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Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 3
March 2016
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 97
The Effectiveness of the Group lending Model for Financing
Micro and Small Enterprises in Tanzania
Obed Hugh Ligate
University of North America, 8618 Westwood Center Drive, 1st Floor, Vienna, VA 22182, United States
Email: obj_hugh@yahoo.com
Abstract
Micro, Small to Medium Enterprises
(MSMEs) are widely acknowledged to
contribute significantly to economic growth
in developing countries for instance,
(Ayyagari, Beck and Kunt, 2007) put the
average share of MSMEs that have up to
250 employees as 54% of the formal
employment and 26% of the Gross
Domestic Product(GDP) in a analysis that
spans 76 countries. Amongst barriers to the
development of MSMEs in Tanzania was
lack of access of capital due to lack of
repayment culture, no credit history and
effective business plans to secure loans.
Moreover, lack of business skills and
technology to produce high quality goods
in the market place were cited as other
barriers. This study was a critical review of
an international successful micro finance
model known as Grameen model or
generally known as Group lending its
suitability in the Tanzanian environment
and whether it should be promoted as a
major means of bridging the financial gap
for MSMEs. A qualitative technique was
used supplemented by secondary sources.
Keywords: Micro, Small to Medium
enterprises, Grameen model, Poverty
alleviation
Introduction
The economic context
Tanzania has a population of just
over 51 million (July, 2015 estimates),
Gross Domestic Product (GDP) of
US$128.2 billion, and GDP per
capita of US$2700, PPP data are in 2014 US
dollars. This makes Tanzania one of the low
income countries. Moreover, the GDP
contribution per sector in 2014 terms is
divided respectively as agriculture (26.5%);
industry (25.6%) and services (47.4%). The
Micro, Small to Medium Enterprises
(MSME) subsector in overall terms
contributes 33% to the country GDP as of
2011. Eighty per cent of the country’s
population lives in rural areas depending on
subsistence agriculture while the remaining
20% of the population are employed in the
industry and services sector of the economy
and live in urban areas (CIA, 2015).
Tanzania grasped its independence
from the British in 1961. During the period
1967 to 1976, the government resorted to
nationalizing private owned firms and thus
owned all the major means of production
due to socialist policies. During, this period,
private entrepreneurship was discouraged
and there were a few thriving MSMEs
(Olomi and Nchimbi, 2002).
Page 2 of 28
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 3
March 2016
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 98
Moreover, by the late 1970s, the
operation and growth of large scale
government enterprises were deemed
ineffective due to public sector policies
pursued post Arusha declaration in 1967,
deterioration of terms of trade and the Idi
Amin war (Muganda, 2004).
The Tanzanian government had to
resort for financial assistance from the
World Bank and IMF and thus had to
undergo an economic reform in 1986.
Privatization made employees that were
downsized from the former government
owned firms to start MSMEs (Stevenson and
Onge, 2005).
Microfinance in Tanzania
Microfinance in Tanzania started in
early 1990s whereby a few Non- Government Organizations (NGO) and
Savings and Cooperative Credit
Organizations (SACCOS) provided
microloans to urban women
(MFTransparency, 2015).
Moreover, in the 2000s and onwards
Banks and other intermediaries had started
providing loans to poor customers. To-date,
microfinance providers have an outreach to
about 500,000 customers which is an
estimated 2% of the total demand assuming
that 25 million of the working population
required such loans. These institutions
disburse about a total 152M USD (1USD=
1815Tshs) (MFTransparency, 2015).
Additionally, the Ministry of Trade
and Industries of Tanzania that oversees the
SME sector has categorized MSMEs as
indicated in Table 1.
Table 1: Categorization of MSMEs in Tanzania (Table 1: Ligate)
The rest of the paper was organized
asthe literature review, theoretical
framework, methodology, research
questions, findings, conclusion and finally
recommendations.
Literature review
Micro, Small to Medium Enterprises
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Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 3
March 2016
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 99
The role of Small to Medium
Enterprises (MSMEs) in the development
process continues to be in the forefront of
policy debates in developing countries. The
advantages claimed are many, including
creation of entrepreneurship, the likelihood
that MSMEs will use labor intensive
technologies and thus have an immediate
impact on employment generation.
Moreover, MSMEs can be set-up rapidly
and produce quick returns because the
technology used and organization set-up is
relatively simple compared to larger
organizations. MSMEs also decrease income
inequality and develop a dynamic private
sector that’s present a countervailing force
against the monopoly and economic power
of large multinational corporations. More
generally, the development of MSMEs is
seen as accelerating the achievement of
wider economic and socio-economic
objectives including Poverty alleviation
(Cook, 2001; Economic and Social Research
Foundation, 1999).
Financing MSMEs
Finance has been viewed as a critical
element for the development of MSMEs.
Previous 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 (Levy,
1993; Schmitz, 1982; Page and Steel, 1984).
Typically smaller businesses face higher
transaction costs compared to larger entities
in obtaining credit due to lack of collateral,
credit history and effective business plans
(Saito & Villanueva, 1981). This
information asymmetry has restricted the
flow of finance to smaller enterprises and
stifled their growth. Other challenges that
MSMEs face are non-financial especially
due to lack of innovation and creativity on
the part of MSMEs that result in less value
addition and profitability (Liedholm et al.,
1994). To solve the challenges faced by
MSMEs in obtaining finance, an innovative
micro financing model known as the
Grameen model was developed in
Bangladesh by Dr. Muhammad Yunus who
was honored with Nobel peace prize for his
work. The innovative model does not
require a small business owner to have
collateral to secure a loan from a financing
institution, but rather uses peer pressure; the
default rate is very low, however in case of a
loan defaults by a group member other
members will not be able to access loans.
The small business owners are required to
organize themselves in groups of 5 in order
to secure loans whereby each group member
takes turns to access a loan. Once the first
member pays back the loan then another
member can access loans and so on until all
members get loans. Moreover, the loan
amount can be increased in each cycle
(Grameen, 2011). The Group model for
microfinance is depicted in figure 1 below.
