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The role of Small and Medium Enterprises 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 are not as demanding as it is the case for large enterprises. These enterprises can also be established in rural settings and thus add value to the agro products and at the same time facilitate the dispersal of enterprises. Indeed

SMEs development is closely associated with more equitable distribution of income and thus important as regards poverty alleviation. At the same time, SMEs serve as a training ground for emerging entrepreneu (SME Policy,2002).

Empirical studies find that the share of SMEs in GDP is significantly increasing in tanzania with average of 16%a and 18%. This reveals the importance of SME growth and employment generation. However, prevalence of credit market failure is an important constraint on the growth of SMEs. Since the closure rate of SMEs is higher than larger enterprises, the financial service providers tend to consider SME financing risky (Caves, 1998). Much as like in microfinance, SME financing also requires innovations in lending technology that could reduce the risk to the lender in ways that does not increase the overall transaction cost to the entrepreneur. With the aim of generating employment opportunities through SME growth, Akiba Commercial bank of Tanzania launched a special SME lending scheme in 2002. Akiba commercial bank is a private bank in which local ownership is 66% and foreign ownership is 36%.

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As one of the core objectives of Akiba commercial Bank’s SME lending is to support SME growth and employment generation. Research and Development Department of Akiba Commercial Bank was asked to carry out a research to assess the extent of SME growth before and after financing. The following section of the essay presents a brief review of SMEs growth,SME financing, SME and post loan changes and the loan disbursed size to determine contribution of microfinance on SME growth.


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

sometimes referred to as micro, small and medium enterprises (MSMEs). The SMEs cover non-farm economic activities mainly manufacturing, mining, commerce and services.There is no universally accepted definition of SME. Different countries use various measures of size depending on their level of development. The commonly used yardsticks are total number of employees, total investment and sales turnover. In the context of Tanzania, micro enterprises are those engaging up to 4 people, in most cases family members or employing capital amounting up to Tshs.5.0 million. The majority of micro enterprises fall under the informal sector. Small enterprises are mostly formalised

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

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

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

the table below (SME policy, 2002)

The Government of the United Republic of Tanzania began its first major attempt to

promote the small industries sector as far back as 1966 with the formation of the National

Small Industries Corporation (NSIC) under the National Development Corporation

(NDC). The emphasis of the NSIC was to establish small industrial clusters, essentially

training-production workshops, which in 1973 were taken over by the Small Industries

Development Corporation (SIDO), and continue to operate.

They have also implemented, and continue to implement, grassroots

skills training and micro-finance programmes to encourage income-generating activities.

It would appear that an inventory of these past and current MSME development

initiatives has not been compiled, nor has there been a systematic effort to learn lessons

from project assessments. This has limited the exchange of “good practice” models and


In September 2002, the University of Dar es Salaam completed a report on recent

donor efforts on behalf of the DAC Private Sector Development Group Tanzania and the

International Working Group for SME Development of the OECD Committee of Donor

Agencies (Olomi and Nchimbi, November 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 growth means increase in size or improvement of the business development process.Various indicators both qualitative and quantitative are used to measure SME growth. They include;

-outcome indicators-profit

-output indicators-e.g sales volume, number of employee etc

-capacity based indicator-value of assets,capital invested

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

Therefore the measure of SME growth as result of microfinancing is done using above indictors as outlined in assessment below. However the objective of this essay is to explore on whether microfinancing to SMEs will contribute to growth for them.


It is a common understanding that SMEs in Tanzania are being, to some extent, excluded from the targeted clientele of both the formal and semi-formal sectors (e.g. Ahmed, 1999; Meagher, 1998). However, this is not a unique phenomenon particular to Tanzania. A large survey in 80 countries by Schiffer and Weder (2001) revealed that financing is the foremost obstacle for SMEs growth followed by taxes, regulation and inflation. Various factors are considered to be the hindrace for SMEs to be financed. They include lack of access to banking services due to unavailabity of identity document,birth certificates,proof of residence,education and distance and lack of transport infrastructure. Also there is lack of access to credit due to lack of collateral,education and lack of transaction history. Among the factors the major one is the lack of innovation by bankers and regulators.

Most SME ventures in Tanzania depend on personal savings, family or other informal credit sources. A few of the more established MFIs (Microfinance Institutions e.g SACCOS) are scaling up to tap this market. The main microfinance institutions can be categorized as non governmental organizations (NGOs), Cooperative based institutions namely SACCOS and SACCAs while the third category is banks. The major players in the NGOs category include PRIDE Tanzania, FINCA (Tanzania), Small Enterprise Development Agency (SEDA) and Presidential Trust for Self-Reliance (PTF). Others, which are relatively smaller in size, include Small Industries Development Organization (SIDO), YOSEFO, SELFINA, Tanzania Gatsby Trust, Poverty Africa and the Zanzibar based Women Development Trust Fund and Mfuko. There rest consists of very tiny programmes scattered throughout the country mainly in the form of community based organizations (CBOs). Banks that are actively involved in microfinance services delivery include the National Microfinance Bank (NMB), CRDB bank, Akiba Commercial Bank (ACB) and a few Community/regional banks namely, Dar es Salaam Community Bank, Mwanga Community Bank, Mufindi Community bank, Kilimanjaro Cooperative Bank, Mbinga Community Bank and Kagera Cooperative Ban

It is estimated that all the MFIs in Tanzania put together serve a combined client population of about 400,000 SMEs, which is only around 5% of the total estimated demand. Commercial banks including community banks account for around 50,000 while the NGO category accounts for the an estimated population of 220,000 clients. PRIDE Tanzania being the largest single player accounts for about 29% of the market share in this category or 16% of the existing total market share.

3,1 Delivery systems of financial products

Almost all micro-finance institutions (MFIs) provide credit services. Some others also provide financial products such as savings, transfer payments and insurance. Some institutions like FINCA are in the process of developing a new product: micro-leasing. Since credit is the most common service, most of the delivery methods have been developed around credit. Savings and other products are relatively few and there has been less innovation on how to deliver these services. The following are common delivery methods.

Group Lending

This methodology is commonly used by most MFIs. Credit is delivered to groups that guarantee the loan. Peer pressure is used to enforce repayment. The loan can be disbursed to either an individual member of the group or to the group, which in turn provide loans to individual members.

Individual Lending

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

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


The CRDB Bank, 90 per cent owned by DANIDA (the government still holds 10

per cent of the shares) provides both wholesale and retail lending services. Reportedly, it

has a 40 per cent share of the micro-finance market, with centralized lending provided

through their 24 branches.

For the first three quarters of 2003, CRDB statistics on micro-finance activities

indicate that women made up about 41 per cent of their members, and received 47 per

cent of their loans

During the period, male

members received an average of 2.12 loans and women members received an average of

2.54 loans. There is no indication of the distribution between women and men of the

Tshs 25.6 billion in total loan disbursements. Since 2002, the Bank has been piloting the SACCO concept (Savings and Credit

Cooperative Society) in four regions of the country as a way of group-lending to MSEs.

Under this system, the CRDB Bank lends to wholesalers, who in turn deliver microfinance products through the SACCOs. To participate as a SACCO, groups of MSEs

must form and register themselves. Each individual member must agree to buy shares in

the SACCO, which makes them eligible to borrow at a 1:3 ratio depending on the

number of shares they have. Members must also contribute 25 per cent of the loan

amount as security-on-deposit with the CRDB. The wholesaler borrows from the CRDB

at 12.5 per cent and lends out to SACCOs at 24 per cent (2 per cent per month). It

appears that only one of the SACCOs is for women only.

A survey of 125 SACCOs undertaken by the CRDB Bank recently found only 25

operating on a “best practice” basis, the top performing of which was the women’s

SACCO. One of the other findings was that for mixed group SACCOs, women

borrowers had lower default rates than men, a finding consistent with other studies of

micro-finance lenders. The Bank delivers three levels of training to SACCOs – to all of

their members, to their professional staff, and to their management committees. The

intent of the Bank is to roll the SACCO model out across the country. The CRDB aims to

become a retail bank within the next five years. Within this context, funding SACCOs is

an approach for the Bank to reach MSEs that have the potential to become individual

loan clients.



SIDO, with an office in 20 of the 21 regions of the mainland, is a large provider of

financial and non-financial services to MSEs. They have 70,000 credit-delivery clients

and reach 300,000 MSEs through their small business training and consultancy services.

The key informant from SIDO stated that there is a big gap in the capacity of the

organization to meet the demand for credit – of the 71,000 credit applications they had in

the system in November 2003 (for loan amounts totalling TShs 27 billion), they will only

be able to fund about 10 per cent.

SIDO offers three levels of credit:

Level 1: Using the group-lending approach, members can borrow up to Tshs 1

million (US$1,000). Interest rates range up to 30 per cent per annum.

Normal repayment terms are 12 months, but food producers may qualify

for a two-year repayment term.

Level 2: For loan amounts of between Tshs 1 million to Tshs 6.5 million, SIDO

moves to individual loans.

Level 3: For loan amounts greater than Tshs 6.5 million, SIDO links the clients to

a financial institution.

The organization appears to have an excellent process of providing business

development support prior to and after the provision of credit.


In pursuit of this goal, AKIBA pioneered many types of savings and microfinance

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

as food vending, fish mongering, groceries, mitumbas (sale of second hand clothes),

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

works, internet cafes, stationery shops, secretarial services, barber shops, hair salons,

and small scale agriculture etc


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

every type of our customer. In broad terms, the features revolve around both the

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

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

corporate loans and overdrafts.

Group micro loans

Under this scheme, customers are able to borrow as little as TZS 20,000 and as much

as TZS 5 million with no tangible securities other than their savings and the

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

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

Individual micro loans

This is the product that serves many micro entrepreneurs in this

country. Since its launch May 2001 in one branch, it has grown at a faster pace than

any other loan product over the past two years, from just above 700 active loans in

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

advances portfolio of TZS 18 billion, TZS 4 billion is made up of individual

microfinance loans. AKIBA s individual micro loan is characterized by quick turn

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

its direct competitors. The minimum 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 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 grew very rapidly during

the early days of its launching. 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 constant innovations, flexibility, and

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

have continued to grow from 1200 in 2002, to 4300 today borrowing just over TZS 7



In this section general profile is provided for the sample of enterprises that were provided credit by Akiba commercial bank in terms of some key variables and the post loan changes in these variables. Also the uses of the loans and how these have affected the enterprises is discussed.

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Sectoral composition:

Sectoral composition of Akiba Commercial bank borrowers of the sample shows the high extent of concentration of Akiba Commercial Bank on traders (retail and wholesale). No clear pattern is visible among the different categories of borrowers, i.e. new, repeat and dropout, in their sectors of business except for a slightly higher share of manufacturing among the repeat borrowers than new , with which it has supported various micro enterprise activities such as food vending, fish mongering, groceries, mitumbas (sale of second hand clothes), small scale diary cattle keeping, retail and distribution, tailoring, carpentry, masonry works, internet cafes, stationery shops, secretarial services, barber shops, hair salons,

and small scale agriculture etc

Value of the business:

Average value of the businesses, measured by the amount for which the entrepreneur can sell the business, was Tsh 1.84 million before taking loan. Presently, the average value of the business of these enterprises is Tsh 2.49 million. Increase in value of enterprises has been higher for repeat borrowers than new borrowers, as expected, since they are operating for longer durations. However, value of enterprises of the dropout clients has also increased and their initial values were higher than others. Figures of average growth in values by types of enterprises show that manufacturing units have observed the highest growth and agro processing firms grew at the least pace. However, SME loan is not the only factor behind this growth of business. After all, SME loan constitutes only 24 percent of working capital on average.

Sales volume:

Since Akiba Commercial Bank is providing much needed working capital to these enterprises, volumes of sales have increased for almost every borrower. On average, present sales of these enterprises are respectively 40, 67 and 26 percent higher compared to pre-loan period.


Present loan size and future credit plans

Average size of the last loans of the repeat borrowers is understandably higher than that of the new borrowers and dropouts. On average, loan granted is about 85 percent of amount demanded by the borrowers, with enterprises in the service and trading sectors receiving relatively more (87-88% of amount requested) compared to those in manufacturing and agro processing sectors (82-83%). 80 percent of the total respondents (including dropouts) expressed their interest in taking future loans from Akiba commercial Bank. 17 percent of the existing borrowers, both new and repeat, are not keen about future loans. About 70 percent of the dropouts are still considering potential loans from Akiba Commercial bank.


SME enterprises in Tanzania chiefly require financing for three purposes – for start-up, for working capital, and for fixed capital. Unavailability of working capital from formal financial institutions is recognized as one of the major complaints of SMEs in Tanzania. The single most important use of Akiba Commercial bank SME loans is in the form of working capital. 89 percent of the clients reported that they used their loan for increasing working capital. Although the loan is used less for investment in fixed capital, discussions with clients revealed a demand for financing fixed investments, which will typically require a gestation period before the investment generates enough cash flow for repayment. According to the SME borrowers, given that the Akiba Commercial Bank installment scheme is not suitable for fixed capital investment, almost all of it is used for working capital. In increasingly competitive markets, SMEs are under pressure to grow and diversify in order to hold on to their share of the market. One client drew a comparison between his enterprise with a balloon saying that after receiving loan from akiba commercial Bank, his business expands 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 previous loans.


The small and Medium Enterprises in Tanzania are facing many growth berries; from the microfinance selector.

– Many SMEs who require financing in order to grow they are seriously restricted to successfully obtain loan from financial institutions; as to the reasons that the SMEs are unable to meet loan conditions pertaining to security.

– Another constraint for the growth of SMEs in Tanzania is the access to microfinance support services. Many SMEs in Tanzania lack access to advice counseling and encouragement from microfinance services which is largely connected to lack of funds to pay for the services.

– Many of laws and regulations of Microfinance services on Tanzania is affecting SMEs growth which include procedures and criteria of qualifying for the Loans and the amount issued for the Loan. This is referred to corruption and bureaucracy which make the matters worse.

– The UDEC (2002) report expressed that; most of these SMEs in Tanzania mainly owned by women which they don’t have the same opportunities as men to meet and negotiate bribe with principally male microfinance institutions officials.

Microfinance make the SMEs not grow as they assits those who are in business already by not providing SME with the support from the start this can lead the SMEs to be weak from the start.

Most of the microfinance provides vision and mission are focused to SMEs who are already started and not the new ones.

– In additional, researchers identified that may microfinance services are confirmed to be stationed in urban areas which make many SMEs resides in rural remote areas of face the problem to access the service due to the poor economic conditions, poor infrastructure, dealing with complicated formalization procedures, harassment of traveling many times for searching the services, these limitations make the SMEs not to grow due to the luck of sufficient working capital to meet their needs.

– Generally, all SMEs operating in Tanzania are facing a number cultural, socio economic and operational barriers in relation to microfinance services that limit that ability and capacity to grow. In addition SMEs in different stages face other unique challenges to grow and from those who are already running SME the main challenges are limited access to quality and affordable microfinance services, access to term finance and sufficing working capital to meet their needs.

CRDB Bank vission and Mission

Our Vision

We aspire to provide financial and non-financial services throughout Tanzania targeting people below the banking pyramid to cultivate them into CRDB Bank customers and include them in the country’s financial system.

Our Mission

We are a market leader in wholesale microfinance, providing a wide range of needs-driven financial and non-financial services to retail financial intermediaries using a motivated, knowledgeable and skilled workforce. We will operate profitably adding volume of business to the holding company from a market segment previously impossible to harness with normal banking system.

Source: www.crdbmicrofinance.co

Akiba Commercial Bank Vision and Mission

Vision: The vision of Akiba Commercial Bank (ACB) is to be the Tanzanian bank of choice in the provision of financial services to micro-, small- and medium-sized enterprises. To realize this vision, the bank’s mission is to provide appropriate microfinance services in the most efficient and sustainable manner possible while simultaneously embracing the social and environmental interests of all its stakeholders.

Sources: www.accion.org


Innovations in addressing the credit market failures faced by poor households through microfinance have been a major development breakthrough of recent times. Micro and small enterprises have been shown in several studies to be largely underserved, giving rise to the term ‘missing middle’ in the literature. Yet, this is a critical market segment to support for both growth and poverty alleviation through employment generation. As a response to this demand and supply side changes in the traditional microfinance market, which has become significantly more ‘crowded’ in recent times, many microfinance providers in Tanzania have started providing enterprise finance targeted at the small enterprises. Some formal banks have also started operating in this market. Akiba commercial bank established in 2001 with a view to support small and medium enterprises and since 2002 has been providing small and medium enterprises credit. This paper is an early assessment of Akiba microfinance institutions lending to small and medium enterprises with respect to foster growth.

A fairly comprehensive method was employed in order to capture the full extent of SME growth by breaking down enterprises into three groups – manufacturing, trading and agroprocessing employment. Percentage of enterprises graduating from microfinance into small enterprises increased by 20% in average but in varied percentage between manufacturing, trading and agro processing enterprises. Trading is significantly higher than that of manufacturing and agroprocessing. It is noteworthy that more than fifty percent of the new jobs are created by increased enterprises as result of borrowing.Thus the importance of sustained access to finance appears to be important from growth perspective of SMEs.

However growth of SME is not necessarily a function of microfinance other variable such as availability of market, government regulations, education and inflation could equally affect thegrowth of SMEs.

Financing SMEs as a core business is still relatively new for formal financial providers in Tanzania. This is fundamentally different to microfinance, which is essentially providing households with better money management facilities (Rutherford, 2001). Akiba commercial bank’s SME financing has quickly become its core product line and our analysis suggests that it is successfully financing growth of the SMEs supported, which in turn is generating employment. However, the product characteristics still appear to be more suitable for financing growth of relatively established trading based enterprises. Most of the investment being made is also in terms of increasing working capital. Future challenges of Akiba commercial bank SME lending operations would be to develop the right types of products to lend to manufacturing enterprises, and supporting fixed capital investments of SMEs. Such diversification would have greater potential of supporting growth and generating sustainable employment opportunities.

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