and sales performance$
<.2.! T"# R#+1$(+#+ $& SME+E O3(#0+ '( R#%),'$( ,$ L$*),'$(
*t ,as important for this study to learn from respondents according to location, three
districts involved ,hich are 5inondoni, *lala and Teme-e$ The findings sho,ed that
5inondoni districts had the highest percentages of intervie,ed %M0s ,hich account >)
<<$CF" follo,ed by Teme-e E=EB$CF" and finally *lala ,hich accounted (B(D$EF"$
Table >$( provides more details$
According to the study 5inondoni district appears to posses a large number of services,
commerce and trade activities than manufacturing activities ,hile *lala had more
manufacturing activities than other districts$
l+viii
T)9%#+ <.!7 T"# R#+1$(+#+ $& SME+E O3(#0+ '( R#%),'$( ,$ L$*),'$(.
N).# $& D'+,0'*,+ I(5$%5#/
R#+1$(/#(,+
F0#=-#(*? P#0*#(,)8#+ C-.-%),'5#
*lala (B (D$E (D$E
Teme-e E= EB$( >>$=
5inondoni >) <<$C (??
T$,)% DD ! @
S$-0*#: !ield data E?(?
<.2.2 Y#)0 $& E+,)9%'+".#(,
*t ,as observed that most of the %M0 o,ners intervie,ed commenced businesses
bet,een the year E??< and E??D$ The result sho,ed that =B$> percent ,ere established
bet,een E??< and E??D, and EB$( percent bet,een E??( and E??>$

T)9%# <.27 Y#)0 $& ,"# E+,)9%'+".#(,.
Y#)0+ F0#=-#(*? P#0*#(, C-.-%),'5#
Before E??? E? EE$C EE$C
Bet,een E??(AE??> E= EB$( >D$)
Bet,eenE??<AE??D =E =B$> D<$E
E??) and above (= (>$D (??
T$,)% DD ! @
S$-0*#7 !ield data E?(?
*n and after E??) there ,as insignificant increase in %M0sG establishment$ This declining
trend ,as caused by the lac- of startup capital due to poor inaccessibility of funds from
commercial ban-s and other financial institutions $Table >$E above provides more details$
<.2.: F$0. $& O3(#0+"'1
As regards to type of o,nership, the study sho,ed that most %M0s ,ere sole
l+i+
proprietorship <D B<$)F" and this is representative of the nature of business o,nership
commonly found in Tanzania, follo,ed by limited company (C(=$B" partnership
E(=$BF" and (($(F" are cooperatives$ !or more details are sho,n in !igure >$( belo,$
F'8-0# <.!7 !orms of Business O,nership
S$-0*#: !ield data E?(?
The reason as to ,hy most of the %M0s are proprietorship$ *t is easiest form of business
to be established and operate than other type of businesses$ This result can be compared
,ith the last labour force survey of ())( ,hich of about C> per cent of all people ,ere
employed in the sole o,ner businesses$

<.2.< D'+,0'9-,'$( $& G#(/#0
The study revealed that about E< percent of the respondents intervie,ed ,ere females
,hile C< percent ,ere males as in figure >$E illustrated$ This study sho,s more males
participate in operation of small and medium enterprises compare to female, although,
there are other studies sho,ed female participate more compare to male$
l++
F'8-0# >$E: &istribution According to .ender
S$-0*#7 !ield data E?(?
This study sho,ed small percentage of females compared to other previous studies done$
!or e+ample in 4*%% ())(" study ,omen accounted for about =< per cent of informal
enterprises$ By ())<, it ,as estimated that the proportion of ,omen in the sector could
have risen to C? per cent of the informal sector labour force$ *n year E??? 0conomic and
%ocial 6esearch !oundation 0%6!" study sho,ed that << per cent of the enterprises in
the sample ,ere o,ned by ,omen as reported in Mlingi, E???"$ %,isscontact E??="
estimated that ,omen o,ned >= per cent of M%0s$
<.2.> M)0',)% S,),-+ $& ,"# R#+1$(/#(,+
Among of DD respondents intervie,ed, findings sho,ed that most of intervie,ers ,ere
married BEC?$<F" ,hile E(E=$)F" ,ere single and <<$CF" ,ere ,ido,ed$ *n figure
>$= belo, provides more illustrations$ *n this case the study revealed that married
intervie,ers participate more in the operation of small and medium enterprises because
they are to see- money so that to -eep family in ,hich their responsible to: they need
money to send children to school , food , clothes and for medication, from this reason
they are to have other source of income, in so doing they employ themselves to %M0s$
l++i
F'8-0# >$=: &istribution of Marital %tatus of 6espondents
S$-0*#: !ield data E?(?
<.2.@ D'+,0'9-,'$( $& A8# $& ,"# R#+1$(/#(,+
According to the finding about =C percent of the respondents ,ere aged bet,een =( to >?
years older follo,ed by EC percents ,hose age ,as >(years and above and E> percent
aged bet,een (D to =? years as indicated in Table >$= belo,$

T)9%# <.:7 D'+,0'9-,'$( $& A8# $& ,"# R#+1$(/#(,
A8# $& R#+1$(/#(, N-.9#0 $&
R#+1$(/#(,
P#0*#(, C-.-%),'5#
Bet,een (D@=?years E> EC$= EC$=
Bet,een >(@>?years =C >E$? B)$=
Bet,een >(@<?years (D E?$< D)$D
Above <( ) (?$E (??
T$,)% DD ! @
S$-0*#7 !ield data E?(?
The study concludes that the most intervie,ed %M0s o,ner group age ,ere people aged
bet,een =( and >? years$ Therefore, the age bet,een =( to >? is middle aged and
l++ii
normally this group is the more self employed group than other group because at these
ages people are head of their families$
<.2.A E/-*),'$( %#5#% $& ,"# R#+1$(/#(,+
The ma8ority of %M0s o,ners intervie,ed had certificates for primary and secondary
school this accounted to <?<CF" ,hile (>(BF" had first degree, (DE(F" of
respondents had diploma or advanced diploma and ==F" had post graduates degrees$ The
study concludes that most people engaged in %M0 sector have primary and secondary
schools education level$
F'8-0#
>$>:
0ducation
level of
%M0sG
o,ners
S$-0*#:
!ield data E?(?$
A graduate respondent from certain University proclaimed that he failed to secure a job
in the formal sector and had to find alternative means of earning a living for himself and
dependant family members by self employment.This statement sho,s that most literates
rely much on being employed in the formal sector than to be 8ob creator in this case leave
the %M0 sector to people ,ith lo, education$
<.2.D M);$0 E*$($.'* A*,'5','#+ *)00'#/ $-, 9? SME+
l++iii
There are ,ide range of activities carried out in the economy but the researcher
considered only three categories such as manufacturing, services as ,ell as commerce and
trade as the figure >$< belo, sho,s$ These economic activities ,ere very important in this
study because, they enabled to evaluate the performance of %M0 sector$ Manufacturing
activities include/ garages, fabrication, ,elding and fitting, soap and oil production,
carpentry, maize milling and tailoring accounted (B(D$EF" %ervices include hotels,
schools, general supplies, internet services and transportation activities accounted
>><?F"$
Figure 4.!) Major Economic Activities carried Out by SME sector$
S$-0*#: !ield data E?(?
'ommerce and trade activities included/ hard,are shop, ,holesale and retailing shop for
fast and consumers good, selling second hand clothes mitumba" and readymade clothes
accounted ED=($DF"$ These results sho, that participation of people in the %M0 sector
have a great economic significance$ Most respondents are engaged in the services
industry than in manufacturing, and commerce and trade$ The high gro,th of services
industry has been caused by the rapid development in technology, telecommunication,
ban-ing and transportation in the country$
l++iv
The result above can be compared ,ith a study done by *!' in E??< estimated that there
,ere E$C million enterprises in the country of ,hich about B?F ,ere located in urban
areas$ Of ,hich <>F are dominant in trade sector <>F" follo,ed by service sector
=>F"$
<.2.B R#8'+,0),'$( S,),-+ $& S.)%% )(/ M#/'-. E(,#010'+#+
6egistration is one of problems that have been stated by other authors including
6ugumamu and Mutag,ab,a ()))" that many small and medium enterprises donGt not
register business due to bureaucracy$ This study sho,ed that B> C=F" are unregistered
businesses$ This is because some of the respondents thought that if one is registered
heAshe li-ely to pay more ta+es$ Other respondents suggested that the registration process
ta-es a long time$ But about E>ECF" of %M0 o,ners intervie,ed have been registered
and indicated that, they didnGt face such a problem$ !igure >$B belo, sho,s more details$
F'8-0# >$B: 6egistration %tatus of %mall and Medium 0nterprises
S$-0*#7 !ield data E?(?
One of respondent said it takes two to three weeks for registration which seems to be too
long and argued BR!" to open offices in the regions like #$%"&R".
l++v
<.2.! S)%#+ 1#0&$0.)(*#
The researcher ,as interested to -no, the currently annual sales performance of different
small and medium enterprises$ Of DD %M0s intervie,ed <? <B$DF" indicated their sales
to lie bet,een TA% <,???,??? and E??,???,???$ About =E =B$>F" indicated their sales to
be less than TA% <,???,??? and about < <$CF" their sales ,ere in the range of TA%
E??,???,??? to D??,???,???$ More details are seen in Table >$> belo,

T)9%# <.<7 D'+,0'9-,'$( $& S)%#+ P#0&$0.)(*# $& SME+
S)%#+ %#5#%+ &'8-0#+ '(
!C
N-.9#0 $&
R#+1$(/#(,
P#0*#(, C-.-%),'5#.
7ess than < =E =B$> =B$>
Bet,een <@E?? <? <B$D )=$E
Bet,een E??@D?? < <$C )D$)
More than D?? ( ($( (??
T$,)% DD ! @
S$-0*#: !ield E?(?
Therefore, the vast ma8ority of the respondents <?<B$DF" have sales of bet,een TA%
<,???,??? to E??,???,??? per annum$
<.: M$,'5),'$()% &)*,$0+
Motivation factors can be either pull or push factors, pull factors are associated ,ith
having a strong positive internal desire to go into business, ,hile push factors are e+ternal
oriented$ These factors lead people to go and start businesses$
<.:.! M$,'5#+ I(&%-#(*# P#$1%# P)0,'*'1),'(8 '( D$'(8 B-+'(#++#+
&uring the field survey, respondents ,ere as-ed to state up to five main reasons as to ,hy
they are motivated and decided to participate in doing business$ The motives vary from
l++vi
one person to another, as ,ell as from one business to another business$ The reasons cited
during the survey are as summarized in Table >$<$ The findings indicated that most
respondents do business because it is the only ,ay they could ma-e a living
employment"$ Other motives stated include, the need to supplement income from other
sources, the need to avoid ,or-ing for others, and the need to achieve a higher position in
the society$
T)9%# <.>7 M$,'5#+ I(&%-#(*# P#$1%# P)0,'*'1),'(8 '( D$'(8 B-+'(#++#+
M$,'5),'$( F)*,$0+ F0#=-#(*? P#0*#(, C-.-%),'5#
*t is the only ,ay l could ma-e a
living
>E >C$C >C$C
To supplement income from the other
sources
ED =($D C)$<
To avoid having ,or-ing from others (? (($> )?$)
To achieve a higher position in the
society
B B$D )C$C
Other reasons E E$= (??
T$,)% DD ! @
S$-0*#: !ield data E?(?
Other reasons li-e en8oyment of ,or-ing, use of e+isting s-ills and competencies, as ,ell
as doing business as a hobby ,ere also cited as motives$
<.< F'()(*')% '(+,',-,'$(+ '( R#%),'$( ,$ A**#++'9'%',? $& F'()(*#+
!inancial institutions play a -ey role in the development of %M0s in a country$ They are
the intermediary lin- in facilitating the flo, of funds from domestic savings into the
productive sector$ At the time many ban-s and other financial institutions have introduced
various pac-ages of credits and deposits$ The presence of more ban-s is interpreted as
more access to credit among %M0 businesses ,hich is not true, because despite of the
proliferation of ban-ing institutions and the ,ide range of ban-ing products and services,
it seems that very little attention has been paid to help entrepreneurs$ Therefore in this
l++vii
case the demand for microfinance services and funds is still high$ The demand of funds in
microfinance can be met if commercial ban-s ,ill be ,illing to change their attitude
to,ards microfinance mar-et and hence become important actors$ Mr$ Bill 'linton the
former 2resident of the United %tates of America had this advice to ban-s: J'e thought it
is (uite important to get more of our traditional banking institutions involved in bringing
microfinance to the necessary level of density to have an impact on the individuals) lives
of those who receive the loans.
<.<.! N-.9#0 $& B#(#&'*')0'#+ )8)'(+, ,"# N$( B#(#&'*')0'#+ $& %$)(
The findings sho,ed that a substantial proportion of respondents <=B?$EF" applied for
loans from Ban-s or financial institutions ,hile
F'8-0# >$C 2ercentages of Beneficiaries against the 4on Beneficiaries of loan
S$-0*#: !ield data E?(?
=<=)$DF" of the respondents are non beneficiaries of loan from any ban- or financial
institutions as figure >$C above e+plains$ These non beneficiaries they gave the reasons on
,hy they did not ta-e trouble to apply for a loan and argued that stringent requirements
li-e lac- of collaterals, high interest rate and bureaucracy discouraged them to apply for a
l++viii
loan$ !or instance one of the respondents from %he-ilango ,ho is operating tailoring
mart, said that she had been applying a loan several times to a bank but failed to secure
a loan due to lack of collateral although she was told to open an account and operates it
within si* months in order to be given that loan.
<.> I.1)*,+ $& L$)( $( S.)%% )(/ M#/'-. E(,#010'+#+ P#0&$0.)(*#
6espondents ,ho received loans beneficiaries" ,ere also as-ed to give details about the
amount borro,ed for the first time and ,hether the amount given ,as enough or not, time
of repayment and the impact that had e+perienced in their business during repayments$
*nformation on ,hether they have completed paying bac- the loans ,as also posed$ Apart
from these the researcher ,as interested to -no, and identifies the impacts of loan on
sales revenue, financial asset, profitability, physical asset, and mar-et coverage and
employment generation$
<.>.! L$)( S'2#
!indings sho,ed that the ma8ority of respondents about (<ED$=F" applied loans
amounting to bet,een TA% <??,??? to (,???,??? follo,ed by (> EB$>F" ,ho applied for
a loan bet,een TA% (,???,??? and E,<??,??? and only D(<$(F" of respondents
intervie,ed requested belo, TA% <??,???$ More information can be seen in Table >$B$

<.>.2 C0#/', R),'$('(8
*t seems most of the ban-s and other financial institutions use credit rationing as control
measurement to,ard clientsG behavior and the means to reduce ris-s on default rate
possibilities and other transaction cost$
T)9%# <.@7 L$)( S'2# $& ,"# R#+1$(/#(,
A.$-(, 9$00$3#/ &'0+,
,'.#.
F0#=-#(*? P#0*#(, C-.-%),'5#
l++i+
belo, <????? D (<$( (<$(
bet,een <?????A(?????? (< ED$= >=$>
bet,een(??????AE<????? (> EB$> B)$D
bet,eenE<?????A<?????? (? (D$) DD$C
above <?????? B (($= (??
Beneficiaries <= (?? @
4on beneficiaries =< @ @
T$,)% DD ! @
S$-0*#7 !ield data E?(?
The results sho,ed that (CF and D=F of respondents said the amounts given ,ere not
enough and other said enough respectively$ This also can be described in the figure >$D
belo,$ 1o,ever, the study sho,ed again there is a problem on repayment time because
about ==BE$=F" of respondents said time is not enough to repay a loan and about
E?=C$CF" of respondents thought this time is not problem$ This result is interesting
because above e+planations sho,ed that amount given to them ,as not enough and
again the some respondents said time ,as not enough for rationed amount ,hat if they
,ere given full amount ,ould they pay or became a defaultersH
F'8-0# >$D 'redit 6ationing
S$-0*#7 !ield data E?(?
<.>.: F-,-0# C0#/', P%)(+
l+++
About >= D($(F" of the total respondents e+pressed their interest in ta-ing another loan
from Ban-s and other financial institutions after completed paying the first loan and (?
(D$)F" are not -een about ta-ing another loan as table >$C belo, sho,s$ %ome
respondents consider loans to be a savior to their business. But other respondents
consider loan as a burden because if it is acquired disturbed the ,hole performance of
business particularly during servicing the loan this can be seen in figure >$)$

T)9%# <.A7 F-,-0# C0#/', P%)(+
R#)11%'*),'$( $& ,"#
S#*$(/ %$)(
F0#=-#(*? P#0*#(, C-.-%),'5#
;es >= D($( D($(
4o (? (D$) (??
6ecipient <= (?? @
4on recipient =< @ @
T$,)% DD ! -
S$-0*#: !ield data E?(?
<.>.< A&&#*,+ $& R#1)?.#(, $( ,"# &'()(*')% 1#0&$0.)(*# $& SME+
The findings sho,s that beneficiaries of loan ,hich ,ere about =DC($(F" argued that
business financial performance ,as dropping as ,hen servicing the loan due to
repayment time to be shorter plus high interest rate ,hile other (<ED$=F" did not
e+perience that problems$
F'8-0#7 >$): Affects of 6epayment on the financial performance of %M0s
S$-0*#7 !ield data E?(?
l+++i
!igure >$) above provides more evidences on ho, repayment affects the financial
performance of %M0s$ !or e+ample one of respondents from 2osta area, drew a
comparison between his enterprises with a balloon saying that after receiving loan from
"kiba +ommercial Bank, his business e*pands like a balloon, but eventually shrinks
down to its original si-e by the end of the loan tenure.
<.>.> I.1)*,+ $& L$)( $( S)%#+C A++#,+C P0$&',)9'%',?C )(/ M)04#, C$5#0)8#
The researcher further assessed the follo,ing: sales revenue, financial asset profitability,
physical asset and mar-et coverage$ The findings sho,ed that about =<$CF" and
B(($=F" of the respondents reported negative changes, (EEE$BF" remained stable,
EB>)$(F" and B(($=F" sho,ed positive changes in their sales revenue, =<$CF" and
>C$<F" of respondents sho,ed negative changes, (EEE$BF" remained stable, E<>C$EF"
and )(CF" of the respondents reported positive changes in their profits$ 2hysical assets
about (($)F" and >C$<F" sho,ed negative changes ,hile EE>($BF" remained stable,
E?=C$CF" and B(($=F" reported positive changes$ !inancial assets about E=$DF" and
C(=$EF" reported negative changes, (=E>$<F" remained stable ED<E$DF" and =<$CF"
reported the positive changes$ and lastly mar-et coverage of all respondents revealed
E=$DF" and >C$<F" sho,ed negative changes (<ED$>F" remained stable, E?=C$CF"
and (EEE$BF" sho,ed positive changes$ !or more information please refer to Table >$D$
6esults from the study indicated that the ma8ority of the respondents sho,ed that there
,ere positive changes in sales revenues, profitability, physical asset, financial asset and
mar-et coverage this means there ,as improvement of business financial performance$
!or e+ample one of respondents from 5aria-oo
l+++ii
T)9%# <.D7 I.1)*,+ $& L$)( $( S)%#+C P0$&',)9'%',?C P"?+'*)% )++#,C F'()(*')% A++#,+
)(/ M)04#, C$5#0)8#.
L#5#% $&
A*"'#5#.#(,
P#0&$0.)(*# $& %$)( '( S.)%% )(/ M#/'-. E(,#010'+#+
S)%#+
R#5#(-#+
P0$&',)9'%',? P"?+'*)%
A++#,
F'()(*')%
A++#,
M)04#,
C$5#0)8#
4o: F 4o: F 4o: F 4o: F 4o: F
More decrease = <$C = <$C ( ($) E =$D E =$D
%light
decrease
B (($= > C$< > C$< C (=$E > C$<
%table (E EE$B (E EE$B EE >($B (= E>$< (< ED$>
%light increase EB >)$( E< >C$E E? =C$C ED <E$D E? =C$C
More increase B (($= ) (C B (($= = <$C (E EE$B
6espondents >: ! >: ! >: ! >: ! >: !
S$-0*#7 !ield data E?(?
considered loan to be a savior to his business, he said through a loan he is able to
increase stocks and availing market opportunities as well as to supply goods on credit
basis ,this has improved buyers relation, e*pansion of business and cash purchasing
increases status as businessmen, which facilitates future business deals.
<.>.@ E.1%$?.#(, G#(#0),'$(
One of the core roles of 'ommercial ban-s and other financial institutions are %M0
lending ,hich ultimately supporting employment generation$ Tanzania li-e most other
poor countries suffers from lac- of employment opportunities for the population$ As a
result, more people rely on informal sector for their employment$
T)9%# <.B7 E.1%$?.#(, G#(#0),'$(
T"# 0),# $& E.1%$?.#(, N-.9#0 $&
R#+1$(/#(,
P#0*#(, C-.-%),'5#
Bet,een ( @> >) <<$B <<$C
Bet,een < @) (= (>$D C?$>
Bet,een (?@>) C D CD$>
0mployers B) CD$> @
Missing () E($B (??
T$,)% DD ! -
S$-0*#7 !ield data E?(?
l+++iii
The findings of this study revealed that a large number of %M0s >)<<$CF" employs one
to four employees$ Bet,een five to nine employees accounted (=(>$DF" of all %M0s and
finally about CDF" of all %M0s had ten to forty nine employees$ bout ()E($BF" of all
%M0s intervie,ed use their families as employees$ Table >$) above provides more details
on employment generation$
<.@ F)*,$0+ I(&%-#(*#+ SME+ '( /#*'/'(8 S$-0*#+ $& F'()(*#+
<.@.! U+#+ $& L$)( $( S.)%% )(/ M#/'-. E(,#010'+#+
!indings have revealed that %M0s chiefly require finances for three purposes/ for start@up,
for ,or-ing capital and for fi+ed capital$ >=D(F" percent of the respondents reported that
they used their loan for increasing ,or-ing capital, *nvestment in fi+ed capital about
C(=F" of the respondents$ !urther discussion ,ith respondents revealed a demand for
financing fi+ed investments ,ill typically require a gestation period before the investment
generates enough cash flo, for repayment and start up accounted =BF" According to the
data from the field the respondents argued that most loans given are not suitable for fi+ed
capital investment$
Therefore, factors that influences %M0s in deciding sources of finances vary from
,or-ing capital, investment to start up activities this ,ill decide amount given, interest
rates given and time for repayment of the loan concerned$
F'8-0# >$(?$ Uses of 7oan on %mall and Medium 0nterprises
S$-0*#: !ield data E?(?
l+++iv
The study concluded that most of %M0 enterprises use loan for additional ,or-ing capital
as it can be illustrated in figure >$(? than increasing fi+ed asset *nvestment" and starting
up the business$
<.@.2 S$-0*#+ $& SME+ F'()(*#
There are various sources of finance for %M0s$ 1o,ever, in most of developing
government policies are made in favour of the formal sector and against the informal
sector$ This unfavourable situation ,eighs heavily on the %M0s$ :hile formal sector
enterprises en8oy such direct benefit as access to credit, the informal sector is often
ignored and even harassed by the authorities$ 0nterprises and individuals ,ithin this
sector operate largely outside the system of government benefits and regulations and thus
have no access to the formal credit institutions$
T)9%# <.!7 S$-0*#+ $& SME+ &'()(*#.
S$-0*#+ $& &'()(*#
R#+1$(+#+
F0#=-#(*? P#0*#(,
6etaining 0arning
3enture 'apital
2ublic Mar-et
Borro,ing from !riendsA6elatives
'ommercial Ban-
MicrofinanceA4.Os
%A''Os
.overnment %upport
;0% 4O ;0% 4O
C?
E
@
>>
E<
ED
=?
(?
(D
DB
DD
>>
B=
B?
<D
CD
C)$<
E$=
@
<?
ED$>
=($D
=>$(
(($>
E?$<
)C$C
(??
<?
C($B
BD$E
B<$)
DD$B
S$-0*#7 !ield data E?(?
*n the field respondents ,ere as-ed to state up to eight preferred methods used to finance
their business, the results from the field revealed that about <DB<$DF" of respondents
l+++v
e+pected to get additional capital from microfinance institutions4.Os" and %A''O%,
C?C)$<F" depend most on the retained earnings, E<ED$>F" of respondents the data
sho,ed that, they get finances from commercial ban-s, >><?F" borro,ing from friends
or relatives and venture capital accounted EE$=F" and ,hile public mar-et is not yet
developed because most of %M0s are not ready for their business to be registered in &ar@
es@%alaam %toc- 0+change$
A similar study conducted by %hayo@Temu,())D" revealed that financial institutions
severely constrain %M0s access to finance for innovation and gro,th consequently %M0s
are heavily depended on traditional and ,ea- forms source of finances for initial
capitalization start up and business e+pansion$ &ue to the lac- of access to finance most
of %M0s rely on self financing More again, according to survey done in 4igeria by
U%A*& / E??< confirmed that most %M0s in 4igeria are observed to get funding from
personal savings, informal lending schemes -no,n as JesusuK, savings collectors, and
moneylenders, rotating savings and credit associations and family members$
Another survey conducted by *'A in E??D revealed that ban- lending to %M0s firms in
4igeria is relatively lo, say about (F of firms ", %M0s tend to depend a lot on retained
earnings and their o,n fund C?F of firms" for financing$ Table >$(? above sho,s more
results from the field of this study concerning the different sources of finance used by
%M0s in Tanzania as identified by researcher$
<.@.: I(+,',-,'$(+ T"), S-11$0,'(8 S.)%% )(/ M#/'-. E(,#010'+#+
The supportive business environment for %M0s is still ,ea- in Tanzania$ The %M0
support programmes are poorly coordinated and lac- the necessary coverage to reach all
sectors of the small business community, in this case some of the %M0s seem to be
l+++vi
missing business opportunities due to the lac- of information because the support
institutions prefer to deal ,ith %M0s that can organise, manage and assume the ris- free
businesses, such %M0s are able to perform their businesses and recover the costs of
services given to them$
6esults from the field indicated that about =C>EF" of the respondents intervie,ed ,ere
supported by from Ban-s, Microfinance 4.Os" and %A''O%, most of these institutions
cater for those small and medium enterprises ,ith credit requirements$ %*&O and
'onsulting firms accounted to (>(<$)F" each, %*&O has been the main institution that
traditionally advocate importance of %M0s in the country on behalf of .overnment$
About >>$<F" of respondents intervie,ed ,ere supported by services by T''*A ,hile
for instance, about EE$=F" of intervie,ees ,ere supported by TB% and 30TA each$
B0T, according to the results in the field accounted only > >$<F" of all respondents$
T)9%# <.!!7 I(+,',-,'$(+ S-11$0,'(8 S.)%% )(/ M#/'-. E(,#010'+#+
Type of !irm 6esponse !requency 2ercent
Ban-s and !inancial
institution
;es =C >E
4o <( <D
T ''*A ;es > >$<
4o D> )<$<
*nternational donors ;es E E$=
4o DB )C$C
'onsulting companies and
agencies
;es (> (<$)
4o C> D>$(
30TA ;es E E$=
4o DB )C$C
%*&O ;es (> (<$)
4o C> D>$(
TB% ;es E E$=
4o DB )C$C
B0T ;es > >$<
4o D> )<$<
Others ;es @ @
4o DD (??
S$-0*#: !ield data E?(?
l+++vii
Apart from credits supported from these institutions some respondents argued services
li-e mar-eting information, trade fairs, technical s-ills development, business s-ills
development and advertising are not properly addressed as result %M0 support
institutions restrains %M0s from graduating to the ne+t level$ %ome of respondents
intervie,ed insisted on trade fairs because they thin- that these events are very useful in
e+posing them to ideas as ,ell as in creating a,areness and increasing sales of their
products$ !or more details table >$(( e+plains$
<.@.< S,)8#+ '( 3"'*" SME+ R#=-#+, &$0 S-11$0,
The role of %M0s support institutions is very important for %M0s development in the
country if these %M0 business o,ners ,ill play their part in contribution of economic
gro,th and 8ob creation$ *n doing %M0s have been supported at different stage during the
business operations$ The researcher identified stages that %M0 business o,ners thin-
should request services in order the business to become successful these are/ before
creating business, ,hen setting up of business, ,hen business gro, and ,hen business
has problems$
!indings from the field revealed that most of %M0s about EC=?$CF" of responses have
been supported during setting up their business, about E<ED$>F" of %M0 o,ners
intervie,ed requested support ,hen their businesses encountered problems$ The most
%M0 supporting institutions ,ere commercial ban- and other financial institutions
supported %M0 businesses ,hen business gro, rather than ,hen setting up business and
in problems period, *n this case the study revealed that most of financial institutions donGt
prefer to assist small and medium enterprises ,hen they are in problem because they are
afraid of loose their money

l+++viii
T)9%# <.!27 S,)8#+ '( 3"'*" SME+ R#=-#+, &$0 S-11$0,
S,)8#+. R#+1$(+# F0#=-#(*? P#0*#(,
Before creating business ;es > >$<
4o D> )<$<
*nsetting up of business ;es EC =?$C
4o B( B)$=
:hen business gro,ing ;es (D E?$<
4o C? C)$<
*n problems ;es E< ED$>
4o B= C($B
S$-0*#: !ield data E?(?
Also the results in field revealed that the involvement of the government in supporting
%M0s is much insignificant because B0T, TB% and 30TA support %M0s ,hen the
business gro,s but not in other stages$ !or e+ample one respondent reported difficulties
in see-ing qualified information and he does not -no, ,here to see- advice for
establishment of his e+pected business$
%ome respondents argued that information provided is too general and there is a shortage
of necessary information about incentive policies and legal regimes available for %M0s$
<.A P0$9%#.+ '( A**#++'(8 F'()(*# $( S.)%% )(/ M#/'-. E(,#010'+#+
*n both the ())( and ())< *nformal %ector %urveys revealed that lac- of capital ,as cited
as most pressing need of the %M0 operators$ *n this study sho,ed there many dra,bac-s
that encountered by %M0s during accessing finance$ The finding revealed that lac- of
collateral constituted CBDB$>F" of responses as the main problem,E?EE$CF" of
responses said lac- of trac- records ,about E<ED$>F" ,as ne,ness of business, E)==F"
of the responses had problems ,ith entrepreneurship s-ills to borro,ers, about E=EB$(F"
,as poor documentations,=B>?$)F" ,as corruption to many managers, bureaucracy and
high interest rate accounted =E=B$>F" and ===C$<F" of responses respectively as table
>$(= belo, sho,s$
l+++i+
Borro,ers ,ere further as-ed if they used collateral as the means of getting loan from
ban-s and financial institutions$ 6esults sho,ed that about >(CC$>F" of loan
beneficiaries ,ere requested for collaterals and only (EEE$BF" ,ere not requested$ The
study sho,ed that house, carAvan, a surveyed plot and household are ,ere used as
collaterals, 1ouse and car are the most used collateral than other collaterals$ 1ouse and
cars accounted (B =?$EF" of all respondents intervie,ed$ About B(($=F" collateralized
plot, (=E>$<F" used household and E=$DF" collateral ,as not applicable at all$
!urthermore this results from above can be compared ,ith a similar survey reported by
.arcia@!ontes E??<" on *nvestment 'limate for 'hina ,hich found that small businesses
in this Asian continent obtain only (E percent of their ,or-ing capital from ban- loans$
T)9%# <.!:7 P0$9%#.+ '( A**#++'(8 ,$ F'()(*# $( SME+
R#)+$(+ "'(/#0'(8 SME+ ,$ A**#++
F'()(*#
R#+1$(+#+
F0#=-#(*? P#0*#(,)8#
7ac- of collateral
7ac- of trac- records
4e,ness in the business
7ac- of entrepreneur s-ills
2oor documentation
'orruption
7oan competition ,ith other borro,er
Too bureaucratic
1igh interest rate
Others
;0% 4O ;0% 4O
CB
E?
E<
E)
E=
=B
(C
=E
==
E
(E
BD
B=
<)
B<
<E
C(
<B
<<
DB
DB$>
EE$C
ED$>
==
EB$(
>?$)
()$=
=B$>
=C$<
E$=
(=$B
CC$=
C($B
BC
C=$)
<?$(
D?$)
B=$>
BE$<
)C$C
The survey attributed the limited access to/ the lac-ing of adequate credit system to small
businesses, high rating requirements for small businesses loans, lac- of collateral to
support small businesses repayment ability, lac- of credit rating assessment for small
+c
businesses, lac- of small businesses transparent and audited financial records and ban-sG
favoring of large loans by larger businesses$
<.A.! O,"#0 C$(+,0)'(,+ F)*'(8 ,"# SME S#*,$0
Apart from problems that facing small and medium enterprises in accessing finance, there
,ere other constraints cited by the respondents including competition of business ,hich
encountered C?C)$<F" respondents out of DD %M0s surveyed,
T)9%# <.!<7 C$(+,0)'(,+ F)*'(8 ,"# SME S#*,$0.
C$(+,0)'(,+ F)*# ,"# SME S#*,$0$
R#+1$(+#
F0#=-#(*? P#0*#(,)8#+
'ompetition of business
1igh ta+ation
7o, purchasing po,er of the population$
2rocedural difficulties in starting a business
&ifficulty in accessing to credit facilities
7o, coordination bet,een !inancial *nstitutions
and %M0s
7ac- of qualification of %M0sG o,ners
7ac- of mar-et information
2oor infrastructure facilities
Technological changes
'hanges of e+changes rates
7ac- of management s-ills
Unstable legal environment
7ac- of business support and training
1igh interest rate from ban-s and other !ls
Others
;0% 4O ;0% 4O
C?
=>
=C
<D
B(
()
B>
=E
=B
(C
(?
>D
E>
B>
>D
<
(D
<>
<(
=?
EC
B)
E>
<B
<E
C(
CD
>?
B>
E>
>?
D=
C)$<
=D$B
>E
BB
B)$<
E($B
CE$C
=B$>
>?$D
()$=
(($>
<>$<
EC$C
CE$=
<>$<
<$C
E?$<
B($>
<D
=>
=?$<
CD$>
EC$=
B=$B
<)$E
D?$C
DD$B
><$<
C=$=
EC$C
><$<
)>$=
S$-0*#7 !ield data E?(?
About B>CE$CF" of all respondents indicated that business support and trainings have
been not given ,hich leads some %M0s to die in early stages of their business life$ About
B(B)$=F" of the respondents said there is a problem in accessing credit facilities to small
+ci
and medium enterprise o,ners$ About >D<>$<F" of all respondents confirmed high
interest rates is a ma8or problem that faced them ,hen opting for loan$ About <DBBF" of
all respondents confirmed that procedures for business start ups are cumbersome$
!urthermore the study sho,ed that lac- of management s-ills faced >D<>$<F" of
respondents$
Other problems ,hich faced %M0s include lo, purchasing po,er and poor infrastructure
accounted =C>EF" and =B>?$)F" of respondents respectively, lac- of qualification
accounted E>EC$=F", unstable legal environment accounted E>EC$=F", 'hanges of
e+changes rates accounted (?(($>F",technological changes (C()$=F" and lo,
coordination bet,een financial institutions and %M0s$ Table >$(> belo, indicates more
on constraints that facing the %M0 sector$
<.D F'()(*')% I(+,',-,'$(+
!inancial institutions comprise of 'ommercial ban-s and 4on ban- financial institutions
li-e 2ension fund, *nsurance companies, Microfinance 4.Os", %A''O% and %toc-
0+change$ 1o,ever, commercial ban-s dominate of the financial institutions their
contributions are still small in relation to the national income$ *n this study the researcher
,as interested on follo,ing type of financial institutions/ 'ommercial ban-, Microfinance
4.Os" and %A''O%$ The survey touched fe, ban-s and other financial institutions
,hich are mentioned here belo, A-iba 'ommercial Ban-, 4ational Microfinance Ban-,
Morities !inance 'ompany, Tu8i8enge Tanzania 7imited, 4dugumbi 'ommunity
%A''O%, %0&0O %A''O% 7imited and :A4AMA %A''O% 7imited$ Although of
good number of ban-s, microfinances and %A''O% found in &ar@es@%alaam region$ The
researcher put more emphasis only to the fe, institutions because some of them, they
,ere not ready to provide their data public$
+cii
<.D.! T?1#+ $& F'()(*')% P0$/-*,+ )(/ S#05'*#+
The financial sector reforms have enhanced a number of products in the mar-et and more
innovation of financial retail capacity by financial institutions have been improved li-e
quality of financial business services$
!inancial business services comprise various products for e+ample saving or deposits
services, loan services, transfer payments insurance, trade finance, ban- guarantee, and
mortgage and lease funds$ Table >$(< belo, summarizes the type of financial services
offered by surveyed commercial ban-$
T)9%# <.!>7 T?1# $& F'()(*')% S#05'*#+ O&&#0#/ 9? S-05#?#/ F'()(*')% I(+,',-,'$(+
S)5'(8+
A**$-(,
L$)(
A**$-(,
T0)(+&#0
P)?.#(,+
I(+-0)(*# O,"#0+
-%avings
@'urrent
@!i+ed
S1#*')%
)**$-(,+:
@La,adi
@Biashara etc
@%hort term
@7ong term
@Overdraft
@'onsumer
@%alaried
@3ehicle
@'orporate
@'heque
@Travelers
cheque
@Ban- transfer
@Money fa+
@Money order
@0lectronic
transfer
@2ersonal
@Accident
@Motor vehicle
@Trade finance
@Ban- guarantee
@!oreign
e+change
@Trust receipts
@&ealership
S$-0*#: !ield data E?(?
*n the survey of this study A-iba 'ommercial Ban- is observed to offer several
microfinance loan products ,hich suit every type of customer$
+ciii
More again according to http:AAmicrofinanceafrica$netAne,sAtanzania the report sho,ed
that 4MB had managed to issue loans ,orth more than C?? billion to its customer ,here
><,??? of the beneficiaries are the %mall and Medium 0nterprises country,ide in its
efforts to contribute to social and economic development by E?(?$ 1o,ever, report
identified more the need of increasing %M0sG loan by provide education and a,areness
and identify products and services that customer prefers$
The findings in the field highlighted both Microfinance institutions li-e Tu8i8enge and
Morities !inance and %A''O% li-e %0&0O and :A4AMA can offer same products li-e
,hat ban-s offer these including deposits, loans, payment services and money transfer to
%M0 sector$ *n addition, some of microfinance institutions provide non@financial services
such as training and business advice$ *t is from this standing point of vie, microfinance
institution and %A''O% are seen to be popular to small and medium business o,ners
because their services target the clients ,ho have been e+cluded from other formal
institutions$
<.D.2 C$(/','$(+ &$0 C0#/', A**#++'9'%',?
*n the survey, the findings revealed that in ban-s, microfinance and %A''Os there some
conditions that should be follo,ed in order to get a loan from these institutions$
According managers intervie,ed the customer must do the follo,ing: operated a
licensed business for more than (E months and also if is limited company registered ,ith
B607A, customer must open account and operate it at reasonable months before
applying for the loan, compulsory saving ,customer shall prepare to pledge collaterals
movable and immovable" as security for loan , group member guarantee and customer
shall not have default history from any credit institution other requirement loan must be
paid ,ithin stipulated time by these financial institutions according to the amount given,
+civ
reasonable time of being member particularly in %A''Os or Microfinance and
recognition by local government$ Therefore, according to the findings in the field revealed
that ,hen these conditions not properly met hinders the %M0s borro,ers not qualifying
for the loan$
<.D.: R),# $& I(,#0#+,+
*t is thought that ,ith a successful financial reform the interest rate spread ,ill be
narro,ed to reflect efficiency in the intermediation process, reduction of costs of
transactions and improvement of mar-et competitiveness this is not holding because,
regardless of tremendous gro,th in the number of ban-s, microfinance and %A''O% still
are charging higher interest rate$
F'8-0# >$((: *nterest 6ates 'harged per Annum$
S$-0*#: !ield data E?(?
The findings in the field according to survey indicated that interest rates vary from one
ban-, microfinance and %A''O% to another and this can be charged in t,o form either
flat rate or reducing rate form, for instance A'B charged EEF per year ,hich is
considered to be flat rate, 4MB (DF a year ,hich is also considered to be reducing rate,
Tu8i8enge Tanzania 7imited =BF yearly ,hich is flat rate, Morities !inance 'ompany
+cv
>?F per year ,hich is flat rate, :A4AMA %A''O% 7imited E>F yearly ,hich is
reducing rate, %0&0O %A''O% 7imited (B$E<F a year ,hich is considered to be flat
rate and 4&U.UMB* 'OMMU4*T; %A''O% E>F per year ,hich is flat rate$ The
figure >$D sho,s the interest rates charged by institutions surveyed$
!urthermore, from the study revealed most of microfinance institutions offering higher
rates than ban-s and %A''O%, consequently, this higher interest rates charged have
economic effects such as increases the cost of borro,ing on borro,ers because the
surplus income is spent on interest payment ultimately contributing to poor business
performance$
The similar study done by 1o and %aunders ()D(", sho, that mar-et imperfections
,iden the interest rate spread appro+imating mar-et po,er ,ith ban- size, found a
significant difference in spread bet,een large and small ban-s, ,here smaller ban-s had
higher spreads than the large ban-s$
<.B S,0),#8'#+ $( I.10$5'(8 A**#++'9'%',? ,$ F'()(*# $& SME+
2oor accessibility to finance in small and medium enterprises is still persisting problem
according to the survey done in the field area$ Therefore the researcher requested opinions
and suggestions from %M0s, ban-s, microfinance and %A''Os officers and managers in
the surveyed institutions and came up ,ith necessary strategies for improving and
facilitating small and medium enterprises to access finance$ The follo,ing strategies that
thought if ,ill be underta-en the predominant situation ,ill partial or full eradicated$
<.B.! B)00'#0+ ,$ #(,0?
According to this study, it ,as suggested that reduction of barriers to entry must be used
as one of strategy $This strategy proposes to increase the number of institutions that find
lending to %M0s profitable$ *t is therefore important to reduce the entry barriers into
+cvi
ban-ing and credit business$ 'urrently, such barriers in terms of ban-ing include capital
adequacy and a range of other prudential requirements$ 6eduction of barriers to entry is
li-ely possible to create competition since it is said lac- of competition in credit mar-ets
may cause ban-s to focus on only larger or more profitable clients$
<.B.2 R#/-*,'$( $& '(,#0#+, 0),#+
!rom the finding in the field indicated that high interest rate is critical problem ne+t to
lac- of collateral therefore ban-s ,microfinance and %A''O% should thin- on reduction
of the interest rate as one of strategy so that to encourage small and medium enterprises to
borro, from them$
<.B.: C$..#(*#.#(, $& 80)*# 1#0'$/ +,0),#8?
This strategy ,ill enable more entrepreneurs to access to finance from financial
institutions because entrepreneurs ,ill have the reasonable time starting repayment of
loan given to them and this should mostly be considered to manufacturing activities since
it ta-es a long time for these firms before ma-ing profit$
<.B.< I(,0$/-*,'$( $& #(,0#10#(#-0+"'1 ,0)'('(8+ ,$ 9$00$3#0+
7ac- of entrepreneurship s-ills to the most of borro,ers ,ho can not distinguish bet,een
business earnings from their personal e+penditure is seen to be dangerous for business
sustainability$ Therefore, according to the results from the field$ Officers and managers
from surveyed financial institutions e+plained the needs of entrepreneurship training to
borro,ers as one of strategy to be underta-en in order to improve the accessibility of
finance to %M0s$
<.B.> I(($5),'5# *0#/', 8-)0)(,##+ +*"#.#
According to loan manager from 4MB thought that innovative credit guarantees scheme
+cvii
is one of the best strategy to be employed in order building lin-ages bet,een small non@
ban-able borro,ers and formal financial institutions$ There is lac- of a guarantee scheme
to bac- up ban- financing to %M0s$ *f this strategy is developed ,ill ensure entrepreneurs
secure loan from ban-s ,ith absence of the collateral requirements$
<.B.@ I(*0#)+# *0#/', $-,0#)*" +,0),#8?
The findings revealed that some ban-s and microfinance are concentrated in urban areas
than rural, even operate in limited geographical areas, therefore these institutions should
thin- on increase credit outreach as one of strategy because it is important for these ban-s
and microfinance to spread through out in order to reach various economic group
activities$ Through credit outreach strategy ban-s or microfinance li-ely increase deposit
hence increase revenues and improve loan port folio ultimately the possibilities of
accessibility to finance in %M0 sector ,ill be ,iden$
<.B.A T$ $1#0),# SME &'()(*'(8 3'(/$3
Tanzania Ban-ers Association report, E??D indicated that there is thirty five =<" ban-s
and most of ban-s donGt operate an %M0 financing ,indo, one of respondent thought
that %M0 financing ,indo, should be among of strategy in order to create a good
environment for %M0 to access finance$
<.B.D C0#),#+ $& I(&$0.),'$( D),)9)+# &$0 SME
The findings in field sho,ed there is still a ,idespread perception of small enterprises to
be high ris- business these are constituted of lac- of information as ,ell as high cost of
collecting such information on %M0s, in these reasons if information database ,ill be
created as the one of strategies ,ill enable to minimize ris-s such as default rate, The
creation of %M0s in the same data base ,ill enable to -no, ,hich one more ris-ier$
+cviii
<.B.B I.10$5#.#(, $& ,"# 9-+'(#++ 0#8'+,0),'$( #(5'0$(.#(,
The business registration and regulatory environment in Tanzania is one of the ,orst in
the ,hole of Africa ,hich leads bul- of %M0s to operate in the informal sector$ The
Tanzania *nvestor 6oadmap sho,ed that procedures for registration and licensing in
Tanzania amount to four or five forms needed to complete the process ,hen compared
,ith other nations of Africa ,here similar e+ercises ,ere conducted, therefore policy
ma-ers and business analysts must considered registration environment is one of the
strategy to be underta-en in order to improve financial constraints face %M0s in country$
The finding still elucidated C=F of respondents intervie,ed have not registered their
businesses, in this reason there is possibility of %M0s canGt secures finance from formal
financial institutions$
<.B.! S$%'/)0',? $& 80$-1 %#(/'(8
The finding of this study sho,ed that solidarity of group lending is one of strategy that
A'B and Tu8i8enge Tanzania 7imited have been adopted to reduce rate of defaulters$
Ta-ing an e+ample of group loans, in order to access this service, borro,ers must be in a
group and must o,n a business, -no, each other, trust each other, love each other,
,illingly engaged in the group, ready to guarantee each other, have attended preliminary
training, ready to attend ,ee-ly centers meetings, ready to save specific amount of money
on ,ee-ly basis, li-ely in terms of income and are not blood relatives$ %olidarity of
group lending strategy has been attracting number of business o,ners because has enable
most business o,ners to be reach ,ith loan from formal financial institutions$
+ci+
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
>.! C$(*%-+'$(
Tanzania li-e other countries has been implementing a series of economic reforms since
mid@()D?$ Among of these financial liberalization that ,ere initiated through the Ban-ing
and !inancial *nstitutions Act of ())( ,ere liberation of financial institutions,
liberalization of interest rates, restructuring and privatization of public financial
institutions$
!ollo,ing privatization of the financial sector the number of financial services providers
increased these include 'ommercial ban-s, &evelopment ban-s, %A''Os and
Microfinance institutions$ Although there are an increase in financial sector service
providers and products the study sho,s in table >$(? access to financial services are still
insignificance compare to the tremendous number of financial institutions increased$
The ma8or concern of this study ,as to assess the role of the financial institutions on the
success of %M0s in Tanzania and develop appropriate strategies for improvement of
accessibility to finance$
The research findings confirmed that the role of financial institutions to,ard %M0s
success is a vital important$ Although the study previously notified the affection on
business performance resulted to repayment of the loan still some beneficiaries benefited
from loan once acquired for e+ample according to the results in the field some of %M0s
intervie,ed concluded that there are positive changes in terms of sales revenues, physical
assets, financial assets and mar-et coverage$
c
The study concludes that, factors influence %M0s in deciding sources of finances vary
from ,or-ing capital, investment to starting up activities these factors assist to decide
nature of source of finance to %M0s$ A result of this study sho,ed that most of %M0
financing source come from retained earnings self financing" and follo,ed by
microfinance institutions and %A''O%$ Although, these institutions attempt to correct the
financial imbalances but their outreach, products and services are still limited$
!urthermore, the researcher e+pected that the increase of commercial ban-s and other
financial institutions should improve competition hence efficiency in this industry the
result is opposite because ban- interest rates are still high and poor lending methodologies
for e+ample commercial ban-s still rely on the use of collateral and availability of
business records, these factors restrict %M0s to access credits$
&espite of constraints facing most of small and medium enterprises as highlighted in the
literature also access to finance in this study concluded to be most critical problem as it
comprises lac- of collateral, ne,ness of business, lac- of entrepreneurship s-ills, poor
documentations, corruptions, bureaucracy, high interest rate and competition from other
borro,er$ These constraints continue to inhibit the further gro,th and development of
%M0 sector in Tanzania as it is argued that ma8ority of Tanzanians are employed in this
sector$
7astly the study concluded on proposing appropriate strategies to be adopted in order to
improve accessibility to finance of %M0s such as reduction of interest rates, solidarity of
group lending, creation of information database for %M0s, to operate an %M0 financing
,indo,, increase credit outreach strategy, innovative credit guarantees scheme and
introduction of entrepreneurship trainings to borro,ers$ These strategies ,ill enable the
ci
vast of %M0 o,ners ,ho are not yet to be reached by commercial ban- and other
financial institutions to utilize the financial services opportunities that e+ist$
>.2 R#*$..#(/),'$(+
The findings of this study sho, that access to financial services is important for an
improved success of small and medium enterprises in Tanzania$ The follo,ing
recommendations are suggested based on government interventions, small and medium
enterprises and financial institutions$
>.2.! G$5#0(.#(, I(,#05#(,'$(+
The finding of this study sho,s most of people engage in %M0 sectors are primary and
secondary certificates holders$ Therefore, it is recommendation of this study through the
government to reinvent the future of %M0s by transforming educational system in order
to impart entrepreneurship s-ill to graduates$ *n this regard, ma-e it more functional,
relevant, need@oriented and driven$ The emphasis should be on modern technology and
entrepreneurial studies aimed at producing entrepreneurs ,ho ,ould be motivated enough
to opt to be employed themselves 8ob creators" instead of loo-ing for paid 8obs 8ob
see-ers"$
The study sho,s that, despite of financial reforms ta-en starting from ())( and good
numbers of financial institutions emerged$ *nterest rates charged to %M0s is still higher
compare to large firms$ *t is recommendation of this study to the government through
legistrature should impose the la, that control all financial institutions interest rates
,hich are charged into small and medium enterprises thus, this ,ill assist the interest
rates that create the gap bet,een small firms and large firms to be reduced$ *n so doing
this la, ,ill deliberate effort to favour and promote small and medium enterprises$
cii
The -ey problem in credit mar-ets is the difficulty of obtaining information on the
credit,orthiness of potential %M0 clients$ *f financial institutions perceive the ris- of
lending to a particular client is greater than ,hat it actual is, they ,ill charge higher
interest rates or ,ill refrain completely from lending to that client$ Therefore, it is
recommendation of this study that government should establish credit information center
for %M0s that may sho, the follo,ing: 2ast performance of enterprises in the %M0
sector and the financial characteristics of small and medium firms$ This ,ill help easy in
accessing information that eventually reduce considerable cost and ris- of evaluating
applications for finance from %M0s that increase the cost of such finance$
The finding sho,s that development of public mar-et and venture capital as means to
finance %M0s in the country is not yet developed$ *t is recommendation of this study that
United 6epublic of Tanzania should place a strong emphasis on public mar-et and
venture capital as an appropriate financing vehicle for high gro,th of small and medium
enterprises sector$ .overnment needs to create a Jculture of equityK ,hereby enterprises
,ill better understand the values of public mar-et and venture capital$ !urthermore the
government through &%0 must consider the relative importance of %M0s by reforming
the &%0Gs listing requirements ,hich is arguably a deterrent$
>.2.2 S.)%% )(/ M#/'-. E(,#010'+#+
The findings of the research agree that there is a poor of an accessibility of finance to
%M0s this leads to limited gro,th due to inadequate capital$ *t is recommendation of this
study that %mall and medium scale business entrepreneurs should constantly engage in
capacity building, training, research and development$ !urthermore, proper financial
records should be -ept and clear accounting standards should be adopted in order to
ensure their competencies in managing and sustaining %M0s development$
ciii
>.2.: F'()(*')% '(+,',-,'$(+
The finding of this study sho,s that most %M0s sector faced problems of accessing
finances due to the stringent conditions e+ercised by commercial ban-s and other
financial institutions/ therefore, it is recommended that there is need to revisit the
financial terms and conditions in favour of the development of small and medium
businesses$
Apart from revisit of financial terms and conditions, it is recommendation of this study
that there is a need for financial institutions to become more innovative in developing
ne, products and services as ,ell as improve delivery mechanism$ 2roduct development
and pricing need to be based on clientsG needs and fle+ibility$
Above all, the government should have the political ,ill to effectively and efficiently
implement the above recommended measures in order to achieve the desire results for as
long as the status quo remains ,e cannot achieve or e+pect any improvement in the
crucial %M0 sector$ *f ,e ,ant a change in the status quo as it relates to our %M0s, ,e
must change the ,ay and manner ,e manage affairs relating to %M0s$
>.: S-88#+,#/ A0#)+ &$0 F-0,"#0 R#+#)0*"
The limitations of this study bring a number of prospects for future researches$ Based on
this study several areas ,ere seen to be inadequate insighted and required further
research$ The areas for further research are/
2rimarily, *t is proposed that, a comprehensive study could be conducted involves all
%M0s in the country since this study cover only fe, %M0s in &ar es %alaam region as the
case study$
civ
!inally it is proposed to perform a comparative analysis bet,een %M0s in developing
countries and those in other developed countries$ This study ,ould provide insights as to
,hether the trans national factors are the same$
cv
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,ill reshape the ,orld, The 5auffman foundation, 1arper 'ollins 2ublishers:
4e,;or-$
%hayo@Temu ())D", The *mpact of !inancial *nstitution 6eform in %M0s financing in
Tanzania, Business %anagement Review.
c+iii
%ilvanus$ B E??(", Regulation and #upervision of %icrofinance 0nstitutions in &an-aniaA
&he @eed /or Registrative Reform$ &issertation University of &ar@0s@%alaam$
Tanzania$
%mall Business Administration %BA, E???", JThe Ban- 1olding 'ompany %tudyK,
Office of Advocacy of the U$%$ %BA$
%mith 2. 9 Marro, 6$ 0ds$"$ ())B", !ield trials of health interventions in developing
countries: A Toll Bo+$ 7ondon: Macmillan$
%tiglitz, I$ 0$, and A$ :eiss$ ()D(", J'redit 6ationing in Mar-ets ,ith *mperfect *nfor@
mation$K "merican conomic Review C(=": =)=R>(?$
%,isscontact$E??=",Baseline survey of M%0s andM%!s in the Uruhu 'orridor,Tanzania
%zabo, A$ ())B", JThe 6ole of .overnment in the 2romoting %mall and Medium@sized
0nterprises in 'ountries in Transition$K 4repared within the /ramework of the
Regional "dvisory #ervices 4rogramme of the 0ndustry and &echnology
1ivision.$nited @ations,;eneva.
Tagoe et$al E??<", J An 0mpirical *nvestigation of the .ro,th 'ycle Theory of %mall
!irm !inancingK , .ournal of #mall Business %anagement October", >= >",
pp$=DE@=)E
Tanzania Ban-ers Association 6eport, E??D", held at the MZvenpic- 6oyal 2alm$
Thomas$ 1 E??(", The *mpact of Micro !inance on 0mpo,ering :oman$ Unpublished
dissertation University of &ar@ 0s R%alaam$
Titman, %$, !an, I$, T,ite, .$, E??=", An *nternational 'omparison of 'apital %tructure
and &ebt Maturity 'hoices$ :or-ing paper %ocial %cience 6esearch 4et,or-$
Udry, '$ ())>", J'redit mar-ets in 4orthern 4igeria: 'redit as an insurance in a %M0s
economyK$ *n 5$ 1off, A$ Braverman and I$ %tiglitz, eds$, &he conomics of
#%s Organisations2 &heory and 4olicy. 7ondon: O+ford University 2ress$
$
c+iv
U4&2AU4*&OA*7O, E??E", 6oad map study of the *nformal %ector in Mainland
Tanzania, &ar@es@%alaam$
U4A0'0 %ecretariat$ ())C",J%M0s@Their 6ole in !oreign Trade$K " 4aper 4resented in
B#+ 3orkshop held on 7B:7C @ovember in Dyiv =$kraineE.
U6T, E???", J4ational Micro !inance 2olicyK, &ar es %alaam$
U6T, E??(",Best 0nvironment %trengthening for Tanzania B0%T 2rogrmme":0nhanc@
ing gro,th and 6educing 2overty 2rogramme &esign 6eport JMinistry of Trade
and *ndustry$
U6T E??E",4ational :ebsite$ Available at http:AA,,,$tanzania$go$tz$
U6T E??=",J%mall and Medium 0nterprise &evelopment 2olicyK, &ar es %alaam$
U6T ())B",Ministry of *ndustry and Trade$ %ustainable *ndustrial &evelopment 2olicy
%*&2 ())B@E?E?" &ar@es@%alaam$
:orld Ban- E??E",Tanzania at the turn of the 'entury: Bac-ground 2aper and %tatistics
:ashington &$' The :orld Ban-$
Leller, M$ ())D", J&eterminants of repayment performance in credit groups: The role of
programme design, intergroup ris- pooling and social cohesionK$conomic 1ev:
elopment and +ultural +hange, vol$ >B, no$ =: <))RBE?$
:ebsites$
http:AAmicrofinance Africa$netAne,sATanzania
http:AA en$,i-ipedia$org$,i-iAmicrofinance$
c+v
APPENDICES
A11#(/'6 :.!)C D$/$+$ 43) 3)&)(?) 9')+")0) (/$8$ )- 2) 4),'F3);)+'%').)%'
'1UO 5*5UU 1U6*A TA4LA4*A OUT"[
%$7$2$ E=>?)
&A6 0% %A7AAM
%*MU \E<< EEEBB D))E
4U5U%1* \E<< EEEBB DC<)
TO3UT*: ,,,$out$ac$tz
4dugu mfanya biashara, anaye-upatia dodoso hii ni m,anafunzi 'huo 5i-uu 1uria cha
Tanzania -ati-a mafunzo ya 8uu ya biashara na uta,ala$ 4a-ulingana na utaratibu uliop
o anata-i,a -ufanya utafiti 8uu ya N)&)+' ?) ,))+'+' 2) 4'&#/") 4),'4) 4-4-2)9')+")0)
(/$8$ )- 2) 4),' F 3);)+'%').)%' (*"'(' T)(2)(')$
1ivyo -ama mo8a ,apo ,a Tasnia hii ya biashara unaomb,a -utoa maoni ya-o 8uu ya
utafiti huu, ili -uchangia se-ta ya elimu ya 8uu nchini$
Tafadhali A 1abari uta-azotoa zitahifadhi,a -,a usiri m-ub,a na 'huo 5i-uu 1uria cha
Tanzania na zitatumi-a -,a matumizi ya ta-,imu tu$
Tafadhali 8aza nafasi zifuatazo
( Iina la biashara ya-o ]]]]]]]]]]]]]]]]]]]]]]]]]]
E An,ani ya biashara ya-o ]]]]]]]]]]]]]]]]]]]]]
= M,a-a ulianzisha ]]]]]]]]]]]]]]]]]]
c+vi
> Tafadhali ,e-a vema ili-uonyesha aina ya umili-i ,a Biashara ya-o au yenu$
a" 2e-eeA ya 5ifamilia "
b" ;a pamo8a A Marafi-i "
c" 5ampuni "
d" Ushiri-a A 'hama "
e" Aina nyingine eleza "
<$:ilaya gani biashara ya-o ilipo: Tafadhali ,e-a vema"$
a" *lala "
b" Teme-e "
c" 5inondon "
B$ 4i aina gani ya biashara unayoifanya: Tafadhali ,e-a vema"$
a" Uzalisha8i "
b" 5utoa huduma "
c" Biashara ya 8umla au re8are8a "
C$ Iinsia Tafadhali ,e-a vema "
a" M,anaume "
b" M,anam-e "
D$ 1ali ya 4doa Tafadhali ,e-a vema"
a" 1u8aoa A 1u8aole,a "
b" Ameole,a A Ameoa "
c" M8ane "
c+vii
d" Mgane "
)$ Umri Tafadhali ,e-a vema"
a" 5ati ya mia-a (D@ =? "
b" 5ati ya mia-a =(@ >? "
c" 5ati ya mia-a >(@ <? "
d" Laidi ya mia-a <( "
(?$4ini -i,ango cha-o cha 0limu Tafadhali ,e-a vema"
a" 1u-usoma "
b" %hule ya msingi "
c" %hule ya %ec-ondari "
d" &iploma "
e" &igrii ya -,anza "
f" &igrii zaidi ya mo8a "
(($4i sababu zipi zilizosababisha ,e,e -uanzisha biashara hii ,e-a vema"
a" 4i sehemu ambayo napata mahita8i yote "
b" 5uongeza -ipato "
c" %i-upenda -ua8ili,a "
d" 5u,a -iongozi na -ua8ili ,engine "
e" %ababu nyingine eleza "
(E$Biashara hii imesa8ili,aH Tafadhali ,e-a vema"$
a" 4diyo "
b" 1apana "
(=$Mauzo ya-o -,a m,a-a ni -iasi gani Tshs Tafadhali ,e-a vema"
c+viii
a" 4i chini ya <???,??? "
b" 4i -ati ya <???,??? na E??,???,??? "
c" 4i -ati ya E??,???,??? na D??,???,??? "
d" Laidi ya D??,???,??? "
(>$Ie ume,ahi -u-opa -uto-a -,enye taasisi yoyote ya -ifedha,fedha -,a a8ili ya
shughuli za-o za biasharaH,e-a vema -,enye 8ibu sahihi
a"$ 4diyo "
b"$ 1apana "

-ama ndiyo endelea s,ali la (<, -ama hapana endelea s,ali la E)
(<$4ini sababu zipi zilizofanya -uomba m-opo to-a taasisi za -ifedha:e-a vema"
a" 5,a a8ili ya -uanzisha biashara "
b" 5,a a8ili ya -uongeza mta8i ,a biashara "
c" 5,a a8ili ya -uongeza rasilimali za biashara "
(B$ 5abla ya -uchu-ua m-opo ni -iasi gani cha ,atu ambao uli-u,a ume,aa8iri
Tafadhali ,e-a vema"
a" 4i -ati ya mtu mmo8a na ,atu ,anne "
b" 4i -ati ya ,atu < au ,atu ) "
c" 4i -ati ya ,atu (? na ,atu >) "
(C$ Mara baada ya -uchu-ua m-opo 8e -iasi cha a8ira -iliongeze-aH :e-a vema"
a" 4diyo "
b" 1apana "
c+i+
(D$ 4i -iasi gani ambacho uli-opa -,a mara ya -,anza Tafadhali ,e-a vema"
a" 4i chini ya <??,??? "
b" 4i -ati ya <??,??? na (,???,??? "
c" 4i -ati ya (,???,??? na E,<??,??? "
d" 4i -ati ya E,<??,??? na <,???,??? "
e" Laidi ya <,???,??? "
()$Ie uli-u,a unalipa re8esho la m-opo huo -ila baada ya muda ganiH,e-a vema"
a" 5ila ,i-i "
b" 5ila m,ezi "
c" 5ila m,a-a "
E?$Ie muda uliopati,a -,a a8ili ya -urudisha m-opo unatoshaHTafadhali ,e-a vema"
a" 4diyo "
b" 1apana "
E($Ie m-opo uliopati,a -ati-a biashara ya-o ulitoshaH Tafadhali ,e-a vema"
a" 4diyo "
b" 1apana "
EE$Ie ili-u,a rahisi -upati,a m-opo -,a mara ya -,anzaHTafadhali ,e-a vem"$
a"$4diyo "
b"$1apana "
E=$Ie ulitoa dhamana yoyote -,a a8ili ya m-opo huoHTafadhali ,e-a vema"
a"$4diyo "
b"$1apana "
c++
E>$Ie uli,e-a -itu gani -ama dhamana ya m-opo huoH,e-a vema"
a" 4yumba "
b" .ari "
c" 5i,an8a "
d" 3itu vya ndani -ama T3 n$- "
d" 1a-una chochote "
E<$Ie re8esho la m-opo ,a-o yana athari -ati-a hali ya u,ezo ,a -ifedha -,enye
biashara ya-oHTafadhali ,e-a vema -ati-a 8ibu sahihi"
a" 4diyo "
b" 1apana "
EB Unasema nini -uhusu -i,ango cha riba$ Ie ni -i-ub,aH,e-a vema"
a" 4diyo "
b" 1apana "
c" 0leza -iasi unachotoz,a "
EC$Mara baada ya -umaliza re8esho la m,isho la m-opo ,a -,anza$Ie ulichu-ua m-opo
m,ingineHTafadhali ,e-a vema -,enye 8ibu sahihi"
a" 4diyo "
b" 1apana "
5ama hapana,-,anini eleza
i$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
ii$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
iii$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
c++i
ED$Tafadhali eleza mafani-io uliofi-ia to-a -uanza -uchu-ua mi-opo -uto-a -,enye
taasisi za fedha -ati-a sababu -uu zifuatazo na u,e-e vema$
K'3)(8$ *") .)&)('4'$
($2ungua sana
E$2ungua -idogo
=$1a-una badili-o
>$Ongeze-a -idogo
<$Ongeze-a sana
V'8#2$ K'3)(8$ *") .)&)('4'$
4a: ( E = > <
A Mauzo
B !aida
' 6asilimali
& Tasilimu
0 Maso-o
E)$4ini -ipangamizi cha -u-ua biashara ya-o Tafadhali ,e-a vema mara nyingi
u8uavyo"$
a"$Ushindani ,a biashara "
b"$5odi -ub,a "
c"$:ate8a ha,ana pesaAmzungu-o mdogo ,a fedha "
d"$5uanzisha biashara mpya ni vigumu "
e"$4i vigumu -upata m-opo "
f"$Ma,asiliano -idogo -ati ya Taasisi za -ifedha na ,afanyabiashara "
g"$5u-osa elimu ya biashara "
h"$5uto-u8ua habari sahihi za maso-o "
i"$ Miundombinu mibovu ya biashara "
8"$ 5ubadili-a -,a mbinu za biashara "
-"$5ubadili-a -,a -i,ango cha -ubadilisha fedha "
c++ii
l"$ 5uto-u,a na maarifa ya uta,ala na uendesha8i "
m"$Mabadili-o ya mara -,a mara ya taratibu za biashara$ "
n" U-osefu ,a mafunzo na uhamasisha8i "
o"$ 6iba -ub,a za mi-opo -uto-a taasisi za fedha "
p" Ta8a sababu nyinginezo "
=?$Ie -una u,eze-ana ,a -upanua biashara ya-o si-u zi8azoH ,e-a vema"
a" 4diyo "
b" 1apana "
=($ 4i n8ia zipi muhimu unazotumia -uendeleza biashara ya-otafadhali ,e-a ,ema
mara nyingi u8uavyo "
a"$5utumia faida inayopati-ana "
b"$U,ezesh,a8i -upitia venture capitalisti "
c"$5uuza hisa "
d"$5uazima -uto-a -,a marafi-i na 8amaa ,a -aribu "
e"$5u-opa -uto-a ben-i "
f"$5u-opa -uto-a Taasisi ndogondogo za fedha "
g"$5u-opa -,enye vyama vya -u,e-a na -u-opa "
h"$Uung,a8i au -u,ezesh,a na seri-ali "
i"$0leza -ama -una n8ia nyingine "
=E$ 0leza ni sababu zipi zinazofanya biashara ndogo na -ati -ushind,a -u-opa -ati-a
taasisi za -ifedha Tafadhali ,e-a vema mara nyingi u8uavyo"
a"$5u-osa &hamana "
b"$5uto-u,e-a mahesabu "
c++iii
c"$Biashara -u,a mpya "
d"$5u-osa elimu ya u8asiliamali "
e"$5uto-utunza -umbu-umbu "
f"$6ush,a "
g"$Ushindani "
h"$Urasimu "
i" 6iba -ub,a "
8" 0leza -ama -una sababu nyingine "
==5ati ya Taasisi zifuatazo ni zipi zime,ai -utoa huduma -ati-a biashara ya-o Tafadhali
,e-a vema mara nyingi u8uavyo "$
a" Ben-i na Taasisi nyingine za fedha "
b" 'hama cha biashara Tanzania T$'$'$*$A "
c" :afadhili Taasisi za n8e" "
d" 5ampuni za Ushauri "
e" 30TA "
f" %*&O "
g" TB% "
h" B0T "
i" 5ama zipo nyingine ta8a############
=>$5ama zime,ahi -utoa huduma zozote -ati-a biashara ya-o,huduma hizo ulizipata
biashara ya-o i-i,a -,enye hatua ganiTafadhali ,e-a vema mara nyingi u8uavyo"
a" 5abla ya biashara -uanza "
b" :a-ati ,a uanzisha8i ,a biashara "
c" :a-ati biashara ilipo-u,a ina-u,a "
c++iv
d" :a-ati biashara ili-u,a na matatizo "
A+)(,## 43) 4-,-.') .-/) 3)4$ () .*")(8$ 3) .)3)2$ 4),'4) 4-;)2) /$/$+$
"''.
c++v
A11#(/'6 :.!9 R#+#)0*" =-#+,'$(()'0# &$0 SME+ (B-+'(#++ E(,0#10#(#-0+)
T10 O204 U4*306%*T; O! TA4LA4*A OUT"
2$O$Bo+ E=>?)
&ar es %alaam$
Tel:\E<< EE EBBD))E
!a+:\E<< EE EBBDC<)
:ebsite:,,,$out$ac$tz
&ear respondent the bearer of this questionnaire is an MBA student at The Open
University of Tanzania OUT"$ As par of this on going academic development he is
required to conduct a research and ,rite a report on T"# R$%# F'()(*')% I(+,',-,'$(+ $(
S-**#++ $& S.)%% )(/ M#/'-. E(,#010'+#+ +#*,$0 '( T)(2)(')$ ;ou have been selected
for purpose of this study and therefore requested in support to our countryGs higher
education sector, to complete this questionnaire and submit the same to its bearer$
2lease note that the information to be collected ,ill be treated ,ith utmost confidentiality
and used solely for academic purposes indicated hereon, than- you for your assistance
and supporting us$
5indly please fill in the follo,ing blan-s
($ 4ame of you enterprise ################$$
E$ The permanent address of your enterprises #########
=$ ;ear of establishment #################$$
>$ :hat is the form of o,nership of your enterprise if any 2lease tic- appropriate
c++vi
ans,er"
a" %ole o,ner "
b" 2artnership "
c" 'ompany "
d" 'ooperative "
e" Other please specify ##########
<$ 1ome district of your enterprise : 2lease tic- appropriate ans,er"
a" *lala "
b" Teme-e "
c" 5inondoni "
B Type of activity your enterprise dealing ,ith : 2lease tic- appropriate ans,er"
a"$Manufacturing "
b"$%ervice "
c"$'ommerce and trade "
C$ .ender %e+" of respondent : 2lease tic- appropriate ans,er"
a "$Male "
b "$!emale "
D$ Marital status 2lease tic- appropriate ans,er"
a"$%ingle "
b"$Married "
c"$:ido,ed "
d"$:ido,er "
c++vii
)$ :hat is your age groupH 2lease tic- appropriate ans,er"
a"$Age bet,een (D R =? year "
b"$Age bet,een =( R >? year "
c"$Age bet,een >( R <? year "
d"$Age above <( year "
(?$ :hat is your education level 2lease tic- appropriate ans,er"
a"$ 4o school "
b"$ 2rimary school "
c"$ %econdary school "
d"$'ollege level &iploma" "
e"$ University level degree" "
f"$ 2ost graduate "
(($ :hat reasons made you starting this business please tic- to indicate to ,hat e+tent
each of the follo,ing factors ,as important in influencing your decision to start this
businessH 2lease tic- appropriate ans,ers"$
a"$*t is the only ,ay * could ma-e a living$ "
b"$To supplement income from other sources in order to meet basic needs
c"$To avoids having to ,or- from others "
d"$To achieve a higher position for myself in the society "
e"$Other please specify "
(E$ *s the Business registeredH 2lease tic- appropriate ans,er"
a"$;es "
c++viii
b"$ 4o "
(=$ :hat is your current annual turnover in TshsH 2lease tic- appropriate ans,er"
a"$7ess than <,???,??? "
b"$Bet,een <,???,??? R E??,???,??? "
c"$Bet,een E??,???,??? R D??,???,??? "
d"$More than D??,???,??? "
(>$ &id you ever borro, any loan in your business operationalH2lease tic- appropriate
ans,er"
a"$;es "
b"$4o "
*f ;es continue question (< and if 4o continue question E)
(<$ :hat are reasons made you to apply loan from ban- or other financial institutionsH
2lease tic- appropriate ans,ers"
a"$ !or start up business$ "
b"$ !or additional ,or-ing capital of business "
c"$ !or increasing fi+ed asset of business "
(B$ :hat is the total number of employees of the business before getting loanH2lease tic-
appropriate ans,er"
a"$( R > employees "
b"$< R ) employees "
c"$(? R >) employees "
c++i+
(C$ *s there any increase of employment rate after you have been given a loanH 2lease
tic- appropriate ans,er"
a"$;es "
b"$4o "
(D$ :hat ,as the amount borro,ed at the first time TshsH2lease tic- appropriate ans,er"
a"$Belo, @ <??,??? "
b"$<??,??? R (,???,??? "
c"$(,???,??? R E,<??,??? "
d"$E,<??,??? R <,???,??? "
e" Above @ <,???,??? "
()$ 1o, often do you repay your loanH 2lease tic- appropriate ans,er"
a" :ee-ly "
b" Monthly "
c" ;early "
E?$ :as the time given to repay the loan enough for youH 2lease tic- appropriate ans,er"
a"$;es "
b"$4o "
E(&id the amount you borro, from ban-s and other financial institutions for your
business enoughH 2lease tic- appropriate ans,er"
a"$;es "
b"$4o "
c+++
EE$ :as it easy to access loan at the first time ,hen you started to borro,H 2lease tic-
appropriate ans,er"
a"$;es "
b"$4o "
E=$ :ere you required to offer collateral for the loanH 2lease tic- appropriate ans,er"
a"$ ;es "
b" $4o "
E> :hat ,as the collateral required for the loan 2lease tic- appropriate ans,er"
a"$ 1ouse "
b"$ 'ar "
c"$ 2lot "
d"$1ouseholds "
e"$ 4ot applicable "
E<$ :hat do you thin- about the interest rates for loansH Are they too high 2lease tic-
appropriate ans,er"
a"$ ;es "
b"$ 4o "
c"$ 2lease specify the rate "
EB$ &oes servicing your loan affects negatively your financial performanceH2lease tic-
appropriate ans,er"
a"$;es "
c+++i
b"$4o "
EC After a completion of repayment of first loan did you opt to continue for second loanH
2lease tic- appropriate ans,er"
a"$;es "
b" 4o$ "
*f 4o give reasons
i##########################$$
ii##########################$
iii##########################
ED$ 2lease indicate the level of your firmGs achievement adopted since started being
financed by financial institutions in terms of the follo,ing aspects by putting a tic-
in the bo+ that corresponds to your situation
L#5#%+ $& A*"'#5#.#(,
(^ More decreased
E^ %light decreased
=^ %table
>^ %light increased
<^ More increased
F)*,$0+ L#5#%+ $& A*"'#5#.#(,
4o: ( E = > <
A %ales revenues
B 2rofitability
' 2hysical assets
& !inancial assets
0 Mar-ets coverage
c+++ii
E) :hat are the barriers to the development of your enterprise please tic- to the
appropriate ans,er 2lease tic- as much as possible":
a" 'ompetition in business "
b" 1igh level of ta+ation "
c" 7o, purchasing po,er of the population "
d" 2rocedural difficulties in starting a company "
e" &ifficulty in accessing to credit facilities "
f" 7o, coordination bet,een financial institution and %M0 "
g" 7ac- of qualification "
h" 7ac- of mar-et information "
i" 2oor infrastructure facilities$ "
8" Technological changes$ "
-" 'hanges of e+changes rates$ "
l" 7ac- of management s-ills "
m"Unstable legal environment "
n" 7ac- of business support and training "
o" 1igh interest rate "
p" Others please specify "
=?$ &o you e+pect to e+pand the business in the future 2lease tic- appropriate ans,erH"
a"$ ;es "
b"$ 4o "
=( :hich methods do you prefer in financing your business 2lease tic- as much as
possibleH"
a" By using the retained earnings profit"$ "
c+++iii
b" 3enture capital "
c" 2ublic mar-ets "
d" Borro,ing from friends relative "
e" Borro,ing from commercial ban- "
f" Borro,ing from microfinance "
g" %accos "
h" .overnment support "
i" Other please specify "
=E$ Tic- among those factors ,hich prevent %M0sA entrepreneurs borro,ing from
financial institutions$ 2lease tic- only as much as possible"
a" 7ac- of collateral "
b" 7ac- of trac- records "
c" 4e,ness in the business start up" "
d" 7ac- of entrepreneur s-ills "
e" 2oor documentation "
f" 'orruption "
g" 'ompetition from other borro,er "
h" Too bureaucratic "
i" 1igh interest rate "
8" Other please specify "
==$ :hich of the follo,ing organizations support your organizationH Tic- to the
appropriate as much as possible"
a" Ban- and financial institutions$ "
b" 'hamber of commerce "
c+++iv
c" *nternational donors "
d" 'onsulting companies and agencies "
e" 30TA "
f" %*&O "
g" TB% "
h" B0T "
i" Others please specify$ "
=>$ *f yes at ,hat stage 2lease tic- as much as possible"
a"$ Before creating a business "
b"$&uring the process of business set up "
c" :hen my business started to gro, "
d"$ :hey my business started to have problems "
Than- you for ta-ing your time in filling this questionnaire$
c+++v
A11#(/'6 :.27 R#+#)0*" Q-#+,'$(()'0# &$0 F'()(*')% I(+,',-,'$(+.
T10 O204 U4*306%*T; O! TA4LA4*A OUT"
2$O$ Bo+ E=>?)
&ar es salaam$
Tel:\E<< EE EBBD))E
!a+:\E<< EE EEEBBDC<)
:ebsite: ,,,$out$ac$tz
&ear respondent the bearer of this questionnaire is an MBA student at The Open
University of Tanzania OUT"$ As par of this ongoing academic development he is
required to conduct a research and ,rite a report on T"# R$%# F'()(*')% I(+,',-,'$(+ $(
S-**#++ $& S.)%% )(/ M#/'-. E(,#010'+#+ +#*,$0 '( T)(2)(')$ ;ou have been selected
for purpose of this study and therefore requested in support to our countryGs higher
education sector, to complete this questionnaire and submit the same to its bearer$
2lease note that the information to be collected ,ill be treated ,ith utmost confidentiality
and used solely for academic purposes indicated hereon, than- you for your assistance
and supporting us$
($ 4ame of your organization ###############$
E$ The permanent address of your organization ########$
=$ ;ears of 0stablishment#################
>$ :hat is the ma8or products Aservices" that your organization offers to %M0s, 2lease
tic- on the appropriate several ans,ers possible"
c+++vi
a" %hort term loan less than one year "
b" 7ong term loan over one year "
c" %aving "
d" Training "
e" *ndustrial hire@purchase for asset "
f" 7etter of credit "
h" Trust receipts %afe -eeping of documents" "
i" 0+port credit refinancing 0'6" "
I" Other please specify$ "
<$ Are the criterions" for obtaining your services easily met by the %M0sH2lease tic-
appropriate ans,er"
a" ;es "
b" 4o "
B$ 1o, does your organization ran- small and medium enterprises %M0s" in the
2rovision of loanH Tic- to the appropriate situation"
a" !irst priority "
b" %econd priority "
c" Third priority "
d" 4either of the above "
C$ :hat is interest rate offered by your organization to %mall and Medium 0nterprisesA
0ntrepreneurs######$$
*s it a flat rateH 2lease tic- appropriate ans,er"
a" ;es "
c+++vii
b" 4o "
D$ *n order to get a loan facility, it is argued that the %M0 business o,ners must have
collateral ,hat type of collateral is the borro,er required to offerH
a"############
b"############$$
c"############$
)$ :hat do you thin- are the main factors that prevent entrepreneursA %M0s operators to
borro, from your OrganizationH
a"###########$$
b"###########$$
c"############
(?$ :hat strategies need to be adopted by your organization to facilitate %M0s operators
or entrepreneurs to qualify for loansH
a"#############$$
b"#############$
c"#############$

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c+++viii