MICROFINANCE PAPER WRAP-UP: Tanzanian Micro Enterprises and Micro Finance: The Role and Impact for Poor Rural Women, by Lucy Ssendi and Alistair R. Anderson

By Lucy Ssendi and Alistair R. Anderson, Journal of Entrepreneurship 18, 2009, 19 pages, available for purchase at: http://joe.sagepub.com/content/18/1/1.abstract

The purpose of this paper is to examine the role of microfinance in Tanzania, where, according to the International Labour Organization (ILO), high levels of poverty combined with slow economic growth have forced a large percentage of the population into self-employment and informal activities. Ms Ssendi and Mr Anderson begin by exploring the general nature of microfinance in rural Tanzania and presenting the types of finance available to the poor. They find that formal financial institutions operate mainly in urban areas – largely because of the higher transaction costs involved in operating in more rural areas. Services are relatively scarce in all areas because most formal financial institutions find it difficult to deal with microentrepreneurs because of the lack of collateral, the perception of a high incidence of defaults and the disproportionately high transaction costs associated with issuing of small amounts of credit. As a result, as much as 80 percent of the population in Tanzania is excluded from reliable access to banking services. Women’s access to formal sources of credit is particularly restricted as they generally lack collateralizable assets, including land. Women are estimated to own about 19 percent of registered land, and their plots are less than half the size of those of their male counterparts. As a result, five percent of Tanzanian women are estimated to be banked as of 2008.

There are a growing number of semi-formal and informal financial alternatives in Tanzania, including microfinance institutions (MFIs) run by nongovernmental organizations (NGOs) and rotating savings and credit associations (ROSCAs). ROSCAs, which are called “upatu” in Tanzania, are the simplest form of financial intermediation considered in this paper. In a ROSCA, a small group of people, generally between 15 and 30, form a group and contribute an agreed amount at regular meetings. The entire fund is then distributed to each member on a rotating basis, until everyone in the group has received a loan. The system involves a high degree of flexibility, with the participants determining the size of the group, the amount to be saved, the frequency of contributions and how the funds can be used. Because ROSCAs are largely self-operated, transaction costs are relatively low and, therefore, they are able to reach poorer individuals. Risks are also relatively low because the process of self-selection allows for a high level of mutual understanding and trust. However, the method of self-selection also creates a risk of excluding the poorest members of society.

The authors then examine the impact of one particular NGO-MFI, the Small Entrepreneur Loan Facility (SELF) project. By means of a survey, they compare sample households of SELF clients to those of non-clients at a point time. They find that participation in the SELF program has had some benefit in improving the self-reported profitability over time of microenterprises run by rural poor women. However, only one-fourth of loan recipients noticed any change, as a result of getting the loan, in social benefits, defined in terms of nutrition, housing and clothing. Furthermore, they found little long-term effect as measured by increases in household assets.

Overall, Ms Ssendi and Mr Anderson conclude that although microloans may improve the profitability of microenterprises, the never-ending struggle to make ends meet absorbs the immediate benefits, and the loans therefore fail to produce permanent increases in material assets.

By Conner Brannen, Research Assistant

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