Barakaeli S. Massangwa

CERTIFICATION
I have supervised this research paper entitled “Assessing the accessibility of commercial
bank loans to SMEs” and here by recommend this research paper for the acceptance by
Tumaini University Iringa University College as partial fulfillment for the requirement of
bachelor of business administration major economics.
Signature: ………………………………..
Date: ………………………………..
Mr. Sibo Mwakoko
(Supervisor)
Internal Examiner: …………………………….

…………………………………………………
Date: …………………………………………..
i
DECLARATION
I BARAKAELI S. MASSANGWA, declare that this research is the result of my own

findings to the best of my knowledge. This research has not been presented as a dissertation
or thesis in any higher institution within or outside the country.
Signature………………. ………………………..
Date……………………………………………...
ii
COPY RIGHT
©Barakaeli S. Massangwa, 2011.
All Rights Reserved. No part of this work may be reproduced, restored in any retrieval
system, or disturbed in any form or by any means: electrical, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the author’s or Tumaini
University Iringa College on behalf.
iii
DEDICATION
I dedicate this research paper to;
Rev. Solomon J. Massangwa (father) and Mrs. Janeth Massangwa (mother)
iv
ACKNOWLEDGEMENT
I would like to thank my almighty God for giving me peace, strength and health for all the
three years of my bachelor program. I also appreciate the strong support I always get from
my beloved parents Rev. S. Massangwa and Mrs. J. Massangwa. They have always been on
my side through support I have acquired especially in financial assistance and prayers.
I also acknowledge the support I always got from my teachers as they have been pouring
their knowledge to me for the fulfillment of my BBA-Economics program, not forgetting
my supervisor Mr. S. Mwakoko, our faculty dean.
I would also like to extend my gratitude to all my friends who have no doubt been of a great
support during my writing of this research.
Last but not least, all the research respondents who responded to my questionnaires and
interviews.
v
ABSTRACT
The general presentation of this research is divided into six chapters. Chapter one comprises
of: introduction to the study, background of the study, statement of the problem, research
objectives, conceptual frame work, limitations of the study and significance of the study.
The following were specific objectives of this research: To examine bank requirements for
the acquisition of their loans and the ability of SMEs to meet them, to determine banks
attitudes towards SMEs lending and lastly, to assess government efforts/contribution on
SMEs accessing CBLs for their growth and development.
Chapter two basically deals with literature review. It states what other scholars have said in
relation to this research objective. The chapter includes introduction, theoretical reviews and
empirical reviews.
Chapter three deals with the methods employed by the researcher in conducting the whole
research. It includes research design, respondent’s population, research sample, sampling
design and techniques, data collection methods and data analysis methods. The researcher
employed a descriptive research design where as questionnaires and interview were the tools
used to collect the primary data. Secondary data were collected from various scholars
publications.
Chapter four deals with research findings processing, analysis and presentations. In this
chapter, the research findings have been presented in table forms. The researcher also gives
a slit explanation of the presented table’s figures and their implications.
Chapter five deals with the discussion of the research findings as they are presented in
chapter four. They are discussed in relation to the specific research objectives.
Chapter six is comprised of conclusions and recommendations of the research finding in

relation to the general and specific research objectives. At the end, according to the research
findings, the researcher concluded that, accessibility of commercial bank loans to SMEs is
still a problem to majority of SMEs in Tanzania.
vi
LIST OF TABLES
TABLE PAGE No.
Table 01: CRDB SMES loan profile from 2006 to 2009…………………………….04
Table 02: Successful and unsuccessful SMES loan applicants……………………....14

Table 03: Capital invested in business………………………………….…………….15
Table 04: Application for bank loan………………………………………………….16
Table 05: Reasons to why some SMES don’t apply for commercial bank loans ……16
Table 06: SMES loan applicants with and without bank loan collateral …………….17
Table 07: SMES judgments on bank loan requirement conditions...............................18
Table 08: Banks requirements for acquisition of SMES loans…………………….....18
Table 09: A profile of SMES failing to meet bank loans requirements………………19
Table 10: Banks with and without separate units managing bank relations with SMES
………………………………………………………………………………………...20
Table 11: Factors affecting commercial banks lending to SMES…………………….21
Table 12: SMES loans performance in relation to other loan customers in terms of
profitability, risk and cost…………………………………………………………….22
Table 13: A profile showing banks with and without SMES lending risk assessment..23
Table 14: Commercial banks risk and cost control measures to SMES loans……..….23
Table 15: Banks with government SMES financing policy (2002) support towards
SMES lending ...............................................................................................................25
vii
LIST OF ABBREVIATIONS
CBL commercial bank loans

CRDB corporate and rural development bank
GDP gross domestic product
MFI micro financing institution
MITM ministry of industry, trade and marketing
NMB National micro finance bank
REDET research and education for democracy in Tanzania
SIDO small industry development organization
SME small and medium enterprises
SPSS statistical package for social sciences
URT United republic of Tanzania
viii
TABLEC OF CONTENT
Certification ............................................................................................................................i
Declaration..............................................................................................................................ii
Copy right..............................................................................................................................iii
Dedication...............................................................................................................................iv
Acknowledgement...................................................................................................................v
Abstract..................................................................................................................................vi
List of tables..........................................................................................................................vii
List of abbreviations.............................................................................................................vii
Table of content.....................................................................................................................ix
1.0 CHAPTER ONE...............................................................................................................1
1.1 Introduction.............................................................................................................................1
1.2 Background of the study........................................................................................................2
1.3 Statement of the problem.......................................................................................................4
1.4 Research objectives................................................................................................................5
1.4.1 General objective......................................................................................................5
1.4.2 Specific objectives:...................................................................................................5
1.5 Research questions:................................................................................................................5

1.6 Conceptual framework...........................................................................................................6
1.7 Limitations of the study..........................................................................................................6
1.8 Siginificance of the study.......................................................................................................7
2.0 CHAPTER TWO..............................................................................................................7
2.1 Literature review.....................................................................................................................7

2.2 Introduction.............................................................................................................................7
2.3 Theoretical review..................................................................................................................7
ix
2.4 Empirical review.....................................................................................................................9
2.4.1 Commercial bank requirements for acquisition of loans and the ability of SMES to
meet them..........................................................................................................................9
2.4.2 Commercial banks attitudes towards SMES lending.............................................10
2.4.3 Government contribution towards SMES lending.................................................10
3.0 CHAPTER THREE........................................................................................................12
3.1 Research methodology.........................................................................................................12

3.2 Introducton.............................................................................................................................12
3.3 Research design.....................................................................................................................12
3.4 Area of the study...................................................................................................................12
3.5 Population and sample size..................................................................................................12
3.5.1 Population...............................................................................................................12
3.5.2 Sampling size.........................................................................................................13
3.6 Sampling technique..............................................................................................................13

3.7 Data collection.......................................................................................................................13
3.8 Research instruments............................................................................................................13
3.8.1 Questionnaires........................................................................................................14
3.8.1.1 Completely open-ended questions...................................................................14
3.8.1.2 Closed questions..............................................................................................14
3.8.2 Interview.................................................................................................................14
3.9 Data analysis..........................................................................................................................15

4.0 CHAPTER FOUR..........................................................................................................15
4.1 Results and presentations.....................................................................................................15

4.2 Introduction...........................................................................................................................15
4.3 Primary data...........................................................................................................................15
4.3.1 Finding from smes..................................................................................................15
x
4.3.1.1 To examine bank requirements for the acquisition of their loans and the ability
of SMES to meet them.................................................................................................15
4.3.1.1.1 A profile of SMES who get and the ones who don’t get the applied CBL
..................................................................................................................................15
4.3.1.1.2 Capital invested in SMES businesses.......................................................16
4.3.1.1.3 Application for bank loan.........................................................................17
4.3.1.1.4 Reasons to why some SMES don’t apply for bank loans.........................18
4.3.1.1.5 A profile showing whether SMES had the required collaterals for bank
loan acquisition........................................................................................................18
4.3.1.1.6 The rate of SMES judgments on the bank loans requirements for the
acquisition of bank loans..........................................................................................19
4.3.2 Research finding from commercial banks..............................................................20
4.3.2.1 Banks requirements for acquisition of SMES loans........................................20
4.3.2.2 A profile of SMES failing to meet commercial banks requirements for loan
acquisition....................................................................................................................21
4.3.1.2 To determine commercial banks attitude towards SMES lending...................21
4.3.1.2.1 A profile showing whether commercial banks have SMES among their
customs and the kind of involvement they have with them.....................................22
4.3.1.2.2 A profile showing whether commercial banks have separate units dealing
with SMES relations................................................................................................22
4.3.1.2.3 A profile showing some driving factors which influence commercial

banks involvements with SMES..............................................................................22
4.3.1.2.4 A profile showing how SMES perform in relation to other bank customers
in terms of profitability, risky and cost....................................................................23
4.3.1.2.5 A profile showing whether commercial banks have risk assessments over
SMES lending..........................................................................................................24
4.3.1.2.6 A profile showing how commercial banks mitigate SMES loans risks and
costs..........................................................................................................................25
xi
4.3.1.3 Government contribution towards SMES lending...........................................27
4.3.1.3.1 A response from commercial banks on their relationship with the

government in supporting SMES lending................................................................27
4.3.1.3.2 A profile showing banks relationship with the government in supporting

SMES financing.......................................................................................................27
4.4 Secondary data......................................................................................................................28

4.4.1 Research findings from the MITM.........................................................................28
4.4.1.1 Vision...............................................................................................................28
4.4.1.2 Mission............................................................................................................28
4.4.1.3 Overall Objective.............................................................................................28
4.4.1.4 Policy Statement:.............................................................................................28
4.4.1.5 Strategies:........................................................................................................28
4.4.2 Finding from SIDO................................................................................................29
4.4.2.1 SIDO’S background.........................................................................................29
4.4.2.2 SIDO’S vision..................................................................................................30
4.4.2.3 SIDO’S mission statement...............................................................................30
5.0 CHAPTER FIVE............................................................................................................31
5.1 Discussion and implication..................................................................................................31

5.2 Introduction...........................................................................................................................31
5.3 Bank requirements for the acquisition of their loans and the ability of SMES to meet
them..............................................................................................................................................31
5.4 Commercial banks attitude towards SMES lending..........................................................32
5.5 Government efforts/contribution on SMES accessing commercial bank loans for their
growth and development............................................................................................................32
5.5.1 Achievements.........................................................................................................33
5.5.2 Setbacks..................................................................................................................33
xii
5.5.2.1 Finding from commercial banks on their relationship with the government in
supporting SMES lending............................................................................................33
6.0 CHAPTER SIX...............................................................................................................34
6.1 Conclusion and recommendations......................................................................................34

6.2 Introduction...........................................................................................................................34
6.3 Conclusion.............................................................................................................................34
6.3.1 Examining bank requirements for the acquisition of their loans and the ability of
SMEs to meet them.........................................................................................................34
6.3.2 Determining commercial banks attitudes towards SMEs lending..........................34
6.3.3 Assessing government efforts/contribution on SMEs accessing CBLs for their

growth and development.................................................................................................35
6.4 General conclusion...............................................................................................................35

6.5 Recommendations.................................................................................................................35
6.5.1 To commercial banks.............................................................................................35
6.5.2 To SMES................................................................................................................35
6.5.3 To the government (ministry of industry, trade and marketing)............................36
Reference...............................................................................................................................36
Appendix A............................................................................................................................38
Appendix B.............................................................................................................................40
xiii
1.0 CHAPTER ONE
1.1 INTRODUCTION
Countries are faced with the challenge of increasing provision of banking facilities to firms
and households alike. A well functioning banking sector can play an important role in
channeling resources to the best firms and investment projects. While large companies tend
to be well catered for, small enterprises often have to rely on their own funds. The access to
finance and the quality and cost of the service that small businesses receive from banks are
key to their profitability and prosperity (and that of the economy). For a household, the
implication of a lack of access to banking services is severe (P. Hawkins, 2006).
Small and Medium Enterprises (SME) contribute significantly to poverty eradication in the
world. Over thirty percent and up to sixty percent of the total employment in manufacturing
in many countries as defined by the World Bank are in SME’s firms that employ up to 250
staff hence termed SME (Ayyagari, Beck and Dermirguc; 2003).
The Tanzanian government recognizes the importance of SMEs to its economy and
associates SME with more equitable distribution of income and hence poverty alleviation (U
RT, MID, 2002).
Despite the efforts undertaken by the government and non governmental institutions as an
attempt to simplify accessibility of bank loans to SMEs, Wattanapruttipaisan (Vol. 20, No.
2, December 2003) stated that; SMEs are of great socio-economic significance although
their long-term growth and competitiveness has been compromised by the chronic and often
acute constraints on their access to formal sector finance, among other systemic and
institutional problems in developing countries like Tanzania . Thus, this study investigates
some of the problems associated with SMEs accessing loans from commercial banks.
1
1.2 BACKGROUND OF THE STUDY
Tanzania remains one of the poorest countries in the World. Gross domestic product (GDP)
was estimated to be US$ 22.434 billion and a GDP per capita of US$ 543 in 2010.
Tanzania's economy is expected to grow by 6.7 percent in 2011, compared with an estimated
6.2 percent in 2010, an anticipated pick up in global and sub-Saharan African growth.
Small to medium enterprise play a very crucial part in the economy of Tanzania. SME
operating in Tanzania informal sector, account for 47 percent of the country’s GDP and
employs around 42.24 percent of the labour force. Formal SME account for about 17 percent
of the country’s GDP and employs around 32.10 percent of the labour force (Beck, D. Kunt,
Levine and Maksimovic, 2003).
Micro financing institutions (MFIs) are one among crustal components of any economy.
According to Prof. Suleman, Chambo,1 “Tanzania is a microfinance country”. He goes on to
justify this by stating that out of a total population of approximately 35 million people;
almost 16 million are regarded as poor since they depend mainly on smallholder subsistence
farming. In order for this lot to sustain their small microenterprises, they need financial
services suited for this kind of economic activity, namely microfinance.
It’s been long now ever since the government of Tanzania noted the importance of
microfinance in the country. Despite its notation, the government has attempted to undertake
some measures so as to promote microfinance (MF). According to Kore, ( 2005); it was not
until February 2001 that the National Microfinance Policy was launched. The key objective
of the policy was to establish a basis for evolution of an efficient and effective micro finance
system that served the low-income segment of the society. Among other things, it also spelt
out the national vision for the development of Micro finance as a tool for poverty eradication
through the widespread access to micro financial services right across the country, in both
urban and rural areas, on a commercially sustainable basis, thereby contributing to the
economic growth of this nation. The government has also made some efforts on developing
1
At the Third Annual National Conference on Microfinance held in Arusha in March, 2004, Principal, The
Moshi University College of Cooperative and Business Studies, opens with this sentence.
2
the sector.2 From the year 1999 to 2004, the World Bank has approved over US $ 10 billion
in support of SME activities (Beck, D. Kunt and Levine, 2004).
For a better and strong economy, the two3 very important economic factors should be
brought together. Evidence suggests that access to finance plays a very important role in the
overall business environment, potentially constraining both entry and growth (Beck and D.
Kunt, 2006). Some of the sources of finance are the banks.
But there still seems to be a strong fog 4 between the two5 interdependent and crucial
economic components leading to the inaccessibility between them. As the US literature
(Carey et al, 1993; Berger and Udell, 1996), indicate, it is still unclear how much SMEs in
developing countries would be able to rely on banks to obtain those products.6
Despite the hardships faced by SMEs as they attempt to access bank loans, of which most
time they lead to inaccessibility of the bank loans to them, there still exist some more
opportunities for SMEs to access more bank loans. This is possible if the problems are
investigated in depth and proposed solutions get to be addressed by the particular
stakeholders.
Therefore, this study attempts to investigate some of the problems faced by SMEs as they
attempt accessing commercial bank7 loans in Arusha town. The study will concentrate on
trying to answer the research questions as stated on page number five.
1.3 STATEMENT OF THE PROBLEM

Despite the importance and positive contribution of SMEs to the growth of the Tanzanian
economy, enough has not been done by the government and commercial banks who are the
key stakeholders in supporting SMEs solving their huge constrain of commercial bank loan
2
Small to Medium Enterprise
3
Small to Medium Enterprise and Microfinance Institutions
4
A state of confusion, in which things are not clear, (oxford advanced learners dictionary 6 th edition).
5
Small to Medium Enterprise and Microfinance Institutions
6
Loans secured by certain forms of collateral.
7
As one among many components of MFIs
3
inaccessibility for their growth. Studies indicate that in a list of SMEs applying for bank
loan; merely fifty percent or more fail to access the loan, Pandula, (2011).
It is obvious that commercial banks have been extending more and more loans to SMEs
every year, for example CRDB8 (see on table 1 below) Shambwe, (2009). Also, the
Tanzanian government has recognized that SME development is crucial to the development
of the Tanzanian economy and thus addressed the ministry of industry, trade and marketing
(MITM) to take the overall responsibility of coordinating and implementing the SME
Development Policy of 2001 which states, the Government will promote entrepreneurship
development through facilitating improved access of SMEs to financial and non-financial
services, (MITM, 2002).
Despite the various efforts taken by the government and banks, there still is a big problem of
SMEs accessing bank loans. Studies have highlighted the limited access to financial
resources available to smaller enterprises compared to larger organizations and the
consequences for their growth and development Mushi, (2007). Most studies have been
investigating the problem of bank loan inaccessibility to SMEs on the demand side and little
has been exploited on the supply side, this indicates a gap of knowledge on the supply side.
If this problem is not well investigated and addressed especially on the supply side, the
Tanzanian economy is likely to lag behind in its growth since SMEs contributes almost fifty
percent of its economy. Therefore, this study aimed at investigating the problem of
inaccessibility of commercial bank loans to SMEs on the supply side.
TABLE 01: CRDB SMES LOAN PROFILE FROM 2006 TO 2009
Year
Details
2006 2007 2008 April 2009
No. of Loans
440 1,420 2,463 3,136
processed
8
A big and wide covering bank in Tanzania
4
Approved Loans
5.6mn 22.3mn 44.5mn 50.7mn
(USD)
1.4 RESEARCH OBJECTIVES
1.4.1 GENERAL OBJECTIVE

The main objective of this research was to assess the accessibility of SMEs to commercial
bank loans for enterprise development or growth.
1.4.2 SPECIFIC OBJECTIVES:

 To examine bank requirements for the acquisition of their loans and the ability of
SMEs to meet them.
 To determine banks attitudes towards SMEs lending.
 To assess government efforts/contribution on SMEs accessing CBLs for their growth

and development.
1.5 RESEARCH QUESTIONS:

 What are the bank requirements so as to access their loans; and do SMEs have the
ability to meet the bank requirements?
 What are the banks attitudes towards SMEs lending?
 What are the Government efforts/contributions on SMEs accessing CBLs for their
growth and development?
1.6 CONCEPTUAL FRAMEWORK

For an enterprise to exist or survive, it requires some financial assistance whether it is in its
initial stage or for its expansion for an existing one. These funds can either be from the
enterprise owner, shareholders or a loan from a financial institution like commercial banks.
Basically, because majority of the Tanzanians are said to be poor (E.P. Mkwawa, 2008), this
means majority do depend on external sources of funds to initialize and run their SMEs.
5
Commercial banks are some of the major sources of funds as loans to Tanzanian SMEs.
Their effective lending to SMEs can lead to a great impact on the growth of the Tanzanian
economy.
But on the other hand, SMEs face great challenges on trying to access commercial bank
loans for their development and thus the development of the whole economy at large, E. K.
Bbenkele (2007).
Therefore, this study was seeking to investigate some issues going between SMEs and
commercial banks which might be leading to the inaccessibility of commercial bank loans to
SMEs and the government contribution on solving the problem as it fulfills the SMEs’
development policy of 2002 under the MITM.
1.7 LIMITATIONS OF THE STUDY

The following were expected limitations associated to the study:
 Insufficient time; this was due to the limited timetable of the researcher during the
planned academic research period.
 Data inaccessibility; this was expected because most of the government institutions
and banks are reluctant in publishing their information which are to date to the fullest
exposure.
 Irresponsible respondents; some respondents are normally reluctant in responding to

the data collection methods used.
1.8 SIGINIFICANCE OF THE STUDY

This study is aimed at making the following contribution:
 Contribution of additional knowledge to SMEs, commercial banks, researchers in

related studies and other stakeholders in this particular field.
 Suggesting measures to be taken by the research respondents with respect to the

research objective so as to attain economic growth and development of the nation.
6
2.0 CHAPTER TWO
2.1 LITERATURE REVIEW
2.2 INTRODUCTION
This chapter discuses theoretical and empirical results and opinions of other scholar’s
finding in their literatures. It includes theories on SMEs lending and empirical discussions
and findings related to this particular research objectives.
2.3 THEORETICAL REVIEW
A company can either be funded by a debt or equity. Under its assumptions, the leverage
theory states; the average cost of capital decreases with the use of leverage and the value of
the firm (the value of the debt and equity combined) increases while the value of the equity
remains constant. Modigliani and Miller (1963) argued against the leverage theory stating
that this was not the case. In their analysis, one of their conclusions was that, since the
government is a business partner with business people (as far as the corporate tax is
7
considered), if it reduces the tax burden to companies, the leverage costs will be lowered (as
more income can be used to repay the debt). Daniel et al (2006) pointed out that in the case
of SMEs, the expected costs of bankruptcy is quite high; therefore if this is done to SMEs, it
will reduce the bankruptcy threat to banks when SMEs apply for loans to them. This also
paves a new idea to the Tanzanian government as an addition way of supporting SMEs. But
Andree and Kallberg (2008) found out that this type of tax shield is not appropriate to SMEs
because majority do not have enough profits which can lead to visible funds from the tax
shield and attract them to borrow more from banks. This implies that SMEs should rely on
their own source of financing which is often adequate.
According to Stiglitz and Weiss (1981) agency problems such as asymmetric information
and moral hazards can impact on the availability of credit to SMEs. They termed this
condition as credit rationing. This argument is based on the fact that suppliers of finance
such as banks may choose (due to asymmetric information, adverse credit selection and
monitoring problems) to offer a collection of different interest rates that would leave a
significant number of potential borrowers without access to credit. This implies that, banks
may have negative attitudes towards lending to their stakeholders. The Stiglitz and Weiss’
theory therefore suggests that there is a good number of SMEs that could use funds
productively if they were available, but cannot obtain finance from the formal financial
system such as commercial banks.
G. Pandula, (2011), also pointed out contract enforcement problem to be another cause of
credit rationing which eventually leads to insufficient funds to all the needy (as far as SMEs
are concerned). This problem is likely to affect most of the developing countries like
Tanzania which are not well equipped to legal facilities. In these countries, property
verification and ownership are weak. Hence, the main reason for the contract enforcement
problem is the poor development of property rights. Although the author did not point out
this problem directly to SMEs, but in real situation, SMEs are the victims of this problem
8
compared to large firms. This is because majority of them are said to lack loan supportive
instruments like collaterals.
2.4 EMPIRICAL REVIEW
2.4.1 COMMERCIAL BANK REQUIREMENTS FOR ACQUISITION OF LOANS

AND THE ABILITY OF SMES TO MEET THEM
The main problem facing the development of small and medium enterprises in both
developed and developing countries is finance and this has been supported by the work of E.
Bbenkele, (2007). He further stated that SMEs are reported to be requested the following by
commercial banks: To Keep their accounts in order and maintain a positive cash flow, invest
more time to know bank loan requirements and provide the required information by banks,
SMEs need to maintain an open communication with banks in both situations when the
SMEs are doing well or when they are in difficulties, and generally SMEs need to be honest
in how they conduct their financial transactions by managing their cash flow to reduce
unwanted overdraws on their accounts. Apart from the above motioned bank requirements,
many studies indicate that lack of collaterals, poor financial statement records and a
maintained bank account with a good cash flow to be major problems SMEs encounter as
they try to access commercial bank loans. And this is not only in Tanzania but worldwide.
For example T. M. Obamuyi (2007), found out that; the major reasons attributable to the
SMEs that have made accessibility to credit difficult include, although not limited to, poor
credit worthiness (41.7 per cent), lack of collateral security (33.3 per cent), poor project
package (33.3 per cent), lack of adequate record (25.0 per cent) and high risk (25.0 per cent).
All these problems have combined in several ways to make lending to the SMEs sector very
difficult by the commercial banks.
However, T. Obamuyi also stated that, on the supply side, lending to SMEs are constrained
due to largely regulatory/market requirements and the soundness of the banking sector. He
also found out that the supply of loan able funds by banks depends on the soundness of the
sector and based on the various regulatory requirements like Capital Adequacy Ratio (CAR),
9
Reserve Requirements (RR), Liquidity Ratio (LR), Interest Rate Developments (IRD) and
the lending policies of the banks. These requirements have varied degrees of influence on
the amount of money available for lending by the banks. For instance, Obamuyi further
found that, as at 2005, based on capital adequacy and other rating parameters, fifty two
banks were rated sound/satisfactory, while thirty four (34) were rated marginal/unsound
2.4.2 COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING

For an effective relationship to exist, leading to mutual benefit, there are certain roles
expected from the partners in the relationship to determine the nature of the benefits to be
realized Binks et al (1992). For this case, both SMEs and commercial banks have to meet
the required criteria so that both sides to be served appropriate. E. Bbenkele, (2007) points
out that the nature of bank and SME relationship is that the commercial banks tend to
operate without a good knowledge of needs and how the SMEs run their businesses. The
reasons forwarded for this are that the clients are regarded as high risk and unprofitable.
This is evidence that commercial banks have a negative attitude towards SMEs lending. But
on the other hand, R. Shambwe,9 (2009) pointed out that basically, according to their survey;
they revealed that SME segment is a risk one however profitable.
In addition, weak banking tradition might cause suboptimal behavior of the lenders who
might consider profit-maximization that requires administration of a larger number of
smaller loans administratively too costly or simply too troublesome to deal with, and thus
prefer to administer fewer larger loans, thereby displaying ‘negative attitude’ towards small
lending, D. Czira´ky, S. Tisˇma and A. Pisarovic, (2004).
2.4.3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING

The Tanzanian government has engaged it’s self in supporting SMEs by setting out policies
to help them. But on the other hand, Ellid and Pecotich, (2001) argued that overall policies
on SMEs in sub-Saharan Africa are more macro-economic policies that somehow do not
benefit the development of SMEs. Borgarello, Marignani, and Sande, (2004) also stated that
9
A bank official in Tanzania
10
there is no explicit policy in favor of SMEs; the government should act directly by
developing them.
But at the end, E. Bbenkele, (2007) recommends that further information is needed to assist
both banks and SMEs to build long term profitable business relationships.
3.0 CHAPTER THREE
3.1 RESEARCH METHODOLOGY
3.2 INTRODUCTON
This chapter outlines the methods that were used by the researcher in order to attain the
objectives of the research. The chapter therefore explains about: research design, area of the
study, population and sample, sampling techniques, data collection methods and data
analysis.
3.3 RESEARCH DESIGN

Descriptive design is the type of research design used for this study. Due to the limitations
of economic resource such as time and finance to the researcher, the research was conducted
as a case study. Its results were expected to reflect how the real situation is to majority of
Tanzanian SMEs as they try to access commercial bank loans for their development.
11
3.4 AREA OF THE STUDY
The study was carried in Arusha municipal located in Arusha region northern Tanzania. This
is because the area is comprised with enough number and with full characteristics of the
research variables/respondents. The town is a host to commercial bank branches of almost
all commercial banks in Tanzania. There are also a good number of SMEs with various
characteristics in terms of number of employees, amount of capital employed and sales.
There is also a regional library and universities with libraries where secondary data was
acquired. Government officials responsible to the ministry of industry, trade and marketing
were also available in the town at the regional office.
3.5 POPULATION AND SAMPLE SIZE
3.5.1 POPULATION
The study aimed to collect data from the following population: SMEs in Arusha municipal,
commercial banks in Arusha municipal and government officials’responsible to the ministry
of industry, trade and marketing in Arusha. According to Arusha time (23 April 2011),
Arusha hosts nearly twenty (20) commercial banks outlets. For SMEs, Arusha municipal
council business department points out that, there are merely more than one thousand
registered SMEs in Arusha municipal. For MITM, there were seven officials responsible to
the MITM.
3.5.2 SAMPLING SIZE

Due to the limitation of time and financial constrains, it was difficult to extract data from the
whole population. Therefore, a sample was required from the existing population. From the
above stated population, the following sample was extracted: From SMEs; sixty SMEs
owners were expected to be questioned but only twenty nine responded positively, from
commercial banks; six commercial banks were selected but only five of them responded to
the questionnaires and from MITM; two officials were to be interviewed but only one was
interviewed.
12
3.6 SAMPLING TECHNIQUE
To obtain the sample variables from the population, the study employed the following
sampling techniques; a simple random sampling technique (under the probabilistic sampling
method) and purposive sampling technique (under the non-probabilistic sampling method).
Simple random technique was used to select SMEs and commercial banks. Purposive
technique was used to get the officials who are responsible to the MITM and commercial
bank officials who are concerned with the research problem.
3.7 DATA COLLECTION

The study included both primary and secondary data. Secondary data was collected from
different: books, journals, papers, presentations and articles, publications from the internet
and other supporting documents and records from the research respondents. Primary data
was collected from all the research respondents (officials responsible to the MITM, SIDO,
bank officials and SMEs owners). Below are research instruments which were be used to
collect primary data.
3.8 RESEARCH INSTRUMENTS

The following research instruments/tools were applied as for this research:
3.8.1 QUESTIONNAIRES
Prepared set of questions were distributed to the randomly selected SMEs and purposive
selected bank officials. Sixty copies of questionnaires were distributed to SMEs owners and
six copies to each of the six commercial bank. The respondents were briefed on what the
questionnaires were all about and on how to undertake them. They had to go through the
questions, understand them (ask the researcher questions where required) and answer them
appropriately. See a sample of questionnaires at appendix B.
The Questionnaires included the following formats:
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3.8.1.1 COMPLETELY OPEN-ENDED QUESTIONS
Open-ended questions permitted free responses which recorded in the respondents’ own
words. Such questions were useful for obtaining in-depth information on: facts with which
the researcher was not very familiar, opinions, attitudes and suggestions of informants, or
sensitive issues.
3.8.1.2 CLOSED QUESTIONS

Closed questions had a list of possible options or answers from which the respondents were
able to choose their appropriate choices of answers.
3.8.2 INTERVIEW
A semi-structured type of interview was employed in this study. In it, the researcher had a
worked out set of questions beforehand, but intended the interview to be conversational. To
do so, the researcher was able to change the order of the questions or the way they were
worded. The researcher also gave explanations or left out questions that appeared to be
redundant. So, the main job was to get the interviewee to talk freely and openly while
making sure the in-depth information on the research problem was obtained.
This type of tool was applied to the officials responsible to the MITM at Arusha regional
office and to SIDO official, Arusha branch.
3.9 DATA ANALYSIS

After all the data had been collected, data analysis was conducted after processing the
primary data. Primary data was processed with the help of computer program named SPSS.
After processing the primary data, they were presented in table forms. Data analysis was
then conducted including both, primary and secondary data. At the end, the results were
discussed leading to conclusion and recommendations.
14
4.0 CHAPTER FOUR
4.1 RESULTS AND PRESENTATIONS
4.2 INTRODUCTION
This chapter comprises of the research findings, analysis and presentation of the research
finding from the research respondents and from secondary sources.
4.3 PRIMARY DATA
4.3.1 FINDING FROM SMES
4.3.1.1 TO EXAMINE BANK REQUIREMENTS FOR THE ACQUISITION OF

THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM
The aim of the above objective was to answer the research questions stating; “What are the
bank requirements so as to access their loans; and do SMEs have the ability to meet the bank
requirements?”
The following are research finding in relation to the above objective.
4.3.1.1.1 A PROFILE OF SMES WHO GET AND THE ONES WHO DON’T GET
THE APPLIED CBL
15
The following is a table showing the respondents results as to the ones who got and the ones
who didn’t manage to get the commercial bank loans after their applications.
Table 02: SUCCESSFUL AND UNSUCCESSFUL SMES LOAN APPLICANTS
Cumulative
Frequency Percent Valid Percent Percent
YES 4 13.8 13.8 13.8
NO 6 20.7 20.7 34.5
I have never applied for a bank

19 65.5 65.5 100.0
loan
Total 29 100.0 100.0
Source: Research data (2011)
Out of all respondents, 13.8% are the ones found to have got the applied loans while 20.7%
appeared to have failed to access their applied loans. The rest of the applicants/percent are
the ones who did not applied for the bank loan, 65.5%. Therefore, out of the ones who
applied for the loans, only 40% got the loans while 60% failed to accesses the loans.
The aim of this question was just to portray the general profile of the real situation of
accessibility of commercial bank loans to SMEs.
4.3.1.1.2 CAPITAL INVESTED IN SMES BUSINESSES

The following data was collected in viewing of how much capital was invested in to the
responding SMEs. The table below shows the response from the respondents.
Table 03: CAPITAL INVESTED IN BUSINESS
Frequency Percent Valid Percent Cumulative Percent
1 to 5 million 13 44.8 44.8 44.8
6 to 10 million 9 31.0 31.0 75.9
Above ten million 7 24.1 24.1 100.0
Total 29 100.0 100.0

16
The findings show majority of the SMEs were found to have invested an average of 1 to 5
million where as 44.8% where found to cover this interval of capital invested, 31% where
found to have invested an average of 6 to 10 million of capital and only 24.1% where found
to have invested above ten million. According to the questionnaires, majority of the ones
with above ten million had specified their investment to have covered an average of a range
between 30 to 90 million.
Without sufficient capital, small firms are unable to successfully compete and often face
difficulties in meeting banks requirements for financing, especially during periods of high
capital demand and yet it is capital that provides firms the slack to experiment with new
strategies and innovative projects (Coleman, 2000; Wiklund and Shepherd, 2005). In fact,
several studies confirm that poor capitalization is a leading cause for small firm failure (see
for example, Coleman, 2000 and Carter and Van Auken, 2006).
This implies, because majority of SMEs are found to invest small amount of capital in their
business, therefore majority also fail to meet bank requirements for the acquisition of the
loans for their development.
4.3.1.1.3 APPLICATION FOR BANK LOAN
This part targeted to find out what proportion of SMEs applies for commercial bank loan for
their growth and development. The following are the respondent’s findings.
Table 04: APPLICATION FOR BANK LOAN
YES 10 34.5 34.5 34.5
NO 19 65.5 65.5 100.0
Total 29 100.0 100.0
17
The findings shows that majority of the SMEs don’t go for commercial bank loans. The
results show that only 34.5 % of SMEs go for commercial bank loan while 65.5% don’t.
The reasons to why some SMEs don’t apply for commercial bank loans as results show in
the above finding are stated in the following question below.
4.3.1.1.4 REASONS TO WHY SOME SMES DON’T APPLY FOR BANK LOANS
The following are some results as to the reasons why some SMEs don’t apply for
commercial bank loans.
Table 05: REASONS TO WHY SOME SMES DON’T APPLY FOR COMMERCIAL BANK LOANS
Cumulative
I can’t meet the Bank

14 48.3 48.3 48.3
requirements
I don’t need a bank loan 4 13.8 13.8 62.1
I don’t know how to get a Bank

5 17.2 17.2 79.3
loan
Had once applied for a bank

6 20.7 20.7 100.0
loan
Total 29 100.0 100.0
Out of the while sample of respondents, 48.3% do not apply for bank loans because they
cannot meet the bank requirements, 13.8% are not in need of commercial bank loans, 17.2%
18
do not know how to get the bank loans and 20.7% had once applied for the loans but did not
manage to access them.
From the open ended questions which asked the respondents if they knew the bank
requirements for the acquisition of the loans, 85% of them appear to be aware of the
requirements.
Therefore, upon their own judgments and evaluation of their own values, 48.3% disqualify
themselves to be able to meet the required bank conditions so as to acquire the loans.
4.3.1.1.5 A PROFILE SHOWING WHETHER SMES HAD THE REQUIRED

COLLATERALS FOR BANK LOAN ACQUISITION
The following are the finding to whether SMEs could meet the required collaterals for the
acquisition of commercial bank loans.
Table 06: SMES LOAN APPLICANTS WITH AND WITHOUT BANK LOAN COLLATERAL
Cumulative
YES 4 13.8 13.8 13.8
NO 7 24.1 24.1 37.9
Had never applied for a bank

18 62.1 62.1 100.0
loan
Total 29 100.0 100.0
The finding shows that, only13.8% of SMEs tends to have the commercial bank loans
collaterals required for the acquisition of loans and 24.1% don’t have the required
collaterals. The rest, 62.1% never applied for the bank loans.
19
For this reason, it is open that majority of SMEs are subjected to commercial bank
requirements which are out of their standard (higher level) to the extent that they cannot
afford the requirements leading to failure of majority SMEs applicants of commercial bank
loans.
4.3.1.1.6 THE RATE OF SMES JUDGMENTS ON THE BANK LOANS

REQUIREMENTS FOR THE ACQUISITION OF BANK LOANS
The following are the finding on how SMEs judge the bank conditions kept forth so as to
acquire a bank loan.
Table 07: SMES JUDGMENTS ON BANK LOAN REQUIREMENT CONDITIONS
Very difficult 11 37.9 37.9 37.9
Difficult 15 51.7 51.7 89.7
Simple 3 10.3 10.3 100.0
Total 29 100.0 100.0
Majority of the SMEs found the bank conditions to be difficult to be met. Among the
respondents, 37.9% found the conditions to be very difficult and 51.7% found it to be
difficult. But on the other hand, only 10.3% found the requirements to be simple.
20
4.3.2 RESEARCH FINDING FROM COMMERCIAL BANKS
4.3.2.1 BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS

The following are responses of commercial banks as they answered a question “what are
your main requirements for SMEs lending?”
Table 08: BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS
No. BANK A BANK B BANK C BANK D BANK E
1 At least a three Proceeding A business Business Brief business

years operating business. that is license. plan with
business. operating for projections.
at least three
years.
2 A legal business Registered and A business Business plan. Asset account

(certified and at least three complying performance
licensed). years operating with statistics.
business. regulatory
authorities.
3 Financial Securities. Possession of Financial Securities.

statements for the fixed assets statements.
past three years. for securities.
4 Business plan and Good history A business Certificate of Valuations.

cash flow in the bank. must be registration.
projection. banking with
as for at least
a year.
5 Bank statement Annual Resolution to

for the past six financial borrow.
months. statements.
21
The table above shows commercial bank requirements according to the research
respondents. These are the conditions which majority of the SMEs tend to judge them to be
difficult to meet. As the tables above shows, most of the requirements are difficult to be
fulfilled by majority of SMEs which are informally conducted (putting apart the fixed asset
requirements).
4.3.2.2 A PROFILE OF SMES FAILING TO MEET COMMERCIAL BANKS

REQUIREMENTS FOR LOAN ACQUISITION
The following are finding from commercial banks responding to what percent of SMEs fail
to meet their requirements when applying for their loans.
Table 09: A PROFILE OF SMES FAILING TO MEET BANK LOANS REQIREMENTS
0% to 30% 2 40.0 40.0 40.0
31% to 60% 2 40.0 40.0 80.0
61% to 90% 1 20.0 20.0 100.0
Total 5 100.0 100.0
The results show that 40% of commercial banks have a range of 0% to 30% of SMEs failing
to meet the bank requirements. Another 40% of commercial banks have a range of 31% to
60% SMEs failures while 20% of them have a range of 61% to 90% of SMEs failures.
This means 80% of commercial banks have an average of more than 50% SMEs failing to
meet their requirements for the loans. This is still a huge rate of failure among SMEs.
4.3.1.2 TO DETERMINE COMMERCIAL BANKS ATTITUDE TOWARDS SMES

LENDING
22
4.3.1.2.1 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE
SMES AMONG THEIR CUSTOMS AND THE KIND OF INVOLVEMENT THEY
HAVE WITH THEM
The results show that, 100% of the respondents have SMEs as part of their clients. Apart
from been their clients, 100% of the respondents were also found to offer both; bank deposit
accounts service and loan products to SMEs.
This shows commercial banks have a positive attitude towards SMEs lending as them being
their customers (just like other customers).
4.3.1.2.2 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE

SEPARATE UNITS DEALING WITH SMES RELATIONS
The following are results showing whether the respondents (commercial banks) have
separate administrative units dealing with SMEs relationships with them.
Table 10: BANKS WITH AND WITHOUT SEPARATE UNITS MANAGING BANK RELATIONS WITH SMES
YES 4 80.0 80.0 80.0
NO 1 20.0 20.0 100.0
Total 5 100.0 100.0
The results shows that, 80% of the respondents have separate units dealing with SMEs
relations while 20% of the respondents do not have special units managing their
relationships with SMEs.
This shows majority of commercial banks have a positive attitude towards their relations
with SMEs. Most of them have a separate unit to manage their relations with SMEs.
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4.3.1.2.3 A PROFILE SHOWING SOME DRIVING FACTORS WHICH
INFLUENCE COMMERCIAL BANKS INVOLVEMENTS WITH SMES
The following are results showing how significance some factors are in driving commercial
banks involvements with SMEs. These factors include: perception of profitability in the
SME segment, intense competition with large corporation and intense competition with
retail customers. The following are finding of the five respondents (commercial banks).
Table 11: FACTORS AFFECTING COMMERCIAL BANKS LENDING

TO SMES
Not significant Extremely significant
significant /crucial
Perceived profitability in 0% 60% 40%
the SME segment
Intense competition for 40% 40% 20%

large corporates
Intense competitions for 40% 60% 0%
retail customers
The table above shows that, 100% of commercial banks involve themselves with SMEs
because they perceive them to be profitable. In this segment, 40% find this factor to be
extremely significant. When considering competence with large corporate, 40% term it to be
not significant while 60% term it to be significant (within the 60%, 20% term it to be
extremely significant). When considering competence with retail customers, 40% find it to
be not significant while 60% term it to be significant.
The above findings show that commercial banks perceive SMEs to be very profitable
customers and it is one of the major factor driving their involvement with them. But on the
other hand, SMEs loans are affected by large corporate and other retail customers. This
24
implies that, when it comes to competition, SMEs loans compete with the same chance with
other bank customers. Therefore, commercial banks offers SMEs an equal chance with other
customers when applying for loans, in other words, there are no priorities.
4.3.1.2.4 A PROFILE SHOWING HOW SMES PERFORM IN RELATION TO

OTHER BANK CUSTOMERS IN TERMS OF PROFITABILITY, RISKY AND
COST
The following are respondent’s results showing how SMEs perform in relation to other
commercial bank customers in terms of profitability, risky and costs.
Table 12: SMES LOANS PERFORMANCE IN RELATION TO OTHER LOAN

CUSTOMERS IN TERMS OF PROFITABILITY, RISK AND COST
SME loans are less … SME loans are SME loans are more
than others equally ... to others …
than others
Profitable 0% 20% 80%
Risky 60% 20% 20%
Costly 40% 60% 0%
The finding shows that 20% of commercial banks are found to rate SMEs loans to be
equally to other loan customers in terms of profitability while 80% were found to rate SMEs
loans to be more profitable than other loan customers. In terms of risky, 60% of commercial
banks rates SMEs loans to be less risky than other loan customers and 20% rate them to be
equally to other loan customers while the other 20% find them to be more risky than other
loan customers. When considering costs, 40% of commercial banks rate SMEs loans to be
less costly than other loan customers while 60% of commercial banks rate them to be with
equal cost to other loan customers.
25
The above findings shows that majority of commercial banks consider SMEs loans to be less
risky than loan customers. But when considering the measures they employ to overcome the
risk (table 14), it is obvious that they treat SMEs loans like very risky loans to them.
4.3.1.2.5 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE RISK

ASSESSMENTS OVER SMES LENDING
The following are the results showing whether commercial banks have risk assessment over
SMEs lending to them.
Table 13: A PROFILE SHOWING BANKS WITH AND WITHOUT SMES LENDING RISK ASSESSMENT
Yes 4 80.0 80.0 80.0
No 1 20.0 20.0 100.0
Total 5 100.0 100.0
The results shows that 80% of commercial banks do make some risk assessment of SMEs
lending to them while 20% of the commercial banks don’t conduct risk assessments of
SMEs lending.
Risk is one among factors affecting SMEs financing. According to Cassar, (2004) risk
appears to be one of the causes for the failure to establish sufficient financing from
26
commercial banks. For example, higher risk firms have greater difficulty in obtaining capital
form banks than lower risk firms and must seek for other sources of financing.
Below is a profile showing how commercial banks try to mitigate SMEs loans risk.
4.3.1.2.6 A PROFILE SHOWING HOW COMMERCIAL BANKS MITIGATE SMES

LOANS RISKS AND COSTS
The following are results of how commercial banks control risks and costs of SMEs loans.
Table 14: COMMERCIAL BANKS RISK AND COST CONTROL MEASURES TO SMES LOANS
No. BANKS RISK COST
1 BANK A Proper documentation of the Introduction of processing fees and

collaterals (legal mortgage & all legal and other costs are taken by
comprehensive insurance of the borrower before loan disbarment.
collateral & stocks)
2 BANK B All costs are directed to the

customers and not the bank.
3 BANK C Making sure that loans are secured Well planed and organized man
by strong collaterals. power to execute operations and
processing loans at efficiency &
effectively at reasonable costs.
4 BANK D Perfect and registered securities

and permanent physical address.
5 BANK E Lending to specific industry which SMEs are prized at higher interest
is profitable. rates.
With reference to the above measures kept forth so as to undertake SMEs loans risk, it is
obvious that commercial banks term SMEs as very risky customers. The conditions imposed
act as a barrier to most SMEs in accessing loans. As it has been seen above, most SMEs are
conducted informally. With reference to the above measures, commercial banks have a
negative attitude towards SMEs loans. This is because these measures are away far with
reference to how SMEs conduct their business.
27
When considering the way commercial banks control SMEs loan costs, the measures taken
are also directed to the customers (SMEs). This adds a burden to SMEs, increasing the cause
of their failure to access commercial bank loans.
4.3.1.3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING
4.3.1.3.1 A RESPONSE FROM COMMERCIAL BANKS ON THEIR

RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING
4.3.1.3.2 A PROFILE SHOWING BANKS RELATIONSHIP WITH THE

GOVERNMENT IN SUPPORTING SMES FINANCING
The following are results showing the presence of government efforts in supporting
commercial bank loans to SMEs in relation to the government’s SMEs financing policy of
2002. The results are answers from the question; “Does the existence of government SMEs
financing policy (2002) facilitate your bank SME lending?”
28
Table 15: BANKS WITH GOVENMENT SMES FINANCING POLICY (2002) SUPPORT TOWARDS SMES
LENDING
Yes 2 40.0 40.0 40.0
No 3 60.0 60.0 100.0
Total 5 100.0 100.0
From the results above, 40% of commercial banks are the ones experiencing the government
efforts in supporting SMEs lending while the rest 60% of commercial banks are completely
not connected to any government activities in supporting SMEs financing.
The 40% of the commercial banks have stated the following programs to be related to them
with the government in supporting SMEs financing:
1. “Juhudi loans”.
2. Agro-inputs loans and
3. “Kilimo kwanza program”
This shows that, the government implementation of the SMEs development policy of 2002
on SMEs financing is not well implemented on helping SMEs acquire commercial bank
loans for their development.
4.4 SECONDARY DATA
4.4.1 RESEARCH FINDINGS FROM THE MITM

The objective of the National Vision 2025 is to transform the predominantly agricultural
economy to a semi-industrialized one. The SME sector has a significant role to contribute
towards attaining this goal.
The following are the vision, mission and general objective of the SMEs development policy
(2002).
4.4.1.1 Vision
The vision of the SME Development Policy is to have a vibrant and dynamic SME sector
that ensures effective utilization of available resources to attain accelerated and sustainable
growth.
29
4.4.1.2 Mission
The mission of this Policy is to stimulate development and growth of SME activities through
improved infrastructure, enhanced service provision and creation of conducive legal and
institutional framework so as to achieve competitiveness.
4.4.1.3 Overall Objective

The overall objective of this policy is to foster job creation and income generation through
promoting the creation of new SMEs and improving the performance and competitiveness of
the existing ones to increase their participation and contribution to the Tanzanian economy.
One of the key areas which were stated to be dealt with was the SMEs financing issue. The
policy stated it clear that it aimed to developing strategies that will facilitate provision of
financial and nonfinancial services to SMEs.
The following is the policy statement and its strategies:
4.4.1.4 Policy Statement:

The Government will enhance financial reforms aimed at further liberalization of the
financial sector and the creation of financial intermediaries to cater for SMEs.
4.4.1.5 Strategies:
To take care of this concern the following strategies where to be implemented:-
 Promote transferring lessons and good practices from traditional financing

mechanisms into suitable financial products for financing SMEs
 Facilitate opening up of SME windows in financial Institutions.
 Promote innovative financial products for SMEs such as hire purchase scheme,
leasing, inventory financing, venture capital SMEs and, Saving and Credit Schemes.
 Promote improving access of SMEs to bank financing through simplification of
procedures
 Mobilize resources and promote development of new financial institutions for
financing SMEs.
The Ministry of Industry, Trade and marketing, being the focal institution responsible for the
coordination of the policy implementation, was given the responsibility of collecting,
compile and analyzing information on the implementation of the various programmes. All
30
stakeholders where to be relied upon to furnish the Ministry with the relevant information .
The ministry of industry trade and marketing had assigned various stakeholders the task of
fulfilling the policy. The stakeholders include the Tanzania Industrial Research
Development Organization (TIRDO) which supports local raw materials utilization; Centre
for Agricultural Mechanization Rural
Technology (CAMARTEC) which is involved in promotion of appropriate technology for
rural development; Tanzania Engineering and Manufacturing Design Organization
(TEMDO) responsible for machine design; Tanzania Bureau of Standards (TBS) mandated
to promote standards; Board of External Trade (BET) which is instrumental in promotion of
exports mainly through trade fairs; and the Institute of Production Innovation (IPI) now
known as Technology Transfer Centre which is active in proto-type development and
promoting their commercialization.
Apart from the above mentioned institutions, small industries development origination
(SIDO) is the one with SMEs financing duty.
4.4.2 FINDING FROM SIDO
4.4.2.1 SIDO’S BACKGROUND
Small industries development organization (SIDO) is an independent parastatal organization

established by an act of parliament in 1973 to plan, coordinate, promote and offer a variety
of services to small and medium scale enterprises. it has offices in all regions in Tanzania
main land. To date remains the main government arm for promoting SMEs.
The development objectives of the organization is to contribute to poverty eradication and
enterprise development there by contributing to economic development through provision of
demand driven services that will create employment and generate income.
4.4.2.2 SIDO’S VISION

A leading business support Organization in Tanzania; providing efficiently and effectively
in a business-like manner quality services that unlock potentials for growth and
competitiveness of SME’s in rural as well as in the urban areas.
31
4.4.2.3 SIDO’S MISSION STATEMENT
The central purpose and role of SIDO is to create and sustain indigenous entrepreneurial
base through the promotion and support to the development of SME’s by providing them
with Business Development Services and Specific Financial Services on demand. Priority is
given to productive economic sectors that contribute to wealth creation.
5.0 CHAPTER FIVE
5.1 DISCUSSION AND IMPLICATION
5.2 INTRODUCTION
This chapter deals with the discussion and interpretation of the research findings as they are
stated in chapter four in relation to the research objectives.
5.3 BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND

THE ABILITY OF SMES TO MEET THEM
The above objective targeted to examine the main bank requirements and the ability of
SMEs to meet them for the acquisition of the loans.
From the research finding, majority of SMEs of which the results shows that they fall under
a category of 1 to 5 million Tanzanian shillings of capital investment do not go for
commercial bank loans (table 03 and 04). When considering the reasons for this, the finding
suggest that majority of SMEs don’t apply for commercial bank loans because they cannot
meet the commercial bank loans requirements (table 05).
32
Another thing to note is, as majority of SMEs have a low capital investment which range
from 1 to 5 million Tanzanian shillings (table 03). It proves that many of them run their
business informally. This means; most of them do not maintain their financial reports, they
don’t prepare their business plans and some of them may be operating illegally (not
registered). On the other hand, when referring to the requirements as stated by the
commercial banks (table 08) most of them are not fulfilled by informal SMEs. This is
another reason to why majority of SMEs can’t meet the commercial banks loan requirements
leading to inaccessibility of the loans to them (E. Hategeka, 2009).
When referring to the loan collaterals, finding shows that majority of the SMEs do not have
collaterals to support them for the loans (table 06).
As a result of the findings stated above, most of the SMEs fail to acquire commercial bank
loans. Findings from SMEs shows that 60% of the SMEs who apply for bank loans fail to
acquire them (table 02). This is also reveled from commercial banks where as finding from
them shows an average of more than 50% fail to acquire the loans (table 09).
For all of the above mixed reasons, majority (51.7%) of SMEs rate the acquisition of
commercial bank loans to be difficult (table 07).
5.4 COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING

From the research findings, commercial banks term SMEs loans to be more profitable than
other customer’s loans (table 12). The findings also shows that profitability from the SMEs
segments appears to be the most driving factor influencing the commercial banks
relationships with SMEs (table 11).
Findings from commercial banks also show that 80% of commercial banks have separate
units dealing with SMEs relations with them. This may highly be a force of high profits
experienced from the SMEs segment.
But on the other hand, the results show that 60% of commercial banks SMEs loans are
affected with competition from large corporate and other retail customers (table 11). This
suggests that SMEs loans are termed to be normal to other loan customers and are not given
a special priority when it comes to competition with other customers.
Another contradicting condition is; finding shows that 80% of the commercial banks
conduct risk assessments of the SMEs loans. Its results shows that SMEs loans are less risky
than other loans (table 12). But when coming to measures taken by banks in trying to
mitigate the risks (table 14), commercial banks appears to be more hash than how the real
33
situation is. The conditions they impose appear to be very difficult to majority of SMEs.
This is because, majority of the SMEs are not conducted with huge amount of capital. At the
same time, commercial banks tend to require more complicated securities. This leads to
majority of SMEs failing to meet the security requirements. In other words, despite the
findings from commercial banks risk assessment which shows banks consider SMEs to be
less risky than other customers (table 12), the real situation shows banks seem to regard
SMEs loans to be very risky compared to other customers. This is by considering the
measures they impose on treating SMEs loans risk (table 14).
5.5 GOVERNMENT EFFORTS/CONTRIBUTION ON SMES ACCESSING

COMMERCIAL BANK LOANS FOR THEIR GROWTH AND DEVELOPMENT
As stated in chapter four, SIDO caries the whole responsibility of SMEs financing from the
ministry of industry, trade and marketing as far as the 2002 SMEs development policy is
concerned. It has got a sections dealing with SMEs financing affairs. In fulfilling its duty,
SIDO provides some loans directly to SMEs. It normally receives a sum of money from the
government budget and the funds are distributed regional wise so as to lend them as loans to
SMEs. It offers some loans to SMEs with a maximum of six million Tanzania shillings per
loan.
But with regards to commercial bank loans, SIDO takes a responsibility of linking the in-
need SMEs to commercial banks in case the particular SME needs more than six million as a
loan. SIDO officials assist the in-need SMEs with consultation services like financial
advices and in setting the initial soft bank requirements. They evaluate the business and take
the qualified SMEs to commercial banks for further evaluation and other bank procedures to
continue with the particular SMEs. In Arusha, SIDO is connected to national micro
financing bank (NMB) and performs this duty by the use of memorandum of understanding
(MOU) form. Their unity in supporting SMEs lending is enhanced with the “juhudi loan”
program which is operated jointly between them (NMB and SIDO).
5.5.1 ACHIEVEMENTS
This joint program between SIDO and NMB just started last year (2010). The only physical
and visible achievement ever since the beginning of this program is; SIDO have succeeded
to help only nine SMEs access commercial bank loans from NMB Arusha branch. This
venture has paved a way 170 million Tanzania shillings to the nine SMEs.
34
5.5.2 SETBACKS
According to SIDO Arusha regional office, the main problem they encounter as they try to
link commercial banks with SMEs in accessing loans is that, commercial banks tend to be
very sensitive when it comes to SMEs loans. They tend to be very strict; some small
failures/weaknesses from SMEs applicants make them fail to access the loans. In other
words, commercial banks appear to operate without a clear blue print of how SMEs
operating conditions are. Most of the SMEs operate their businesses informally.
5.5.2.1 FINDING FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP

WITH THE GOVERNMENT IN SUPPORTING SMES LENDING
The findings as presented in chapter four (table 15) shows that, despite the presence of the
government SMEs development policy of 2002, the government action is still very poor on
assisting SMEs financing from commercial banks. This is because only 40% of commercial
banks are the ones experiencing the government efforts in assisting SMEs lending. Out of
five banks, only two banks have a connection with government programs in assisting SMEs
lending. When comparing the government response in relation to the time period ever since
the set of the policy, it is open that is still not well productive.
6.0 CHAPTER SIX
6.1 CONCLUSION AND RECOMMENDATIONS
6.2 INTRODUCTION
This chapter presents the conclusion and recommendation made with regard to the study
findings and objectives.
6.3 CONCLUSION
The main objective of this research was to assess the accessibility of SMEs to commercial
bank loans for enterprise development or growth. Basing to the research finding and analysis
in chapter four and five, the following are conclusions in regards to the specific objective:
6.3.1 Examining bank requirements for the acquisition of their loans and the ability of
SMEs to meet them
According to the findings, it is clear that commercial banks still requires higher standards
securities in reference to the level which majority of the SMEs can afford. As a result,
majority of SMEs fail to meet the requirements. This is because majority of the SMEs
operate informally. This situation give rise to two main problems: first, many SMEs do not
35
apply for commercial bank loans for their development simply because they believe they
cannot meet the bank requirements. And secondly, many SMEs applying for commercial
bank loans fail to acquire them.
6.3.2 Determining commercial banks attitudes towards SMEs lending

Findings show that commercial banks consider SMEs to be very profitable customers with
reference to others. This can be evidenced by the existence of separate windows managing
SMEs affairs in 80% of the commercial banks.
But on the other hand, commercial banks considers SMEs to be very risky than other loan
customers. This is evidenced by the measures they undertake in trying to mitigate SMEs
loan risks (table 14). The same is the case on SMEs loans cost. These measures carried by
commercial banks in controlling SMEs loans risks and costs are the ones leading to failure
of majority of SMEs accessing their loans.
6.3.3 Assessing government efforts/contribution on SMEs accessing CBLs for their

growth and development
With reference to the government SMEs development policy of 2002, it is open that the
government have very positive, good and clears visions, missions and strategies in
developing SMEs in Tanzania. But when it comes to its implementations with regards to
assisting SMEs financing from different financial institutions, commercial banks
specifically, the government appears to be very slow and not productive. For example,
according to the case study of this research, Arusha, the government has begun dealing with
commercial banks financing to SMEs in the year 2010 while the policy was set in 2002. In
other words, the government is very slow in fulfilling its policies on SMEs financing from
commercial banks.
6.4 GENERAL CONCLUSION

In general, the research findings show that accessibility of commercial bank loans to SMEs
is still a difficult task to majority of SMEs in Tanzania. This is due to the following: first,
majority of SMEs can’t meet CBLs requirements, secondly, negative attitude of commercial
banks towards SMEs lending (considering SMEs being too risky) and thirdly, low support
from the government.
6.5 RECOMMENDATIONS
The following are recommendations to different stake holders with regards to this research:
36
6.5.1 TO COMMERCIAL BANKS
 Commercial banks should take time in making deep assessments of how SMEs
operate their activities. This will help them set conditions and requirements which
will fit with the standards of majority of the SMEs for the acquisition of the loans.
6.5.2 TO SMES
 Despite the fact that majority of the SMEs are found to be investing small amount of
capital leading them to operate informally, they should develop the habit of
conducting their businesses formally. This will help them to acquire wide
knowledge, information and understanding on how to run their business. As a result,
they will be able to meet the soft banks requirements so as to be able to acquire
commercial bank loans for their growth and development.
6.5.3 TO THE GOVERNMENT (MINISTRY OF INDUSTRY, TRADE AND

MARKETING)
 With reference to the research case study, the government agency responsible in
fulfilling its SMEs development policy (SIDO) should widen its base in case of
commercial banks it is related to in assisting SMEs lending. Currently, there are so
many commercial banks but SIDO is connected to NMB only.
37
Reference
URT (2002), National SME Development Policy. United Republic of Tanzania. Ministry of
Industry and Trade.
Alan Fisher (2007), Small Business Access to Bank Credit, California Reinvestment
Coalition
Thitapha Wattanapruttipaisan (2003), Four proposals for improved financing of SME
development in Asean, Asian Development Review, Vol. 20, No. 2
Penelope Hawkins (2006), Financial access and financial stability, FEASibility

Limited, South Africa
Tom O. Kore (2005), Microfinance in Tanzania, Win2PDF available at

http://www.daneprairie.com
DR. DONATH OLOMI (2006), Opportunities and challenges for rural

SMEs development in Tanzania, ESRF, Tanzania
Kothari, C.R., 1985, Research Methodology-Methods and Techniques, New

Delhi, Wiley Eastern Limited.
ILO Office, Dar es Salaam and MIT (2003), Jobs, Gender and Small Enterprise in Africa,
ILO Publications, Geneva Switzerland.
TBA Newsletter (2007), micro finance in Tanzania, Volume 2, Issue 3, Win2PDF available
at http://www.daneprairie.com.
38
T. M. Obamuyi (2007), an exploratory study of loan delinquency among small and medium
enterprises (smes) in ondo state of Nigeria, University of Tasmania.
O. Fatoki and A. Odeyemi (2010), Which New Small and Medium Enterprises in South
Africa Have Access to Bank Credit? International Journal of Business and Management Vol.
5, No. 10; October 2010
E.K. Bbenkele (2007), An investigation of small and medium enterprises perceptions

towards services offered by commercial banks in South Africa, African Journal of
Accounting, Economics, Finance and Banking Research Vol. 1. No. 1. 2007.
BOT (2003), small and medium enterprises credit guarantee scheme draft policy and
operational guidelines, bank of Tanzania directorate of financial markets.
E. Masuke ( ), Recent African experience in SME Financing – A case of CRDB Bank LTD
(Tanzania)
G.Pandula (2011), an empirical investigation of small and medium enterprises’ access to

bank finance: the case of an emerging economy, Proceedings of ASBBS Volume 18
Number 1, Las Vegas.
R. M. Shambwe( ), SME Financing – A case of CRDB Bank PLC (Tanzania), Senior

Relationship Manager –SME
D. Czira´ky, S. Tisˇma and A. Pisarovic, (2004), Small Business Economics, Kluwer

Academic Publishers, Netherlands.
http://www.investorwords.com/955/commercial_bank.html
http://www.soyouwanna.com/definition-bank-loans-8514.html
http://www.bsp.gov.ph/downloads/regulations/attachments/2001/circ272.pdf
http://www.sido.go.tz/Reports/WEB_RPT004.aspx?Region=Arusha
http://www.sido.go.tz/Web/Index.aspx
39
Appendix A
DEFINITION OF IMPORTANT TERMS
COMMERCIAL BANKS
A commercial bank refers to an institution which accepts deposits, makes business loans,
and offers related services. Commercial banks also allow for a variety of deposit accounts,
such as checking, savings, and time deposit. These institutions are run to make a profit and
owned by a group of individuals or governments. While commercial banks offer services to
individuals, they are primarily concerned with receiving deposits and lending to
businesses.10
BANK LOAN
A bank loan refers to a cash amount of money offered by a bank to its client. When one take
out a bank loan, he/she borrows a lump sum of money, while promising to pay back the
original amount borrowed, plus interest, over a specified period of time. Most loans have
fixed rates and payment schedules, meaning that one’s payment will be the same throughout
the life of the loan, and once he/she makes the last payment, the debt is satisfied. Loan
repayment periods can last for a few months, or up to 30 years or more. Loans can be
secured by something of value, or they can be unsecured, based solely on the income and
10
http://www.investorwords.com/955/commercial_bank.html
40
credit history of the borrower. A bank loan allows one to make a purchase that he/she could
not have made with cash by dividing the purchase price into smaller, manageable payments.
SMALL TO MEDIUM ENTERPRISE (SMEs)
SMEs 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. According to small and medium
enterprise development policy (2002), the commonly used yardsticks are total number of
employees, total investment and sales turnover. In Tanzanian context, SMEs are those
engaging up to four people, in most cases family members or employing capital amounting
up to Tshs.5.0 million and having a turnover of 12.0 million per annum. They are mostly
formalized undertakings engaging less than 50 employees. The majority of micro enterprises
fall under the informal sector.
41
Appendix B
QUESTIONNAIRES TO COMMERCIAL BANKS:
BANKS REQUIREMENTS FOR SMES LENDING:
What are your main bank requirements for SMEs lending?
1. ………………………………………………………………………………………………
2. …………………………………………………………………………………………………
3. …………………………………………………………………………………………………
4. …………………………………………………………………………………………………
5. ………………………………………………………………………………………………….
What percent of SMEs applicants fail to meet your requirements for the loan acquisition?
A. 0% - 30% B. 31% - 60%
B. 61% - 90% C. More than 90%
COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING
1. Does the bank currently have SMEs among its clients?
A. Yes B. No
2. If yes, does the bank have a separate unit managing the banking relation with SMEs?
A. Yes B. No
3. What type of involvement do you have with SMEs?
A. The bank primarily offers loan product B. The bank offers both deposits and loan products
C. Other, please specify : …………………………………………………………………………
4. List main lending products you offer to SMEs?
42
1. …………………………………………………………………….
2. ……………………………………………………………………
3. ……………………………………………………………………
4. ……………………………………………………………………
5. What is your exposure to SMEs in terms of loans? (%)
A. SME share of total value of loans outstanding: ……………………………………………….
B. SME share of total number of loans outstanding: …………………………………………….
6. Do you have any assessment of how risk SMEs lending is to your bank?
A. Yes B. No
If so, please describe and quantify: ……………………………………………..
7. To what degree is your involvement with SMEs driven by the following? [put an X where
appropriate]
Not significant Extremely significant

significant /crucial
Perceived profitability in
the SME segment
Intense competition for

large corporates
Intense competitions for
retail customers
8. Provide your assessment of the risk, profitability and cost of the SME financing relative to
the other loans of your banks. [put an X where appropriate]
SME loans are less … SME loans are SME loans are more
than others equally …
… than others than others
Profitable
Risky
Costly
43
9. How do you mitigate risks and costs of SME loans relative to those of other loans?
Risk
Cost
BANK’S RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES

LENDING:
1. Please list the government programs that you are familiar with that directly or indirectly
affect you involvement with SMEs and discuss their additionality in terms of increased
financing
Programs Additionality
1.
2.
3.
4.
2. If you think government programs affect your involvement with SMEs, qualify the effect.
A. Overall Positively B. Overall Negatively

C. Inconsequential
3. Does the existence of government SMEs financing policy (2002) facilitate your bank SME
lending?
A. Yes B. No
If it needs to be improved, explain how:
44
QUESTIONNAIRES TO SMES:
ABILITY OF SMES TO MEET COMMERCIAL BANK REQUIREMENTS FOR LOAN

ACQUISITION:
What Amount of capital have you invested in your business?
A. 1 to 5 million B. 6 to 10 million
C. Above 10 million D. If the answer is c, specify…………………………………
Have you ever applied for a bank loan?
A. Yes B. No
If yes, did you get it?
A. Yes B. No
Do you know requirements for the acquisition of commercial bank loans?
A. Yes B. No
If yes, mention them.
…………………………………………………………………………………………………………
………………………………………………………………………………………………………..
Apart from requirements you mentioned, are there any other inconveniences you faced?
A. Yes B. No
If yes, please mention them.
……………………………………………………………………………………………………..........
What collateral was required for the loan?
A. Bank deposit B. Fixed assets
C. others (specify)…………………………………………………………………………
Did you have such collaterals?
A. Yes B. No
If no, how did you manage to get the loan?
A. Using friends collaterals B. Group loans

45
C. Others (specify)
……………………………………………………………………………………
How do you rate the loan requirements conditions?
A. Very difficult B. Difficult C. Simple D. Very simple
46

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CERTIFICATION

Internal Examiner: …………………………….

I BARAKAELI S. MASSANGWA, declare that this research is the result of my own

system, or disturbed in any form or by any means: electrical, mechanical, photocopying,

University Iringa College on behalf.

I dedicate this research paper to;

Rev. Solomon J. Massangwa (father) and Mrs. Janeth Massangwa (mother)

Chapter six is comprised of conclusions and recommendations of the research finding in

TABLE PAGE No.

Table 01: CRDB SMES loan profile from 2006 to 2009…………………………….04

Table 02: Successful and unsuccessful SMES loan applicants……………………....14

SMES lending ...............................................................................................................25

CBL commercial bank loans

1.0 CHAPTER ONE...............................................................................................................1

1.4.2 Specific objectives:...................................................................................................5

1.5 Research questions:................................................................................................................5

2.1 Literature review.....................................................................................................................7

2.4.2 Commercial banks attitudes towards SMES lending.............................................10

2.4.3 Government contribution towards SMES lending.................................................10

3.0 CHAPTER THREE........................................................................................................12

3.1 Research methodology.........................................................................................................12

3.5.2 Sampling size.........................................................................................................13

3.6 Sampling technique..............................................................................................................13

3.8.1.1 Completely open-ended questions...................................................................14

3.8.1.2 Closed questions..............................................................................................14

3.9 Data analysis..........................................................................................................................15

4.1 Results and presentations.....................................................................................................15

4.3.1.1.2 Capital invested in SMES businesses.......................................................16

4.3.1.1.3 Application for bank loan.........................................................................17

4.3.2 Research finding from commercial banks..............................................................20

4.3.2.1 Banks requirements for acquisition of SMES loans........................................20

4.3.1.2 To determine commercial banks attitude towards SMES lending...................21

4.3.1.2.3 A profile showing some driving factors which influence commercial

4.3.1.3.1 A response from commercial banks on their relationship with the

4.3.1.3.2 A profile showing banks relationship with the government in supporting

4.4 Secondary data......................................................................................................................28

4.4.1.3 Overall Objective.............................................................................................28

4.4.1.4 Policy Statement:.............................................................................................28

4.4.2 Finding from SIDO................................................................................................29

4.4.2.1 SIDO’S background.........................................................................................29

4.4.2.2 SIDO’S vision..................................................................................................30

4.4.2.3 SIDO’S mission statement...............................................................................30

5.0 CHAPTER FIVE............................................................................................................31

5.1 Discussion and implication..................................................................................................31

6.0 CHAPTER SIX...............................................................................................................34

6.1 Conclusion and recommendations......................................................................................34

6.3.2 Determining commercial banks attitudes towards SMEs lending..........................34

6.3.3 Assessing government efforts/contribution on SMEs accessing CBLs for their

6.4 General conclusion...............................................................................................................35

6.5.3 To the government (ministry of industry, trade and marketing)............................36

1.3 STATEMENT OF THE PROBLEM

TABLE 01: CRDB SMES LOAN PROFILE FROM 2006 TO 2009

1.4 RESEARCH OBJECTIVES

1.4.1 GENERAL OBJECTIVE

1.4.2 SPECIFIC OBJECTIVES:

 To determine banks attitudes towards SMEs lending.

 To assess government efforts/contribution on SMEs accessing CBLs for their growth

1.5 RESEARCH QUESTIONS:

 What are the banks attitudes towards SMEs lending?

1.6 CONCEPTUAL FRAMEWORK

1.7 LIMITATIONS OF THE STUDY

 Irresponsible respondents; some respondents are normally reluctant in responding to

1.8 SIGINIFICANCE OF THE STUDY