Bridging the Finance Gap for Women Entrepreneurs

34. Tanzania: Policy insights on microfinance

Dr. Dina Modestus Nziku
University of the West of Scotland

Dr. Chanel Bikorimana
Glasgow Caledonian University

Background

There has been a strong post-pandemic recovery in Tanzania over the period of 1 July 2022 to 30 June 2023, reaching 5% annual growth rate in Gross Domestic Product (GDP) (World Bank, 2023[1]). This was achieved following the implementation of structural reforms for strengthening the competitiveness of the economy, improving both business and investment environment and greatly reducing the costs of regulatory compliance.

Micro-, small- and medium-sized enterprises (MSMEs) play a significant role in the economy as they create jobs, boost productivity, generate income, foster innovation, and contribute towards the general economic growth of the nation (Swid, Ruboko and Maro, 2023[2]). However, many micro-enterprises face multiple constraints in accessing capital and other essential resources. Evidence suggests that only 30% of Tanzanian MSMEs can access mainstream financial services (Ishengoma, 2018[3]) and face several barriers due to tight financial regulations and poor technologies.

Most women entrepreneurs operate in the informal sector and have low and irregular incomes. However, most prefer to remain informal due to a lack of awareness of the clear benefits of being formal (ILO, 2014[4]). Despite their informal status, women-led businesses focus on generating income for themselves and their extended family members. Most of these women conduct small-scale activities such as informal food catering, food vending, beauty salons, and roadside/open markets, the most neglected sectors by commercial banks.

Recent studies reveal that women entrepreneurs in Tanzania continue to face significant barriers to accessing finance for business creation, including microfinance (Nziku and Forson, 2021[5]; Mng’ang’a, Nyabakora and Nyagali, 2020[6]; Nziku and Henry, 2020[7]). One of the major obstacles is related to the lack of rights for women to own assets that can be used as collateral to obtain start-up capital from financial institutions. Most commercial banks require land title deeds to guarantee any loan, but married women cannot provide title deeds to the banks as collateral without the husband’s permission (Gender Land Taskforce Tanzania, 2013[8]). The inequality in land ownership lies in the traditions and customary practices that favour men rather than women (Lusasi and Mwaseba, 2020[9]; Mhango, Malima and Lukumay, 2014[10]). Following the traditional norms, any married woman belongs to their husband’s family; as a result, the land which is family property must be retained and given to men allowing them to be far better off financially than women. However, some women may have land without title deeds due to a lack of affordability of registration costs.

Policy issue: Access to microfinance for start-ups

Most of the financial institutions in Tanzania are reluctant to offer loans to informal businesses because they lack collateral, and it is difficult to collect basic information about the entrepreneur. These businesses, therefore, tend to approach microfinance institutions (MFIs) to secure funding. Usually, MFIs offer loans to those who do not have assets and charge low interest compared to banks. However, MFIs face several challenges in delivering financial services to women entrepreneurs.

One of the main challenges for the microfinance sector in Tanzania is that MFIs lack a wide geographic coverage. The lack of MFIs is largely observed in rural areas. This leaves the majority of women entrepreneurs in rural areas reliant on family, friends or other informal sources of funding. This significantly limits the amount of funding that can be acquired, hindering the businesses potential development.

Another issue is that MFIs, such as the Savings and Credit Cooperative Society (SACCOS), tend to lack capital investments since they have difficulties borrowing money from commercial banks. Most MFIs avoid borrowing more from commercial banks due to high interest rates charged since their members pay low interest rates. Therefore, MFIs rely on deposits from their member/clients with a large percentage in returned lending to borrowers who agree to pay interest.

A close analysis of the current microfinance policy reveals, despite a moderate increase in the number and types of commercial banks and MFIs, access to formal financial markets in Tanzania continues to remain relatively low. This is due to the lack of collateral and the absence of reform to implement policy which can support women entrepreneurs in urban and rural areas. In addition, most women are financially excluded and have a low intake to access financial services, particularly in rural areas because they lack the required assets required as a collateral to obtain loans. Despite the availability and accessibility of MFIs, they still have not contributed substantially to reduce women entrepreneurs’ income poverty. Most women borrow money from families and friends, but these informal channels often lead to paying back loans with high interest rates among other problems (Brown et al., 2015[11]). Therefore, barriers related to the lack of availability of money among families and friends restrict the development of women-led businesses.

Conclusions

The government has made significant progress in recent decades in implementing entrepreneurship policies. This includes implementing actions under the National Strategy for Growth and Reduction of Poverty (2010-15), National Microfinance Policy (2017) and Tanzania’s Development Vision 2025, which seeks to tackle gender inequalities by 2025. Despite such efforts, women entrepreneurs continue to face great challenges accessing finance. One of the most significant issues is that MFIs lack capital investment and avoid increasing their pool of funds by borrowing from commercial banks. This, combined with a lack of presence in rural areas, undercuts the potential for MFIs to facilitate access to finance for women entrepreneurs. One potential solution is that MFIs could be offered incentives to expand operations in rural areas.

Another challenge is that many of the current programmes and initiatives are not designed to support women entrepreneurs who operate very small and informal businesses. Existing initiatives, such as Export Credit Guarantee Scheme (ECGS) cover up to 75% of the principal amount of the credit and Small and Medium Enterprises Credit Guarantee Scheme (SME-CGS) which cover up to 50% of the principal amount for credit facility between TZS 50 million and TZS 1 billion, have contributed little to alleviating poverty among women. Those schemes were not designed to support most women entrepreneurs who operate in informal sectors.

References

[11] Brown, A. et al. (2015), Financial Inclusion and Microfinance in Tanzania. Inclusive Growth: Tanzania Country Report, https://www.cardiff.ac.uk/__data/assets/pdf_file/0010/592129/Tanzania-Feb-2015-FINAL.pdf (accessed on 3 October 2024).

[8] Gender Land Taskforce Tanzania (2013), Annual Report 2013. Tanzania Women’s Lawyers Association, http://www.tawla.or.tz/wp-content/uploads/2020/08/ANNUAL-REPORT-2013.pdf. Accessed on 2nd 09.2023 (accessed on 3 October 2024).

[4] ILO (2014), Report IV: Small and medium-sized enterprises and decent and productive employment creation, International Labour Organization, Report for International Labour Conference, 104th Session.

[3] Ishengoma, E. (2018), “Entrepreneur Attributes and Formalization of Micro, Small and Medium Enterprises in Tanzania”, Journal of African Business, Vol. 19/4, pp. 491-511, https://doi.org/10.1080/15228916.2018.1472480.

[9] Lusasi, J. and D. Mwaseba (2020), “Gender Inequality and Symbolic Violence in Women’s Access to Family Land in the Southern Highlands of Tanzania”, Land, Vol. 9/11, p. 468, https://doi.org/10.3390/land9110468.

[10] Mhango, S., R. Malima and E. Lukumay (2014), “Gender equality in land ownership as a strategy for poverty reduction in Tanzania: A case of Ilala Municipal in Dar Es Salaam City”, Developing Country Studies, Vol. 4/10, pp. 73-78.

[6] Mng’ang’a, J., W. Nyabakora and R. Nyagali (2020), “Contribution of Microfinance Institutions in Empowering Women in Tanzania (A Case of Serengeti District Council)”, International Journal of African and Asian Studies, Vol. 63, pp. 47-53, https://doi.org/10.7176/JAAS/63-06.

[5] Nziku, D. and C. Forson (2021), “Building Entrepreneurship Skills for Women – Tanzania”, in Entrepreneurship through a Gender Lens, OECD Publishing, Paris.

[7] Nziku, D. and C. Henry (2020), “Policies for supporting women entrepreneurs in developing countries: the case of Tanzania”, Journal of Entrepreneurship and Public Policy, Vol. 10/1, pp. 38-58, https://doi.org/10.1108/JEPP-09-2020-0073.

[2] Swid, A., E. Ruboko and E. Maro (2023), “Start-up Life May Stop Here: Helping Women Entrepreneurs in Sub-Saharan Africa”, Journal of Global Business Insights, Vol. 8/1, pp. 16-30.

[1] World Bank (2023), A New Era in Development: Annual Report 2023, https://www.worldbank.org/annualreport (accessed on 3 December 2023).