STM Article Repository

Micro, Small to Medium Enterprises (MSMEs) in Tanzania have significant barriers, encompassing
insufficient capital that had manifested itself in many forms, loans were too small, and transaction
costs were high. Moreover, repayment capacity and culture were also lacking for MSMEs; this was
echoed by Microfinance Institution managers interviewed, which accentuate the problems of adverse
selection and moral hazard that culminated in credit rationing (Stiglitz & Weiss, 1981). Moreover,
focus group discussions with three groups of MSMEs revealed that these groups’ primary barriers
were insufficient capital, lack of business skills, lack of affordable modern production equipment, lack
of premises, and lack of market access. The government of Tanzania had introduced an SME policy
in 2003 that attempted to tackle these challenges. Group lending was a useful model adopted by MFIs
that had shown good outreach and financial sustainability and hence needs to be promoted by the
government, investors, and all stakeholders alike. This chapter recommends group lending because
of the relatively smaller capital outlays reaching more people, thus achieving SDGs 1 and 10. In so
doing, eradicating poverty as well as reducing inequality. Tanzania’s government was urged to
incentivize investors in the Microfinance space to bridge the gap because only about 1.3% of the
demand for microloans is satisfied by 20 Microfinance institutions that cater to about 500,000 clients
for an estimated 38 million people living in the rural areas who are potential clients based on the data
collected in this analysis.