Role of Small and Medium Enterprises in Tanzania


It is now increasingly accepted that the Small and Medium Enterprises (SMEs) play an essential role in job creation and income generation in Tanzania. SMEs all over the world and in Tanzania in particular, can be easily established since their requirements in terms of capital; technology, management and evenutilities aren't as requiring as it is the circumstance for large enterprises. These enterprises can even be founded in rural adjustments and therefore add value to the agro products and at exactly the same time facilitate the dispersal of enterprises. Indeed SMEs development is directly associated with more equitable distribution of income and thus important as regards poverty alleviation. At the same time, SMEs serve as an exercise ground for rising entrepreneu (SME Policy, 2002).

Empirical studies find that the show of SMEs in GDP is significantly increasing in tanzania with average of 16%a and 18%. This uncovers the value of SME development and employment technology. However, prevalence of credit market failure is an important constraint on the growth of SMEs. Since the closure rate of SMEs is greater than much larger enterprises, the financial service providers tend to consider SME financing high-risk (Caves, 1998). Much as like in microfinance, SME funding also requires enhancements in loaning technology that can decrease the risk to the lender in ways that will not raise the overall purchase cost to the entrepreneur. With the aim of generating employment opportunities through SME growth, Akiba Commercial loan company of Tanzania launched a particular SME lending structure in 2002. Akiba commercial loan company is a private bank where local possession is 66% and overseas ownership is 36%.

As one of the main targets of Akiba commercial Bank's SME financing is to aid SME growth and employment technology. Research and Development Team of Akiba Commercial Loan provider was asked to carry out a study to assess the amount of SME expansion before and after financing. The following section of the essay reveals a brief review of SMEs growth, SME financing, SME and post loan changes and the loan disbursed size to find out contribution of microfinance on SME development.

SMEs expansion in Tanzania

The SMEs term inTanzania is employed to mean micro, small and medium enterprises. It is

sometimes known as micro, small and medium enterprises (MSMEs). The SMEs cover non-farm monetary activities mainly making, mining, business and services. There is absolutely no universally accepted definition of SME. Different countries use various procedures of size depending on their level of development. The popular yardsticks are final number of employees, total investment and sales turnover. Within the context of Tanzania, micro enterprises are those participating up to 4 people, generally members of the family or employing capital amounting up to Tshs. 5. 0 million. Nearly all micro enterprises are categorized as the casual sector. Small enterprises are mainly formalised

undertakings participating between 5 and 49 employees or with capital investment from

Tshs. 5 million to Tshs. 200 million. Medium enterprises use between 50 and 99 people

or use capital investment from Tshs. 200 million to Tshs. 800 million. This is illustrated in

the stand below (SME policy, 2002)




Capital Investment

in Machinery (Tshs. )

Micro enterprise

1 - 4

Up to 5 mil.

Small enterprise

5 - 49

Above 5 mil. to 200 mil.

Medium enterprise

50 - 99

Above 200mil. to 800 mil.

Large enterprise

100 +

Above 800 mil.

SME progress means upsurge in size or improvement of the business enterprise development process. Various signals both qualitative and quantitative are used to assess SME progress. They include;

-outcome indicators-profit

-output indicators-e. g sales amount, number of staff etc

-capacity centered indicator-value of investments, capital invested

-Qualitative indicators-structure, management practice, degree of formalization etc

Therefore the way of measuring SME progress as result of microfinancing is done using above indictors as specified in examination below. However the objective of the essay is to explore on whether microfinancing to SMEs will donate to growth on their behalf.

Microfinancing SMEs in Tanzania:

It is a common understanding that SMEs in Tanzania are being, somewhat, excluded from the targeted customers of both the formal and semi-formal areas (e. g. Ahmed, 1999; Meagher, 1998). However, this isn't a unique phenomenon particular to Tanzania. A large study in 80 countries by Schiffer and Weder (2001) unveiled that funding is the main obstacle for SMEs expansion followed by taxes, legislation and inflation. Various factors are believed to be the hindrace for SMEs to be financed. They include insufficient access to banking services due to unavailabity of id document, birth certificates, proof of home, education and distance and insufficient carry infrastructure. Also there exists lack of access to credit credited to insufficient security, education and lack of transaction history. On the list of factors the major one is the lack of invention by bankers and regulators.

Most SME ventures in Tanzania rely upon personal personal savings, family or other informal credit sources. A few of the more established MFIs (Microfinance Organizations e. g SACCOS) are scaling up to tap this market. The main microfinance establishments can be categorized as non governmental organizations (NGOs), Cooperative based companies namely SACCOS and SACCAs while the third category is banks. The major players in the NGOs category include Pleasure Tanzania, FINCA (Tanzania), Small Venture Development Organization (SEDA) and Presidential Trust for Self-Reliance (PTF). Others, which can be relatively smaller in proportions, include Small Business Development Business (SIDO), YOSEFO, SELFINA, Tanzania Gatsby Trust, Poverty Africa and the Zanzibar established Women Development Trust Account and Mfuko. There rest consists of very tiny programmes scattered throughout the united states mainly in the form of community based organizations (CBOs). Banking companies that are actively involved with microfinance services delivery are the National Microfinance Bank (NMB), CRDB loan company, Akiba Commercial Standard bank (ACB) and a few Community/regional banks namely, Dar es Salaam Community Loan provider, Mwanga Community Lender, Mufindi Community lender, Kilimanjaro Cooperative Bank, Mbinga Community Loan company and Kagera Cooperative Ban

It is predicted that all the MFIs in Tanzania come up with serve a combined client population of about 400, 000 SMEs, which is merely around 5% of the full total estimated demand. Commercial banking institutions including community banking institutions account for around 50, 000 while the NGO category makes up about the around human population of 220, 000 clients. Pleasure Tanzania being the major single player accounts for about 29% of the marketplace share in this category or 16% of the prevailing total market talk about.

Delivery systems of financial products

Almost all micro-finance organizations (MFIs) provide credit services. Some others also provide financial loans such as cost savings, transfer obligations and insurance. Some establishments like FINCA are along the way of developing a new product: micro-leasing. Since credit is the most typical service, the majority of the delivery methods have been developed around credit. Savings and other products are relatively few and there has been less innovation how to provide these services. Listed below are common delivery methods.

Group Lending

This methodology is often utilized by most MFIs. Credit is sent to groups that guarantee the loan. Peer pressure can be used to enforce repayment. The loan can be disbursed to either an individual person in the group or to the group, which in turn provide lending options to individual participants.

Individual Lending

Under the methodology, credit is sent to individuals according to their ability to provide the MFI with the assurance of repayment and some degree of security.

Constraints and difficulties facing the micro-finance industry in Tanzania

The constraints faced by the micro-finance industry in Tanzania include:

Poor control and governance set ups;

Shortage of os's, other than for loans i. e. accounting, inner controls;

Absence of effective policies and operating types of procedures;

Shortage of qualified workers to handle technical issues such as the appropriate opportunities of financial resources;

Poor/low capital bottom part;

Poor infrastructure especially in the rural areas;

Declining donor support;

Despite these constraints, the prospects are best for the following reasons:

Government popularity and support of the micro-finance sector;

The operationalization of the Country wide Micro-finance Insurance policy;

The living of a large part of unmet demand;

Entrance of commercial banking companies with innovative products and delivery methods such as CRDB Bank and Akiba Commercial Bank;

Emphasis on the development of the rural infrastructure, i. e. under the Highly Indebted Low of the Countries Initiative of the World Standard bank and the IMF.

That notwithstanding, the sector is faced with some troubles including:-

Reaching the poorer areas;

Balancing goals of poverty alleviation which of reaching sustainability;

Provision of appropriate products to different types of clients;

Options of capital since most of them are donor centered.

Improvement of the rural infrastructure to facilitate easy accessibility to remote areas;. The united states is big and sadly and resources are limited;

Capacities building as most of the MFIs are badly monitored. Capacity building in management and specialized aspects is essential to press the industry in advance;

Creation of other incentives for private sector investment into the sector, i. e. taxes treatment;

Public education to accomplish a change of attitude

With the aim of fostering growth also to seize the opportunities of the unserved market various financial instutions are coming up with innovative lending methods to touch the SMEs microfinancing needs. One of the approaches designed by one of them is explored hereunder and progress motives to SMEs is analysed;

Akiba commercial bank approach.

In pursuit of this goal, AKIBA pioneered various kinds of savings and microfinance

loan products, with which it has backed various micro enterprise activities such

as food vending, seafood mongering, groceries, mitumbas (deal of second hand clothes),

small scale diary cattle keeping, retail and distribution, tailoring, carpentry, masonry

works, internet cafes, stationery shops, secretarial services, barber retailers, locks salons,

and small size agriculture etc


AKIBA presently offers several microfinance loan products each tailor-made to suit

every kind of our customer. In wide-ranging conditions, the features revolve around both the

traditional group and specific loan methodologies. Besides these, and by virtue of

being a full-fledged commercial bank or investment company, it also able to offer consumer lending and

corporate loans and overdrafts.

Group micro loans

Under this structure, customers are able to borrow less than TZS 20, 000 as much

as TZS 5 million without tangible securities apart from their personal savings and the

guarantees that associates of the group give to each other. The full total portfolio size

currently stands at TZS 800 million. Total of 4000 customers have been dished up under this approach.

Individual micro loans

This is the product that serves many micro business people in this

country. Since its unveiling May 2001 in one branch, it is continuing to grow at a faster rate than

any other loan product within the last 2 yrs, from just above 700 energetic loans in

December 2001 to 4500 today. Out of the current spectacular total loans and

advances profile of TZS 18 billion, TZS 4 billion comprises of individual

microfinance lending options. AKIBA s individual micro loan is seen as a quick turn

around time and flexible loan terms more versatile than any of the products offered by

its direct opponents. The minimum amount loan amount is TZS 200, 000 and the maximum

currently stands at TZS 10 million. Beyond this, customers graduate to SME loans

and further to corporate and business loans and overdrafts depending on their working capital


Consumer Loans

As with the individual micro finance lending, AKIBA was the pioneer of consumer

lending in Tanzania having introduced the product in December 2000. It was little

wonder that the portfolio and the total asset base of the bank or investment company grew very quickly during

the start of its starting. Competition has however since set in with all the

mainstream banks now aggressively offering salary based loan products similar to

AKIBA s. In spite of this, and because of our own constant innovations, overall flexibility, and

good market cleverness, rather than lose our market share, the number of borrowers

have sustained to develop from 1200 in 2002, to 4300 today borrowing just over TZS 7


SME and post loan changes

In this section general profile is provided for the test of enterprises that were provided credit by Akiba commercial loan company in conditions of some key variables and the post loan changes in these parameters. Also the uses of the loans and exactly how these have damaged the enterprises is discussed.

Sectoral composition:

Sectoral structure of Akiba Commercial standard bank borrowers of the test shows the high extent of concentration of Akiba Commercial Standard bank on investors (retail and wholesale). No clear design is obvious among the different categories of borrowers, i. e. new, do it again and dropout, in their sectors of business except for a somewhat higher talk about of manufacturing one of the do it again borrowers than new, with which it has recognized various micro enterprise activities such as food vending, seafood mongering, groceries, mitumbas (sales of used clothes), small level diary cattle keeping, retail and distribution, tailoring, carpentry, masonry

works, internet cafes, stationery retailers, secretarial services, barber shops, scalp salons,

and small level agriculture etc

Business connection with entrepreneurs:

Akiba Commercial Bank SME borrowers have a good amount of experience in their respected businesses. Majority of the borrowers are involved in the business for more than 10 years. This conforms to the actual fact that the Akiba commercial bank or investment company look for customers with some amount of experience. Though most the borrowers got SME credit for the 7 business already about 9 years old, some 17 percent of the borrowers received credit for the businesses that they had been doing for not more than 3 years. This shows that Akiba Comercial Lender offers credit service to new entrants on selective basis, because entrance and exit in trading is relatively high. Average get older of manufacturing items is significantly less than trading units among the SME borrowers. Though these numbers of years give the idea of length of operation of the businesses, the experience of the enterprisers might be higher. Actually, thirty percent of the borrowers have prior business experience of same sort out or other. Not surprisingly, possibility of having previous business experience in other enterprises is higher for those business owners who have been awarded credit for relatively recently established enterprises in comparison to others. This advises bias against start ups which is a common feature in SME financing. Regarding to ownership routine of the projects, two third of the enterprises are proprietorships as the rest are family business.

Capital collection:

Personal and family savings account for more than three quarter of the administrative centre in the surveyed SMEs. It isn't unexpected that enterprises with higher capital were granted larger levels of loan1. It really is interesting to notice that before loans, the size of average capital was almost the same for trade, service and production sectors. Enterprises in trading sector have were able to increase the size of their capital, more rapidly than enterprises in other industries. Only 3. 4 percent of all enterprises reported capital erosion and over 40 percent managed to more than increase their capital after taking loan. There is no clear difference one of the three groups of enterprises. However, it is important to note that upsurge in capital may well not solely be influenced by the SME loan. In the words of a customer, "SME loan only offers momentum to already increasing business. " On average, SME lending options constitute 37 percent of the total capital of the borrowers. These results for the new and repeat borrowers are 31 and 44 percent respectively.

Value of the business enterprise:

Average value of the firms, measured by the amount for which the entrepreneur can sell the business, was Tsh 1. 84 million before taking loan. Currently, the average value of the business of the enterprises is Tsh 2. 49 million. Upsurge in value of enterprises has been higher for repeat borrowers than new borrowers, as expected, being that they are working for longer durations. However, value of enterprises of the dropout clients in addition has increased and their initial values were greater than others. Information of average growth in worth by types of enterprises show that developing units have seen the highest development and agro processing firms grew at the very least rate. However, SME loan is not the only factor behind this growth of business. In the end, SME loan constitutes only 24 percent of working capital normally.

Sales size:

Average yearly product sales of the new, duplicate and dropouts were Tsh 4. 29, 5. 61 and Tsh 6. 47 million before taking loan. Since Akiba Commercial Loan provider is providing much needed working capital to these enterprises, volumes of sales have increased for nearly every borrower. On average, present sales of the enterprises are respectively 40, 67 and 26 percent higher in comparison to pre-loan period.

Breakdown of expenditures:

Since almost all of the enterprises are involved in trading, it isn't surprising that cost of goods purchased as raw materials or for sale accounts for more than 90 percent of these expenditure. Wage repayments arrived as the second major price. Rents, vitality and utilities, and other operating expenditures constitute the others. A prevalent idea about business in Bangladesh is the fact that informal and contingency repayments in conditions of extortion and bribes are rampant. However, over 95 percent of the enterprises reported that they do not have to pay any total under this heading. Although there are no significant variations between your enterprises that incur these expenditures and those that do not in our sample, conversations with clients claim that these bills are prevalent limited to larger enterprises.

Salary repayment:

Wage bill reflects, somewhat, the labour strength of your business organization. Whenever a particular business company expands, it is expected that its wage expenses will can also increase. On average, gross annual expenses in salaries and wages increased by Tk 16, 000 for the test enterprises after taking SME loan. Because the level of trade has also increased during this period, talk about of wage altogether expenses have never increased. For the enterprises under consideration, wage constituted 4. 89 percent of their total bills at pre-loan period. However, comparable present figure has dropped marginally to 4. 63 percent. This indicates that wage bill increased at lower rate than their total expenses. 55 percent of all the enterprises are spending same the total amount as wage bill currently as they used to do before loan. However, in regards to a quarter of these enterprises managed to increase their product sales by at least one third. This indicates that there was some extent of underemployment in these enterprises and SME loan helped them, at least partly, to utilize this surplus labour.

Present loan size and future credit plans

Average size of the last loans of the duplicate borrowers is understandably greater than that of the new borrowers and dropouts. Normally, loan granted is approximately 85 percent of amount demanded by the borrowers, with enterprises in the service and trading sectors obtaining relatively more (87-88% of amount wanted) in comparison to those in processing and agro control areas (82-83%). 80 percent of the total respondents (including dropouts) portrayed their involvement in taking future loans from Akiba commercial Bank. 17 percent of the existing borrowers, both new and repeat, are not willing about future lending options. About 70 percent of the dropouts are still considering potential lending options from Akiba Commercial lender. A fair level of eagerness among the dropouts indicates they have not decreased out voluntarily. However, the actual fact remains that currently they have no outstanding lending options with Akiba commercialBank. 23 percent of the dropouts stated that they were refused repeat lending options, 34 percent discontinued due to high interest levels, 13 percent turned to other finance institutions/NGOs and 12 percent did not need further financing. In terms of progress plan, both new borrowers and dropouts expect bigger jumps in loan sizes compared to repeat borrowers. Repeat borrowers have, perhaps, tweaked their anticipations from experience. Majority of new clients and dropouts need to get their next loan increased by two thirds. It really is interesting to note that 50 percent of the customers, who are considering next loans, think that they might have to apply for a larger amount of loan to get their desired size of loans. It was found that past experience with amount requested and amount awarded is associated with their strategy of future request. The ratio of amount demanded and came to the realization in the prior cycle is positively correlated with the ratio of future pattern plans.

Uses and impact of loan

SME enterprises in Tanzania chiefly require financing for three purposes - for start-up, for working capital, and for set capital. Unavailability of working capital from formal financial institutions is regarded as one of the major claims of SMEs in Tanzania. The solitary most important use of Akiba Commercial loan company SME lending options is in the form of working capital. 89 percent of the customers reported that they used their loan for increasing working capital. Even though the loan is used less for investment in fixed capital, discussions with clients unveiled a demand for funding fixed investments, that will typically require a gestation period prior to the investment generates enough cash flow for repayment. According to the SME borrowers, considering that the Akiba Commercial Bank or investment company installment system is not ideal for set capital investment, almost all of it can be used for working capital. In more and more competitive marketplaces, SMEs are under pressure to grow and diversify to be able to hold on to their talk about of the marketplace. One consumer drew a comparison between his business with a balloon stating that after getting loan from akiba commercial Bank or investment company, his business expands just like a balloon, but eventually shrinks down to its original size by the end of the loan tenure. Other uses of loan included buying vehicles, repairing shops, building houses and repaying prior loans.

When asked about the positive effects of the loan on the businesses, clients in the SME lending options came up with a set of areas. In order of importance, we were holding increased working capital, cash purchase, earnings, sales, diversification of goods and services. Furthermore, clients stated that increased deals facilitated by the lending options have increased their status in the business community.

Clients declare that increased working capital has direct impact on the volume of sales. They are able to increase stocks and shares and kinds and reap the benefits of availing market opportunities. Many retailers grow business by starting up wholesale transactions. Transactions in credit are also facilitated due to the option of cash. This enables entrepreneurs to buy raw materials and goods for sale at lower prices, and also improve their relations with the buyers by offering sales on credit. Extension of business and cash purchasing boosts their status as businessmen, which facilitates future business bargains. Interestingly, none of them of the clients described having recruited new employees as an important impact of the lending options. Relating to them, the labour hours is increased only by the businessperson himself, as he seems extra pressure for repaying the loan promptly. Within a fitness, clients were asked to get ranking the eight shown effects by order worth focusing on. Increased work from the entrepreneur turned out to be the most crucial effect of the loan in virtually all cases. Clients sensed that they might not be putting in so much work if they hadn't taken the loan.


Innovations in addressing the credit market failures encountered by poor homeowners through microfinance have been a significant development breakthrough of recent years. Micro and small enterprises have been proven in several studies to be generally underserved, giving climb to the term 'missing middle' in the books. Yet, this is a crucial market segment to aid for both development and poverty alleviation through employment generation. As a response to the demand and offer part changes in the traditional microfinance market, which includes become significantly more 'crowded' in recent times, many microfinance providers in Tanzania have began providing enterprise fund targeted at the small enterprises. Some formal banking companies have also started operating in the forex market. Akiba commercial bank proven in 2001 with a view to aid small and medium enterprises and since 2002 has been providing small and medium enterprises credit. This newspaper is an early on evaluation of Akiba microfinance corporations loaning to small and medium enterprises with respect to foster expansion.

A fairly complete method was employed in order to capture the full extent of SME progress by breaking down enterprises into three groups - creation, trading and agroprocessing occupation. Percentage of enterprises graduating from microfinance into small enterprises increased by 20% in average but in varied ratio between manufacturing, trading and agro control enterprises. Trading is significantly greater than that of manufacturing and agroprocessing. It is noteworthy that more than fifty percent of the new careers are manufactured by increased enterprises as result of borrowing. Thus the importance of sustained access to finance is apparently important from expansion perspective of SMEs.

However growth of SME is not necessarily a function of microfinance other adjustable such as availability of market, government laws, education and inflation could evenly have an effect on thegrowth of SMEs.

Financing SMEs as a main business is still relatively new for formal financial providers in Tanzania. This is fundamentally dissimilar to microfinance, which is essentially providing homes with better money management facilities (Rutherford, 2001). Akiba commercial bank's SME financing has quickly become its core products and our analysis suggests that it is efficiently financing progress of the SMEs reinforced, which in turn is generating occupation. However, the merchandise characteristics still seem to be more ideal for financing expansion of relatively proven trading structured enterprises. Most of the investment being made is also in terms of increasing working capital. Future troubles of Akiba commercial bank SME lending businesses is always to develop the right types of products to lend to developing enterprises, and supporting fixed capital ventures of SMEs. Such diversification would have greater probable of supporting expansion and making sustainable employment opportunities.

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