1

PROBLEMS AFFECTING THE GROWTH OF MICROFINANCE INSTITUTIONS IN TANZANIA

J. Mukama, T. Fish and J. Volschenk

University of Stellenbosch Business School

Abstract

This paper examines factors that inhibit growth in the microfinance sector in Tanzania by measuring
the perceptions about such issues among Microfinance Institutions (MFIs). The findings indicate
interesting phenomena that deserves consideration from legislators. Most prominent is the dual nature
of the finance sector, with the conventional banking institutions experiencing factors differently to the
Savings and Credit Co-operative Societies (SACCOS). SACCOs by their nature have a lower cost
structure and have better information about their own clients, but lack sufficient access to loan capital.
Yet some factors are prominent in the bigger industry, such as the education level of clients.

Introduction

Microfinance services in Tanzania have existed for some years, yet for a number of reasons, have not
been able to reach the majority of low income Tanzanians. Without the prioritization of the factors that
impede the growth of these microfinance services, solutions might have no significant impact on
growth in the sector if they are not correctly targeted. Establishing an efficient and growing
microfinance system is central to serving the low income segment of society effectively while also
contributing to economic growth (UNCDF, 2005; Ravicz, 1998). Therefore the identification of the
major problems affecting growth of MFIs will provide guidance on how microfinance service providers
should prioritise their activities. Moreover, the ranking of such problems could assist regulators,
supervisors and the government focus on resolving issues of greater importance rather than those that
would have a minor impact (Volschenk, 2002: 12).

Therefore the major objective of this paper is to rank factors impeding growth in Tanzanian MFIs as
perceived by managers and loan officers. The literature describes 24 such factors. These were
explored through the conduct of interviews with Tanzanian MFI managers and loan officers.

Data was gathered from the Tanzania microfinance sector during 2004. The study investigated
perceptions regarding the growth of Microfinance Institutions (MFIs) amongst institutions that were
registered to provide microfinance services in Tanzania. These MFIs included institutions registered as
commercial banks, non-bank financial institutions, Non Government Organisations (NGOs) or as
Savings and Credit Co-operative Societies (SACCOs). The study further investigated the priorities
these institutions assign to specific problems selected from those identified in the literature and went
further to focus on two distinctive tiers in the Tanzanian microfinance environment.
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The first part of this paper identifies factors raised by a number of authors that inhibit growth in the
microfinance industry. The empirical study discusses the results of a primary data gathering exercise
in the Tanzanian microfinance industry and focuses on the differences in perceptions of supply side
MFI role-players. The third and last section of the paper concludes with recommendations for policy
makers.

Microfinance in Tanzania

Tanzania is one of the three countries in Eastern Africa (Tanzania, Kenya and Uganda) that received
political independence from British rule in 1961. In 1967, Tanzania was declared a democratic socialist
state in the Arusha declaration. As a result, the Government nationalised private financial institutions.
In 1991, through the Banking and Financial Institutions Act no. 12, the Tanzanian Government initiated
financial sector reforms in order to create an effective and efficient financial system. Banks were
allowed to operate on a commercial basis, making business and management decisions free from
outside intervention within the norms of prudential supervision. As at December 31, 2003, there were
thirty-one financial institutions dealing with banking services (twenty licensed banks and eleven non-
bank financial institutions).

The financial sector reforms included liberalisation of credit allocation to state owned institutions,
strengthening the Bank of Tanzania's role in regulating and supervising financial institutions,
restructuring of state owned financial institutions, allowing entry of local and foreign private banks and
the introduction of financial markets (money and capital markets).

The Government realised that in order to have an efficient and effective financial system, additional
focus had to be placed on the expansion of financial services to the low-income segment through
financial sector reform programs. It also realised that the microfinance sector needed to be an integral
part of the country’s financial system (Randhawa & Gallardo, 2003: 2).

While it was understood that efficiency would require the existence of sustainable and competitive
financial intermediaries, an effective system was expected to ensure that both savers and investors
(high, middle and low earners) were adequately serviced throughout the country. It is worth noting that
the adoption of financial reform adversely affected the supply of financial services to the poor.

In support of United Nations programme eradication of poverty, the Tanzanian Government has set a
goal to reduce poverty by fifty percent (50%) by 2010 and to eradicate poverty in 2025 (Tanzania
Poverty Eradication Strategy Paper, 2000). Low-income households constitute fifty one percent of
Tanzania’s population. This level of poverty impacts on the ability of the population to save, where the
average deposits per rural member were found to be US$14 and Tsh. 160,000 or US$200 in urban
regions (Randhawa & Gallardo, 2003: 8). Table 1 provides an overview of the macroeconomic
environment in Tanzania.
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Table 1: The Tanzanian macroeconomic environment

Population, in Millions 1 36.7 million
Annual growth rate 1.83%
Urban: Rural distribution 24% : 76%
Gross Domestic Product $23.71 billion
GDP per capital, in US $ $700 (2004 est.)$ 267
Gross domestic saving per capita in US $ (1998) $ 15,26
Poverty line Tshs. 114,19
Percentage of poor households living in rural areas 92%
(1999)
Percentage of households below poverty line (1991) 36% (2002 est.)
Source: Randhawa & Gallardo, 2003b: 3.

Poverty alleviation in Tanzania cannot succeed without proper financial and economic policies that
address and target the needs of the poor. The low income segment forms the major productive forces
where about 80% are engaged in agricultural production (World Bank, 2001).

In order to address this goal, the need for MFIs is crucial. These institutions provide an opportunity for
the poor to access financial services without the cumbersome and bureaucratic processes found in the
formal financial sector.

The Tanzanian government initiated the formulation of the National Microfinance Policy in 1996 and it
was eventually approved in 2001. The policy articulates a clear vision and strategy for the
development of a sustainable microfinance industry. It specifies respective roles of the key
stakeholders, i.e.
 that the Tanzanian Government has overall responsibility of developing a stable financial system
and oversees all official donor assistance and
 that MFIs should serve as the driving force behind the achievement of the ultimate goal of
development of sustainable microfinance.

Despite the creation of the Microfinance Directorate within the its central bank and other efforts, the
Tanzanian Government is still faced with the challenge of establishing viable and sustainable MFIs
that can grow to serve the low-income segment of the Tanzanian population with adequate range of
financial products .

Gallardo, Ouattara, Randhawa and Steel (2005) divide registered financial institutions which provide
financial services to households and micro to small enterprises into three categories, namely:
(i) licensed commercial, regional and rural banks, (ii) SACCOs, and (iii) NGO-based MFIs.

 Banks:
o Commercial Banks: Certain Tanzanian commercial banks extend their traditional financial
activities into additional services aimed at small borrowers, most of whom are low-income

1
The World Factbook, 2005
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earners. These include the National Microfinance Bank, CRDB Bank and Akiba Commercial
Bank.
o Non-bank financial institutions: The Tanzania Postal Bank is the only microfinance
service provider registered as such.
o Regional/Rural/Community Banks: these are microfinance service providers licensed as
specialised community banks. Kilimanjaro Co-operative Bank is an example of a regional
bank, while Mufindi Community Bank, Mwanga Rural Community Bank and Dar es Salaam
Community Bank are typical examples of Community banks.
 Savings and Credit Cooperative Societies (SACCOs): The Cooperative Societies Act of 1991
provided the basis for the development of Savings and Credit Cooperatives. Societies (SACCOs)
are privately-owned and organized equity-based institutions which are member driven and
democratically organised. Another important factor is that SACCOS is an alternative that
encourages savings, in difference from many micro finance institutions that primarily encourages
credits and investments. Some are registered with the Ministry of Cooperatives and Marketing
while others are not registered. The number of unregistered SACCOs is unknown. SACCOs are
neither directly supervised nor regulated by government. The 650 active urban and rural SACCOs
have an estimated membership base between 130,000 to 160,000, only a fifth of them borrowers
(Gallardo et. al., 2005).
 Non-Government Organisations (NGOs): The 60 NGO MFIs are dominated by two large NGOs,
PRIDE and FINCA, which have three-quarters of the market, estimated at 100,000 client-members
(Gallardo et. al., 2005). The NGO-MFIs serve a predominantly urban clientele, and competition
appears to be growing as lenders strive to keep their base of good-paying clients.

Gallardo et. al. (2005) further report that “the Tanzania Postal Savings bank and several commercial
banks (National Microfinance Bank, CRDB Bank and Akiba Commercial Bank) are the leading
providers of microfinance services, with outreach that exceeds the combined outreach of SACCOs
and NGO-MFIs. International donor agencies comprise a significant and influential stakeholder group
in Tanzanian microfinance, providing technical assistance as well as funding”.

The Tanzania association of microfinance institutions is an umbrella organisation for microfinance

institutions and other industry stakeholders operating in the microfinance sector in Tanzania. Its
mission is to develop a vibrant microfinance industry in Tanzania through capacity building of MFIs as
well as acting as a forum and network for advocacy on behalf of MFIs (Tanzania Association of MFIs
Activity Progress Report, 2002).

The Consultative Group to assist the Poor (CGAP) published the following data (Table 2) for various
institutions providing microfinance in Tanzania (http://www.cgap.org/regsup/docs/pro_Tanzania.pdf).

The client base of most MFIs in Tanzania is unknown which makes it difficult to estimate a sample for
analysing. Various processes are being put in place to regulate the microfinance market which will in
future assist in the estimate of the client base.
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Table 2: Tanzania - General Participation in the Financial Services Market*

No. of No. of Target

Total Assets Deposits
institutions clients market
US$2,220,519,700 (Figures
Commercial
No. of for banks were taken from the
Banks
institutions 23 Bank of Tanzania website,
(including Unknown US$1,812,393,300 N/A
(including 3 Consolidated Financial
Regional
Regional Banks) Statements for the Quarter
Banks)
Ending Sept. 2003)
US$71,039,370 (Figures for
NBFIs were taken from the
Non bank
Bank of Tanzania website,
Financial 8 Unknown US$43,852,885 N/A
Consolidated Financial
Institutions
Statements for the Quarter
Ending Sept. 30, 2003)
Approximately
Savings and
646 (See
Credit 130,000 US$17 million Unknown US$10 million Unknown
Randhawa and
Cooperatives
Gallardo, 2003)

The poor,
particularly
NGOs Unknown Unknown Unknown Unknown
those in rural
areas

*Tanzania: Country Indicators. Last update: September 2004

Factors affecting the growth of MFIs

A number of authors have dealt extensively with issues that affect the growth and profitability of MFIs
(Metcalfe, 2002; Masinde, 2001; Lok, 2000a and 2000b; Ahmed, 2002; Rutherford, 2000; Naidoo,
2002; and Volschenk, 2002).

Volschenk (2002) classified problems experienced by MFIs in terms of strategic, operational,

capitalisation and marketing issues. The authors of this paper split potential factors that impede growth
into three categories (See Table 3), i.e. client related, system related and staff related problems. The
rationale for the different classification system was motivated by the more logical classification and the
familiarity of the terms in the finance sector, as well as the use of these terms in the risk management
field.

Table 3: Factors listed in the Survey

Client related problems
System related problems
 Service quality to customer
 Client focus
 Attraction of low income clients
 Retention of existing clients
 Lack of information about clients
 Educational level of clients
 Small and irregular cash flows
 Low population density
 Quality of loan books
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Staff related problems
 Fraud
 Lack of enough capital to lend to clients
 Profit performance
 High costs
 Poor selection of practices
 Unreliable infrastructure
 Increased competition
 Legislation and regulatory framework
 Ownership structure unclear
 Inadequate donor funding
 National payment system
 Interest rates / commissions
 Educational level of staff
 Skills development of staff
 Appropriate staff incentive schemes

Client related problems refer to problems relating to the target segment of a MFI. In the case of MFIs,
this is possibly the largest distinguishing factor from mainstream lenders. The target markets of MFIs
are the poor and often poorly educated, although there are exceptions to such generalisations. The
success of MFI growth is higher where service quality to customers is good. Lack of information about
clients affects MFIs’ focus that is necessary for development of financial products attractive to low-
income clients as well as retaining of the existing clients. Educational level of clients leads to lack of
awareness among MFIs’ clients and members on their collective rights, duties and obligations
resulting into small and irregular cash flows from clients that affect the institutions growth (National
Cooperative Development Policy, 1994: 6).

Beroff (1999: 22) indicates that the costs of serving sparsely populated areas are higher in terms of
transportation and time consumed. Low population density can cost a lender up to 20% of loan income
to reach his/her clients.

Financial sustainability is necessary for expanding outreach growth. System related problems refer
to structures and processes within MFIs and how these influence the growth and profitability of
institutions. Without self-sufficiency, there is little hope for MFIs to reach greater numbers of poor
households (Kimenyi, Wieland & Pischke, 2000: 17).

Failure to maintain good quality of loan books lead into delinquency risk, credit risk and payment
default risk (Chambo, 2004). Frauds such as corruption, embezzlement, misappropriation and theft of
assets (Otero & Rhyne, 1994: 70) have resulted into high administration costs detrimental to MFIs’
growth (Mbwala, 2004).
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High costs make it difficult for some MFIs to sustain their operations from loan revenues alone. Costs
to MFIs affect the rate at which the fund their loan books, salaries of staff and infrastructure expenses,
but may be exacerbated by unreliable infrastructure, an inefficient payment system, commissions and
poor selection procedures.

The increased competition in microfinance sector in Tanzania has resulted in improved quality and
quantity of financial services and products offered (Limbu, 2002), but has made the sector difficult for
MFIs with high cost of capital burdens. The lack of enough capital to lend to clients is globally one of
the most severe problems inhibiting the growth of MFIs (Fitzgibbon, 1999 & Mbawala, 2004). To some
extent MFIs can use the deposits by clients to increase its loan book, but this option is often limited in
poor communities. In order to expand programs, MFIs need access to a stable and an ongoing source
of funds for MFIs to achieve sustainable growth (Nelson, Mknelly, Slack & Yanovitch, 1994: 55). There
is often a mismatch in the maturity of an MFIs loan and deposit books, making it difficult and risky to
grow the loan book.

Besides lack of financial sustainability, other problems that contribute to system related obstacles
include inadequate donor funding (for donor dependent organizations), an unclear ownership
structure, too much donor intervention as well as legislation and regulatory framework that is not
conducive to allow sound MFIs to emerge and grow (Otero & Rhyne in Tanzania Bankers’ Journal,
1997:11).

Staff related problems are probably the most manageable of the problems experienced by MFIs.
Educational level of staff and skills development of staff can be supported by appropriate incentive
schemes in order to facilitate improved quality of loans books, improved quality of service - which
attract new customers and retains existing clients. Good selection practices can be incentivised
through a well-structured commission scheme, which in turn would lead to fewer fraudulent practices
and increased repayment rates. Allowing staff to attend courses of providing in-house training may
increase regulatory and supervisory compliance. MFIs would not be able to deliver financial services
efficiently to the poor in lieu of staff efforts (Otero & Rhyne, 1994: 87). Batchelor (1991: 128) found that
MFIs with well-motivated staff has an increased chance of growth.

Methodology

The literature describes 24 factors which impede the growth of Tanzanian MFIs. These factors are
ranked as perceived by managers and loan officers. These were explored through the conduct of
interviews with MFI managers and loan officers. The survey was largely conducted through personal
and postal interviews, rather than faxes and emails. Poor telecommunication infrastructure in Tanzania
hamper electronic surveys and the interviewer wished to be able to give clarity to issues should it be
required by the interviewed person.
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A large part of the Tanzanian population resides in rural areas, with many of the poor living in areas far
from the cities. However, many MFIs have business offices within the Dar es Salaam region, and
given the difficulty in reaching a large sample in rural areas, the interviews were limited to the Dar es
Salaam region.

The sample included the following:

 three Commercial Banks that provide microfinance services in Tanzania (National Microfinance
Bank, Cooperative and Rural development Bank (CRDB) and Abika Bank)
 The only non-bank financial institution that provides microfinance services in Tanzania (Tanzania
Postal Bank (TPB))
 The five Rural/Community Banks that provide microfinance services in Tanzania (Kilimanjaro
Cooperative Bank, Community Banks, Mfundi Community Bank, Mwanga Rural Community Bank,
Dar es salaam Community Bank, Mbinga Community Bank)
 The three largest NGOs in terms of outreach and client base operating in Tanzania (PRIDE,
MEDA and PTF)
 Registered SACCOs in Dar es Salaam region where 50 SACCOs were selected from a list of 62
Dar es Salaam registered SACCOs provided by Registrar of Savings & Credit Cooperative Unions
League of Tanzania. Four are community based SACCOs whereas 58 are workplaces based
SACCOs.

The largest 10 SACCOs were selected from each of the three districts of Dar es Salaam region (Ilala,
Kinondoni & Temeke). These SACCOS were perceived to have the ideal size (in terms of number of
clients) and have good quality data. A random sample of 20 SACCOs was selected from the rest of
the SACCOs.

MFI managers/officers were asked to rank the factors in the questionnaire (Appendix 1) according to
the extent to which they pose a problem in the particular MFI. The respondent could attach a rank of 0
(no problem) to 4 (severe problem). The issues were then ranked by computing the arithmetic mean of
all the responses to each problem. In this regard the reader should be aware that the use of the mean
for non-parametric data may be misleading. However, using modes or medians as indicators for the
ranking does not result in a significantly different ranking (Appendix 2).

Findings and discussions

Forty-eight (77% success) responses were received from the 62 MFIs in the sample. All but two of the
non-responses were from the SACCOs (the latter being the group interviewed through postal
questionnaires).

Table 4: Responses received

MFI Postal Personal Total responses Total MFIs
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questionnaire interviews received sampled

Commercial banks 3 3 3
Rural / Community banks 3 3 5
Non-bank financial institutions 1 1 1
NGOs 3 3 3
SACCOs 8 30 38 50
Total 8 40 48 62

Because of the difference in weighting between the SACCOS (with their unique characteristics), the
findings within this study are reported at two different levels – firstly the combined data of all MFIs
investigated are reported and secondly the SACCOs and non-SACCOs MFIs are reported separately.

Table 5: Profile of Sampled MFIs

Type of MFI Both Only Urban Grand Total
Commercial bank 3 - 3
Rural/community bank 3 - 3
Non bank financial institution 1 - 1
NGO 3 - 3
SACCOS 12 26 38
Grand Total 22 26 48

With the exception of 68% of the total number of SACCOs (26/48) which operated only within the
urban environment, all other institutions operated both in the rural as well as in the urban
environments (table 5). Caution should be taken in the interpretation of this statistic as the SACCOs
are biased to the urban regions. But even though the SACCOs constitutes 79% of the sample, as
stated earlier, Gallardo et al (2005) report that the leading providers of microfinance services (the
Tanzania Postal Savings bank and several commercial banks National Microfinance Bank, CRDB
Bank and Akiba Commercial Bank) have an outreach that exceeds the combined outreach of SACCOs
and NGO-MFIs.

Most respondents indicated that their services are offered to individuals as well as groups, the
exception being SACCOs who by definition of their constitution service individuals. Of the 38 SACCOS
interviewed, 1 provided group lending schemes, while only 5 provided both individual and group loans
to members.
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Table 6: Group/individual preference of MFIs in sample2

Type of MFI Individual Group Both individual and
approach approach group approach
Commercial bank 1 (33.3%) 2 (66.7%)
Rural / Community bank 3 (100%)
Non-bank financial institution 1 (100%)
NGOs 1 (33.3%) 2 (66.7%)
SACCOs 32 (84.2%) 1 (2.6%) 5 (13.2%)
Total % 34 (70.83%) 1 (2.08%) 13 (27.09%)

As expected, funding for SACCOs is primarily through member contributions. Donor supporters such
as government and foreign donors provide funding for NGOs and commercial banks. Further analyses
make a distinction between MFIs which are exclusively donor funded as compared to those that are
both funded by member contributions and donor funding.

The 48 MFIs sampled had 301 branches in total (Table 7). Commercial Banks have the highest
number of branches followed by the SACCOs. Rural/Community Banks have the least number of
branches. The infrastructure which the commercial banks have enables them to have a larger
outreach enabling greater access to communities. However, the nature of SACCOs which are member
driven (and often work-based) means that their branches are also accessible to their member workers.

Table 7: MFIs by number of branches criteria

Number of branches
Grand
Type of provider Donors Members* Total
Commercial bank 122 122
NGO 52 52
Non bank financial
institution 3 3
Rural/community bank 3 3
SACCOS 22 99 121
Grand Total 199 102 301
*this group includes both donor and member support

Table 8 indicates that MFIs with donor funding issue more loans than MFIs that just rely on members’
savings (such as non-bank financial institutions, rural/community banks and SACCOs). MFIs that have
donor support have the capacity to offer more loans to low income earners than those MFIs which
have no donor-support.

2
The percentages in brackets are the proportion of MFIs in that category
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Table 8: MFIs by number of loans issued

Number of loans
Type of provider Donors Members Grand Total
Commercial bank 106,875 106,875
NGO 150,120 150,120
Non bank financial
institution 4,124 4,124
Rural/community bank 23,606 23,606
SACCOS 1,146 11,385 12,531
Grand Total 281,747 15,509 297,256
*this group includes both donor and member support

Ranking of factors in survey

Respondents in the survey were requested to rank each of the 24 factors in the survey by the extent to
which it poses a challenge that affects the growth of the MFI. Responses regarding the severity of the
factors were collected by means of questionnaires and personal interviews. Responses varied
considerably among the MFIs. The ranking was done on basis of average score (mean score) rather
than number of yes or no responses (although the top 4 would virtually remain unchanged). See
appendix 2 for a complete breakdown of scores, the medians and modal values. Under normal
circumstance a “mean” would imply normally distributed data and not non-parametric data as in this
case. Therefore, as a matter of caution, care should be taken while drawing strict conclusions from the
ranking in Figure 2 below.

100
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% %
Lack of information about clients
Small and irregular cash flow s from clients
Client related

Retaining existing clients

Quality of loan books
Attracting low -income clients
Client focus
Service quality to customers
Education levels of your clients
Low population density
Indequate donor funding
Ow nership structure unclear/donor intervention
Fraud
System related

National Payment System

Poor selection of practices
Profit performance
High costs
Legislation and regulatory framew ork
Un reliable infrastructure
Interest rates/commissions
Increased Competition
Lack of enough capital to lend to Clients
Educational level of staff
related
Staff

Appropriate staff incentive schemes

Skills development of Staff (Microfinance skills)

Total No Responses Total Yes Responses

Figure 1: Responses as to whether a factor poses a problem (Yes or No)

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Client and staff related factors return a lower number of ‘No’ responses i.e. a rank of 0 (no problem
encountered) than in the system and staff related factors (figure 2). In other words, MFIs tend to
experience more problems related to their clients and staff than to their systems.

Staff related problems (score = 2.02) pose marginally higher challenges than client and system related
problems (with respective scores of 1.59 and 1.42). The average of all the means in Figure 3 is 1.55.

Lack of capital is the biggest inhibitor of growth in the MFI sector. However, what seems surprising is
that donor funding is not perceived as a pressing inhibitor of industry growth. Inadequate donor
funding was listed only fifth from last (20th). This could be explained by the large differences within the
MFI sector, as the member based SACCOs are member based (as opposed to other MFIs which are
primarily donor based) but do experience a need for capital to lend. See the section below on the
homogeneity of the MFI sector in Tanzania for more in-depth discussion. A lack of capital to lend to
clients could lead to loan applications that are processed on a queuing basis, favoritism in loan
allocations and fraud. Such a MFI cannot expand microfinance services/products. With inadequate
funds to afford reliable infrastructure, research for clients’ information, education, skills and incentives
to employees, the result is poor quality of loan books, low morale among employees and poor
selection practices. The same applies to inadequate donor funding for donor dependent organisations.

Ranking of problems listed in the survey

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Educational level of clients 2.71

Client related problems

Service quality to customer 1.90

Client focus 1.88
Attraction of low-income clients 1.67
Small and irregular cash flows from clients 1.60
Retention of existing clients 1.33
Lack of information about clients 0.96
Low population density 0.67
Client related problems Average 1.59
Lack of enough capital to lend to clients 2.73
Increased competition 1.98
Unreliable infrastructure 1.94
System related problems

Legislation and regulatory framework 1.92

High costs 1.69
Interest rates/commissions 1.69
Quality of loan books 1.23
Profit performance 1.02
National payment system 1.00
Inadequate donor funding 0.94
Poor selection of practices 0.81
Fraud 0.79
Ownership structure unclear(donor intervention) 0.69
System related problems average 1.42
Appropriate staff incentive schemes 2.33
problems
related

Skill development of staff 2.31

Staff

Educational level of staff 1.42

Staff related problems average 2.02

Figure 2: Ranking of problems by Tanzanian MFIs respondents

The education levels of clients ranks at second, highlighting the importance of education in the
Tanzanian microfinance sector. As many authors have discussed, the educational level of clients
leads to lack of awareness among MFIs’ clients and members on their collective rights, duties and
obligations which subsequently results in small and irregular cash flows from clients that affect the
institutions growth thereby increasing the risk experienced by MFIs.
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As mentioned in the literature review, the issue of appropriate staff incentives stands central to most
microfinance institutions. From an effective incentive scheme could flow many self-regulating solutions
to other problems.

One of the surprising findings in the survey was the discrepancy between the importance attached to
skills development of staff (ranked the fourth most important issue) and the relatively low ranking of
the education levels of staff. This issue might point towards an interesting field for future research. It
might indicate that the staff need other forms of development, such as “streetwise” skills specifically
related to microfinance. MFIs that do not have the capacity to develop skills of their staff are also
experiencing a problem of instituting appropriate staff incentive schemes that could enhance
employees’ morale. Hence such MFIs that remain with de-motivated staff have a greater chance of
failure to grow.

Homogeneity of the Tanzanian microfinance sector

Throughout this study, the assumption is made that the microfinance sector in Tanzania is relatively
homogeneous. However, delving deeper into the results of the survey provides one with an interesting
profile of at least two sectors with unique factors (this supports Gallardo et. al’s, assertion, 2005).
These two groupings revolve around the SACCOS and Non-SACCOS classification. It also points
towards the advantages and disadvantages of pure membership-driven organizations versus
organizations in the more formal and often donor-aided environment. The profiles surrounding the two
sectors emerge once one focuses on the largest differences in ranking of the two sectors. Table 9
shows the ranks assigned by the two groupings, as well as the difference in mean scores of the two
groups. The p-values in the last column indicate the level of significance of the differences within the
two populations. The SACCOs sample consisted of 38 values and the non-SACCOs sample consisted
of ten values. The differences in mean scores indicate two highly polarized sectors with unique
problems.

Table 9: SACCOs vs. Non-SACCOs

Difference in
Rank for Rank Non mean scores p-value
SACCOS SACCOs (Appendix 3) MWW Test
Lack of information about clients 20 11 0.94 0.04*
High costs 13 2 0.90 0.0866**
Small and irregular cash flows from clients 14 6 0.50 0.316
Legislation and regulatory framework 10 4 0.48 0.3675
Unreliable infrastructure 9 3 0.46 0.466
Quality of loan books 16 13 0.34 0.44
Ownership structure unclear/donor intervention 23 20 0.27 0.4239
Fraud 22 19 0.26 0.477
Poor selection of practices 21 18 0.24 0.648
Low population density 24 24 0.17 0.3742
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Retaining existing clients 15 14 0.08 0.92

Attracting low-income clients 11 10 0.04 0.97
Profit performance 18 17 -0.03 0.8292
Service quality to customers 7 8 -0.12 0.97
Appropriate staff incentive schemes 4 5 -0.17 0.7034
Inadequate donor funding 19 23 -0.17 0.859
National Payment System 17 22 -0.25 0.5508
Education levels of your clients 2 1 -0.39 0.71
Increased Competition 5 12 -0.48 0.388
Educational level of staff 12 16 -0.53 0.248

Skills development of Staff 3 7 -0.65 0.1098***

Client focus 6 15 -0.98 0.0463*

Interest rates/commissions 8 21 -1.12 0.031*
Lack of enough capital to lend to Clients 1 9 -1.30 0.033*
* Significant at 5% significance level using the two tail Mann-Whitney-Wilcoxon (MWW) Test
** Significant at 10% significance level using the two-tail Mann-Whitney-Wilcoxon (MWW) Test
*** Not significant at 10% significance level using the two-tail Mann-Whitney-Wilcoxon (MWW) Test. However, using a one-tail Kruskal Wallis test
in favour of non-SACCOs delivers a p-value of 0.0549. Hence it becomes significant at the 10% level.

The competitive advantages of Credit Cooperatives over Non-SACCOs tend to lie in a cost advantage
and better information about their own clients. They typically benefit from their member structure to
avoid infrastructure costs. The fact that SACCOs are membership based as well as frequently
workplace-based, means that the knowledge of their clients allow them to avoid the pitfalls
surrounding poor selection practices, and hence its loan book is of better quality than those of non-
SACCOs. SACCOs are also less sensitive to regulation as much of its activities take place in the
informal sector and is thus self-regulatory. All these issues appear to be less pressing for SACCOs as
can be seen from the rankings, even the though the differences in the means are not significant.

However, SACCOs find it hard to find sufficient capital to lend to its members, while non-SACCOs find
this less of a problem which could relate to the greater amount of donor funding available to the non-
SACCOs. The credit cooperatives also find education levels of its staff a factor which impedes its
activities, while this is less of a problem in the formal sector. SACCOs are democratic organizations,
meaning that it serves a communal need and not that of individuals. They therefore experience a lack
of client focus. The survival of SACCOs is dependent on higher interest rates than in the more formal
sector. It is therefore not surprising that credit cooperatives found high interest charges and
commissions to be the 8th most pressing problem, while it only ranked at 22 for non-cooperative
organizations.

SACCOs are informal structures and staff-members are therefore usually not formally trained to be
efficient in a specific technical role, while in the banking environment staff members are often trained
(formal education or in-house training). SACCOs therefore find the lack of skills of staff to be an
impeding factor to growth while this is not the case in the formal sector.
 15

Conclusion & further research

In terms of problems affecting the growth of MFIs, a clear list of priorities can be listed from the
perceptions in the industry. The most important include the educational levels of clients, lack of capital
to lend to clients and staff related incentives and skills development.

It is important to note that the Tanzanian regulators cannot address the MFI sector as a homogeneous
segment, but that there are at least two tiers. In depth analysis of the results of the survey underlying
this paper shows that a distinction can be made between credit cooperatives and more formal banking
structures. If the Tanzanian government or donor agencies, can provide SACCOs with a form of loan
capital, the sector would be able to grow faster than what it has managed in the past. It was shown
that organisations that receive donor funding are able to make more loans and this would have a
major impact on the SACCOs industry. However, the industry has been fairly unregulated in the past
and this has given it a cost-advantage. If financing would therefore be associated with regulation it
might have negative implications.

The formal banking sector is bigger that the sector covered by SACCOs, both in terms of the number
of loans and total money loaned to clients. However, it may be able to learn valuable lessons from the
SACCOs. It may also be worthwhile for banks to consider lending to SACCOs. None of the banks
currently lend to groups (although CRBD started to provide loans to a number of SACCOS after this
study was concluded) and it may be able to decrease its cost while empowering SACCOs
simultaneously. However, further research would have to be conducted to determine regulatory
limitations to such a suggestion.

Further research should surround the specific impeding factors within the SACCOs and Non-SACCOs
industries. This study did hint at some differences, but stratifying future samples may enable more
significant results.

A lack of resources limited this study to mostly urban-based MFIs, although almost half of the
institutions in the survey had some rural footprint. This study could therefore be expanded to include
(or focus only on) rural MFIs.
 16

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 19

Appendix 1: Questionnaire
1. Type of Microfinance service provider…………………………………….
(Commercial bank, Non bank financial Institution, Rural /Community bank, Regional unit bank, NGO,
or SACCOS).
2. Year established…………………………………………………………….
3. Which financial products do you offer? (tick the applicable service)
- Financial service
Credit……………………………
Savings………………………….
Insurance………………………..
- Non-financial services provided (tick the applicable service)
Education………………………..
Health……………………………
Community projects………….…
Domestic………………………..
- Any other (mention)………………………………………………………..
4. Does your organisation provide a service to? (Put a tick in the appropriate block):
Only Women Only Men Both

Only Groups Only Individuals Both

Only employed Only unemployed Both

5. Who are your major donors?

……………………………………………………………………………………
6. Number of borrowers (clients) Individuals & groups who had received loans to date
…………………………………………………………………………..
7. Number of Branches/offices providing Microfinance services………………

8. Which geographic areas do you serve? (Put a tick in the appropriate block):

Only Rural Only Urban Both

9. Number of Districts covered…………………………

10. Please indicate whether (Yes or No) you currently experience the following factors/problems as
challenge in your organisation. If your answer is “Yes”, please rank that factor/problem by
putting a tick against a relevant code concerning to which extent does that factor/problem affect
your organisation from expanding microfinance services to more low income people.
Ranking codes:
4 - the factor is a severe problem.
3 - the factor is a moderate problem.
2 - the factor is a minor problem.
1 - the factor is a small problem.
0 - the factor is not a problem

Problem Yes or No 1 - Small 2 - Minor 3 - Moderate 4 - Severe

Problem Problem Problem Problem
1. Quality of loan books (credit risk, Y N
delinquency and payment default
risk)
2. Fraud Y N
3. Increased competition Y N
4. Service quality to customers Y N

5. Lack of information about clients Y N

6. Profit performance Y N
7. High costs Y N
 20

8. Small and irregular cash flows Y N

from Clients
9. Client focus (delivering what Y N
clients want)
10. Attracting low – income clients Y N
(poor client response)
11. Retaining existing clients Y N
12. Education levels of your clients Y N
(low educational awareness
especially among the low income
earners)
13. Education level of staff Y N
14. Skills development of staff Y N
(Microfinance skills)
15. Lack of enough capital to lend to Y N
clients
16. Poor selection practices Y N
17. Appropriate staff incentive Y N
schemes (does your
incentive scheme does what
it should?)
18. Legislation and regulatory Y N
framework
19. Ownership structure unclear/ Y N
donor intervention.
20. Low population density Y N
21. Unreliable infrastructure (Poor Y N
communication, transport &
Information technology)
22. Inadequate donor funding ( for Y N
donor dependable organisations)
23. National payment system
24. Interest rates/commissions
Other problems (Please mention them specifically)
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Suggest four things that can be done to significantly increase financial service to the poor

First:
………………………………………………………………………………………………………
Second:
………………………………………………………………………………………………………
Third:
………………………………………………………………………………………………………
Fourth:
………………………………………………………………………………………………………
 21

Appendix 2: Results of the factors in the Survey by Total sample, Non-SACCOs sample and SACCOs sample

(does your incentive scheme do what

Legislation and regulatory framework

Appropriate staff incentive schemes

Small and irregular cash flows from

Indequate donor funding (for donor

Ownership structure unclear/donor

Lack of enough capital to lend to

Lack of information about clients
Education levels of your clients

Attracting low-income clients

Service quality to customers

Interest rates/commissions

Skills development of Staff

Poor selection of practices
dependable organizations)

National Payment System

Retaining existing clients

Un reliable infrastructure

Educational level of staff

Low population density
Increased Competition
Quality of loan books

(Microfinance skills)
Profit performance
Client focus

intervention
High costs

it should?)
Clients
clients

Fraud
% No Responses 8.3% 18.8% 29.2% 47.9% 33.3% 22.9% 27.1% 31.3% 62.5% 25.0% 52.1% 35.4% 29.2% 64.6% 68.8% 29.2% 68.8% 58.3% 29.2% 16.7% 58.3% 16.7% 39.6% 14.6%
% Yes Responses 91.7% 81.3% 70.8% 52.1% 66.7% 77.1% 72.9% 68.8% 37.5% 75.0% 47.9% 64.6% 70.8% 35.4% 31.3% 70.8% 31.3% 41.7% 70.8% 83.3% 41.7% 83.3% 60.4% 85.4%
Rating = 1 10.4% 18.8% 35.4% 25.0% 16.7% 16.7% 18.8% 27.1% 14.6% 12.5% 16.7% 10.4% 14.6% 16.7% 10.4% 10.4% 6.3% 8.3% 18.8% 6.3% 16.7% 10.4% 12.5% 10.4%
Rating = 2 14.6% 25.0% 20.8% 16.7% 16.7% 22.9% 22.9% 22.9% 8.3% 18.8% 8.3% 12.5% 16.7% 6.3% 10.4% 12.5% 4.2% 14.6% 18.8% 6.3% 12.5% 25.0% 22.9% 27.1%
Rating = 3 35.4% 29.2% 12.5% 4.2% 22.9% 25.0% 22.9% 14.6% 10.4% 27.1% 22.9% 33.3% 14.6% 10.4% 6.3% 33.3% 4.2% 12.5% 20.8% 29.2% 10.4% 18.8% 16.7% 25.0%
Total Sample

Rating = 4 31.3% 8.3% 2.1% 6.3% 10.4% 12.5% 8.3% 4.2% 4.2% 16.7% 0.0% 8.3% 25.0% 2.1% 4.2% 14.6% 16.7% 6.3% 12.5% 41.7% 2.1% 29.2% 8.3% 22.9%
Mode 3 3 1 0 0 3 0 0 0 3 0 0 0 0 0 3 0 0 0 4 0 4 0 2
Mean 2.71 1.90 1.23 0.96 1.60 1.88 1.67 1.33 0.79 1.98 1.02 1.69 1.92 0.69 0.67 1.94 0.94 1.00 1.69 2.73 0.81 2.33 1.42 2.31
Median 3 2 1 1 1.5 2 2 1 0 2 0 2 2 0 0 2 0 0 2 3 0 2 1 2

Score = 0 30% 20% 30% 20% 20% 30% 40% 30% 50% 40% 60% 20% 10% 50% 50% 10% 70% 70% 50% 40% 50% 10% 60% 10%
Non-SACCOs

Score = 1 0% 20% 20% 30% 20% 40% 0% 30% 20% 10% 10% 10% 20% 30% 20% 20% 10% 10% 30% 10% 30% 30% 0% 20%
Score = 2 0% 30% 20% 30% 10% 20% 30% 20% 10% 10% 0% 10% 30% 0% 30% 20% 0% 0% 10% 10% 0% 10% 30% 50%
Score = 3 40% 20% 30% 0% 40% 10% 10% 10% 20% 30% 30% 30% 10% 20% 0% 30% 10% 10% 10% 20% 10% 30% 0% 20%
Score = 4 30% 10% 0% 20% 10% 0% 20% 10% 0% 10% 0% 30% 30% 0% 0% 20% 10% 10% 0% 20% 10% 20% 10% 0%
Mean Score non-SACCOs 2.4 1.8 1.5 1.7 2 1.1 1.7 1.4 1 1.6 1 2.4 2.3 0.9 0.8 2.3 0.8 0.8 0.8 1.7 1 2.2 1 1.8

Score = 0 3% 18% 29% 55% 37% 21% 24% 32% 66% 21% 50% 39% 34% 68% 74% 34% 68% 55% 24% 11% 61% 18% 34% 16%
Score = 1 13% 18% 39% 24% 16% 11% 24% 26% 13% 13% 18% 11% 13% 13% 8% 8% 5% 8% 16% 5% 13% 5% 16% 8%
Score = 2 18% 24% 21% 13% 18% 24% 21% 24% 8% 21% 11% 13% 13% 8% 5% 11% 5% 18% 21% 5% 16% 29% 21% 21%
SACCOs

Score = 3 34% 32% 8% 5% 18% 29% 26% 16% 8% 26% 21% 34% 16% 8% 8% 34% 3% 13% 24% 32% 11% 16% 21% 26%
Score = 4 32% 8% 3% 3% 11% 16% 5% 3% 5% 18% 0% 3% 24% 3% 5% 13% 18% 5% 16% 47% 0% 32% 8% 29%
Mean Score SACCOs 2.79 1.92 1.16 0.76 1.50 2.08 1.66 1.32 0.74 2.08 1.03 1.50 1.82 0.63 0.63 1.84 0.97 1.05 1.92 3.00 0.76 2.37 1.53 2.45

Difference in Means -0.39 -0.12 0.34 0.94 0.50 -0.98 0.04 0.08 0.26 -0.48 -0.03 0.90 0.48 0.27 0.17 0.46 -0.17 -0.25 -1.12 -1.30 0.24 -0.17 -0.53 -0.65
p-value (MWW Test) 0.71 0.97 0.44 0.04 0.316 0.0463 0.97 0.92 0.477 0.388 0.8292 0.0866 0.3675 0.4239 0.3742 0.466 0.859 0.5508 0.031 0.033 0.6478 0.7034 0.248 0.1098
 22

Appendix 3: Mean scores in SACCOS and Non-SACCOs samples

0 0.5 1 1.5 2 2.5 3 3.5

Lack of enough capital to lend to Clients

Education levels of your clients
Skills development of Staff
Appropriate staff incentive schemes
Increased Competition
Client focus
Service quality to customers
Interest rates/commissions
Unreliable infrastructure
Legislation and regulatory framework
Attracting low-income clients
Educational level of staff
High costs
Small and irregular cash flows from clients
Retaining existing clients
Quality of loan books
National Payment System
Profit performance
Indequate donor funding
Lack of information about clients
Poor selection of practices
Fraud
Mean Score non-SACCOs
Ownership structure unclear/donor intervention
Mean Score SACCOs
Low population density