Robert Makorere. Mzumbe University, Tanzania

Transcription

1 Page1 ISSN: Vol. 3 (4): 1-19 The role of microfinance in promoting small and medium enterprises (SMEs) in Tanzania: empirical evidence from SMEs holder who have received microcredit from financial institutions in Morogoro, Tanzania Robert Mzumbe University, Tanzania rmakorere2001@yahoo.com Abstract This paper is stressed to examine the role of microfinance in promoting small and medium enterprises, Tanzania. With that, the study aimed to solve this question: what are the key factors influencing small enterprise to become medium enterprise and hence large enterprises? A total of 51 respondents received microfinance from Tanzanian commercial banks were selected for an interview using simple random and snow ball sampling techniques as well. Results show that increased on business profits, labour employments, outlets, and sales volume are the impact of adequate microfinance access (statistically significant at P 0.05 level of significant). Result shows increased on business profits, employments, outlets, sales volume are statistically significant at when P 0.05 level of significant. Statistically the finding shows that the increased of business capital structure has no direct relationship with microfinance access only (insignificant by when P 0.05 level of significant). The enterprises whose owners also received business training, tax exemption, fair interest rate, enough grace period and infrastructures performed better than those that did not. With all that, the study further shows that many problems facing Tanzanian entrepreneurs are not only related to size of capital, it is related to macro-economic institutional constraints. Keywords: microfinance; small and medium enterprise development Citation:, R. (2014). The role of microfinance in promoting small and medium enterprises (SMEs) in Tanzania: empirical evidences from SMEs holder who have received microcredit from financial institutions in Morogoro, Tanzania. Global Business and Economics Research Journal, 3(4): Available online at

2 Page2 1. INTRODUCTION Small and medium enterprises (SMEs) play crucial role in employment creation and income generation in many developing economies. This role is particularly critical in the national efforts to eradicate poverty. The significance of SMEs to these two roles in Tanzania is evident from the estimated more than 1.7 million businesses operating, which are estimated to employ more than 3 million people (URT, 2002). SMEs also serve as breeding ground for emerging entrepreneurs as well as forming the backbone of the indigenous private sector. In spite of the finance unsoundness, finance is one of the important determinants of small business success. Microfinance is an important source for businesses growth. There are number of microfinance mushroomed in Tanzania since the onset of economic reforms in mid 1980 aimed to support SMEs development, extending credit to MSEs, filling the gap left by commercial banks. What are the key factors influencing small enterprise to become medium enterprise and hence large enterprises? It is microfinance. Microfinance is an important tool to promote business development. Development of small business is subjects to access and received adequate finance and lucrative markets. Furthermore, microfinance improves business working capital. In Tanzania, many of the small business enterprises have limited working capital; one of the functions of microfinance institutions to meltdown problem of working capital that small business face (World Bank, 2001). More than 10,000 firms in 80 countries, SMEs worldwide on average named financing constraints as the second most severe obstacle to their growth, while large firms on average placed finance only fourth (WBES, 2004). Of all the factors above, microfinance is the most important one because it encompasses a number of factors. Therefore, the objectives of the study on which this article is based were to; analyze challenges facing SMES access finance from Microfinance institutions; second, determine to what extent do microcredit associates with employment creation, business expansion, sales volume and capital structure of the SMEs; and third, determine whether government intervention needed to improve credit as well as SMEs development. The paper is organized into five parts. Following this introduction, we discuss the theoretical and conceptual issues surrounding the role of microfinance in SME development. Part three describes the study methodology. Part four and five present the data on entrepreneurs who have received microfinance services from commercial banks in Tanzania and concludes the paper and gives some recommendations for intervention.. Available online at

3 Page3 2. LITERATURE REVIEW 2.1 Small and medium enterprise in Tanzania In the context of Tanzania, small and medium enterprises (SMEs) are those engaging up to 4 people, in most cases family members or employing capital amounting up to Tshs.5.0 million. Small enterprises are mostly formalised undertakings engaging between 5 and 49 employees or with capital investment from Tshs.5 million to Tshs.200 million. Medium enterprises employ between 50 and 99 people or use capital investment from Tshs.200 million to Tshs.800 million (URT, 2003). Microfinance refers to small-scale financial services (credits services); that are provided to people who running certain business; operate small or micro-enterprises where goods are produced, recycled, repaired, or traded in both rural and urban areas (Stanley, 2008). 2.2 Capital structure and financing of SMEs A decision to start a business or expand an existing firm by increasing the productive assets, involves an implicit decision to raise money capital in order to finance the growth. There are three main sources of funds; namely equity financing, debt financing, and the use of retained earnings. The first two sources, equity and debt financing constitute external financing, while retained earnings are an internal source (Koutsoyiannis, 1982). The capital structure of a firm concerns the mix of different securities. Brealey and Myers (2003) contend that, the choice of capital structure is fundamentally a marketing problem. They state that, the firm can issue dozens of distinct securities in countless combinations but it attempts to find the particular combination that maximizes market value. According to Weston and Brigham (1990), the optimal capital structure is the one that maximizes the price of the firm s stock. The theoretical literature for explaining the capital structure of large firms also applies in the case of SMEs. The finance reports provides three major theories of capital structure: (i) the agency cost/tax shield trade-off model, (ii) the pecking order hypothesis; and (iii) the signalling model. Megginson (1997) provides a review of these theories with an emphasis on the most researched - the trade-off model. In this model, firms choose their capital structures by trading off the tax benefits of debt with the agency costs of debt and expected bankruptcy costs. 2.3 The role of microfinance in SME development Lack of access to finance has been identified as one of the major constraints hindering the development of small businesses, and therefore the supply of entrepreneurial activities not just in Tanzania, but in other developing. Commercial banks have traditionally concentrated. Available online at

4 Page4 their lending mainly to large formal enterprises which possess collateral and, therefore, contended to be less risky. According to Megginson (1997) study on the supply and demand for financial services in Tanzania by K-Rep, less than 5% of households (not necessarily all entrepreneurs) in the urban and rural areas in Tanzania had access to credit from formal sources. Women's World Bank estimated that worldwide, less than 2% of low-income entrepreneurs have access to financial services. Although the role of credit as a determinant for successful entrepreneurial activity may look obvious when using a partial analysis, the dynamics in the entrepreneurial processes makes this role less obvious. The analysis of an entrepreneurial activity shows that finance does not in itself create economic opportunities. Rather it is entrepreneurial people who see ways in which they can generate income from situations, skills or contact or other push factors. It is in this context that the role of credit should be seen. Entrepreneurial success could be defined in a conventional sense in terms of a firm's profit generation and growth in terms of employment, output, and sales etc. over-time. Through growth a firm can graduate from one size to a higher one. In addition, firms that are also realizing results like increased employment of family members, and increased household welfare (increased access to education, health, better housing) and those businesses that are able to survive under intense competition are also included. In a competitive situation these successes cannot happen unless a firm is developing an edge that allows it to take advantage of opportunities. The issue then becomes that of how credit can assist in a process of exploiting such opportunities (Kuzilwa, 2003). As it was cited by Kuzilwa (2003) linked McCormick with the determinants of supply of entrepreneurial activities. Utilizing the Scott and Twomey model explaining the supply of entrepreneurship, McCormick distinguishes what are called predisposing and triggering factors and how these are created by economic reforms. Predisposing and triggering factors and how these are created by economic reforms. Predisposing factors include entrepreneurs background (education, work experience, personal ties), perception and personality which are Important human capital that influences the ability of an entrepreneur in dealing with business environment. Triggering factors are those that actually trigger the entrepreneurial activity. This include, for example, increase in the domestic demand for a particular commodity to increased processing capacity and market opportunity, or an opportunity to export due to linkage to a particular chain. Triggering factors have been seen as opportunity for profitable activity. Triggering and disposing factors are seen jointly to be necessary conditions for supply of entrepreneurial activities. At the same time there are factors, named. Available online at

5 Page5 as constraining factors, which are said to be against entrepreneurial activities. These include lack of financial resources, lack of information, lack of appropriate education, and weak markets. 2.4 Principal objectives of microcredit program The principal objective of microcredit programs is to raise incomes and broaden financial markets by providing financial services (principally credit) to small-scale entrepreneurs who otherwise lack access to capital markets. Some of the programs have primary social missions, focusing on outreach to SME and measuring success in terms of poverty alleviation. The enthusiasm for microfinance rests on the idea that people who has next to no money deserved financial services just as much as those who have plenty. A lot of the times those people who have next to no money are poor small business. So microcredit is often justified by notions of equity or fairness: everyone should have clean water and health care, and everyone should have the right to deploy their talent. For that, access to credit is crucial. Not surprisingly, the last decade has seen the evolution of microfinance institutions that have created significant income and employment opportunities for the poor in developing countries, especially small business since they constitute the targeted majority of such programs. In addition to reaching out to many disadvantaged micro-entrepreneurs, some programs have made significant strides in moving toward operational and financial selfsufficiency. 2.5 Problem of Tanzanian SMEs on credit access SMEs in Tanzania have the most difficulty in accessing finance. Large, well-capitalized companies rarely have any problem, while micro businesses are increasingly being catered to by the plethora of microfinance institutions operating in the country (Kangero, 2004). The cost of finance is also an issue. Large, successful corporations are able to access finance at relatively low rates. Micro businesses, however, are charged very high rates of interest, but the loans tend to be relatively short-term. Therefore, the actual amount of interest being paid is acceptable when seen in the context of the overall transaction. SMEs require longer-term funding. However, because of the inherent risks perceived by banks, their cost of finance is generally quite expensive. The challenge then is how to assist the "missing middle" in accessing finance. It is important to appreciate the banker's point of view. Bankers are in business, like anyone else, to make profits for their shareholders. But they also have a duty to their depositors and thus are quite naturally averse to taking undue risks. Whilst a bank's job is to assist in financial intermediation, it is not obliged to lend to anyone that it does not wish to do business with.. Available online at

6 Page6 Ideally, small business customers should have well-established systems for gathering information and forecasting and would find no difficulty in keeping their bankers informed of their current financial position and prospects (Johnson, 2001). However, the vast majority of small enterprises are unable or unwilling to provide such information and, therefore, a bank is obliged to deal with them as it finds them. At this point it is worth reminding would-be borrowers that they have considerable choices when choosing their commercial banks. In the Tanzania market, there are 17 to choose from. It is probably fair to say that the transnational banks concentrate on the high end of the corporate market. This may change as opportunities in this segment diminish and banks are forced to look elsewhere for opportunities. For example, the recent acquisition of National Bank of Commerce Bank by Stanbic may well see the combined bank targeting the SME market as a means of increasing revenues. 2.6 Conceptual framework The conceptual framework of the study is governed by microeconomic theory. Traditional microeconomic theory treats finance as a corporate factor of production. Irrespective of firm size and age, finance is normally required for three standard uses, that is for start-up capital in machinery and acquisition of buildings, financing working capital during start-up or while expanding and purchase of operating materials. Implementation of a business activity can only take place when these factors are in place; otherwise the activity has to be aborted. Financing of factors of production can be undertaken from own savings, generated internal profits (for on-going businesses) or external funds (for start-ups and on-going businesses). Finance becomes important when internal sources of finance are inadequate for an envisaged entrepreneurial activity as figure 2 indicates. The business needs to be connected to finance and macroeconomic factors. Finance is a major factor use to improve business to grow. Interest rate should be fairly. Then, both grace period and initial ceiling amount should be improved so as to improve impact of credit on SMEs. Beside, macroeconomic factors need to be improved by the government to improve economic benefits of the businesses. Macroeconomic factors is used to promote development of SMEs in the country especially when SMEs are adequately connected on business infrastructures and the government reduced tax rate, which can lead operates at less transaction costs.. Available online at

7 Page7 Despite of constraints face small businesses to grow, microcredit is a major driving factor for the business development. One of the factors depict that business grows are increased employment, increased capital structure, profits amount, sales amount, and outlets. Therefore, the model entails that the microfinance and macroeconomic factors if can be utilized and managed properly, automatically industrial sector will grow sustainably as well as total national economy can be improved. Figure 2: Conceptual Model Microfinance Product Interest rates Grace Periods Collaterals Gender Violation Initial Ceiling Amounts Macro-Economic Factors Improved Infrastructures Reduced Transaction Costs Tax regime SME s Food Shops Kiosk Shop Tailoring Shop Poultry Enterprises General Enterprises Development Indicators Business Survive Increased Employment Increased Profit Increased Outlets Increased Capital Size Improved Business Management Source: Researcher 3. MATERIALS AND RESEARCH METHODOLOGY The study was carried out in Morogoro Municipal in Morogoro region in September, The study was specifically conducted in three wards namely Kingo, Boma Road, Saba Saba. The area covered with many SMEs and microfinance institutions such as commercial National Microfinance Bank, SACCOS and Vikoba. A cross-sectional research design was used, in which data were collected once from sampled respondents (customer with credit). Simple random sampling was used to select respondent SMEs owner from sampling frames that were obtained from loan officers. Snow. Available online at

8 Page8 ball sampling was used to identify respondents with bank credit Primary data were collected in September, 2011 by the two researchers using a structured questionnaire that comprised closed, tabular, and open-ended questions. Secondary data were collected to support primary data using document review instrument, reviewed journals, books, and teaching manuals from internet and Mzumbe university Library. The study s unit was come from all entrepreneurs who have received microfinance from the microfinance institutions in Morogoro Municipal. 3.1 Analytical framework The study used both qualitative and quantitative methods of analysis. Data from the survey were coded, summarized and analyzed using Statistical Package for Social Science (SPSS) version 11.5 computer software to find descriptive statistics, including frequencies and percentages. Chi-square analysis was used to determine whether microfinance can promote SMEs development or not, when (P 0.05) level of significant. 4. RESULTS AND DISCUSSIONS 4.1 Socio-economic characteristics of Respondents This section describes the characteristics of the respondents (Traders). The social-economic profiles for the traders were characterized by an array of attributes of credit practices and other economic activities. These activities were analyzed to get a thorough understanding of the general social-economic profiles of the different traders in the business ventures. Characteristics of respondents were looking at their gender, age, nature of business and marital status. The following Table-1 summarizes social-economic characteristics of traders surveyed: Table -1: Social- economic characteristics of Traders Variable Frequency Percent Gender Distribution Males Females Age Distribution: Years (Youth Group) Years (Adult Group) Years and Above (Old Group) Marital Status Distribution:. Available online at

9 Page9 Single/Unmarried Married Widowed Business Experience: Two Years Three Years Four Years and Above Nature of Business Venture: Food Vending Kiosk Tailoring Poultry Others Sources of Microfinance: CRDB Bank NMB Bank NBC Bank Overall Source: Field Data (2011) Gender distribution: The study took much seriousness on the issue of gender sensitivity in the selection of the respondents to be involved in the study in order to avoid gender biasness. This can be proved from the evidence shows that males surveyed were 28 (54.9%) and females surveyed were 23 (45.1%), out of 51 respondents surveyed. Therefore the results of the findings of this study are not gender biased as the selection of consumers is considered to be both males and females with almost equal proportions. Age distribution: The Table 1 above provides ages of respondents who have advanced microcredit by the banks. From Table 1, results revealed that the majority of bank consumers, who are using banks credits, have age intervals between (62.7%) years old. This means more adult age group get involves on entrepreneurship activities and connected to microfinance bank. This group is likely to be exposed on collaterals and other banking conditions thus why more group from this interval connected to microfinance institutions. Follows by years 8(15.7%) surveyed were more or less constrained to access microcredit due to unmet bank conditions.. Available online at

10 Page10 Marital status: Table 1 above describes marital status of each respondent surveyed from the field: Results shows majority of the respondents surveyed were marriage 31 (60.8%), follows by single/never married 10 (19.6%), and widow were 10 (19.6%). Generally, this implies that the microfinance deals more with marriage people than the rest because of their commitment in business. Secondly, means marriage people are engaged on business than other groups. This could be due to increasing on family commitment. Marriage people, in most cases, have less risk in term of business seriousness as well as credit repayment. Business Experiences: The study was intending to assess levels of business experiences in connection to microcredit access. Table 1 above express levels of business experience in doing business and linked it with microcredit access. It is obviously, most of banks preferred to deal with businesses which have more knowledge and skills on business issues. This can be witness by looking on table 1 above where the majority of businesses accessed bank loan have four years and above business experience 23(45%). This implies that banks minimize risk associate with future events and business also minimize risk of becoming defaulters because already knows the market patterns. Nature of Businesses: The Table 1 above indicates different categories of SME activities done by each respondent in Morogoro Municipal. It is indicated that most of the respondents surveyed comes from other business were 29 (56.9%), followed by food vendors 13 (25.5%), and the last poultry farming 2(3.9%). This implies that general enterprises are more connected to microcredit than other business. Poultry business gets less connected to microfinance due to venerability of the business exposed. Microfinance Institutions: The study surveyed respondents from different microfinance institutions in Tanzania. These are the categories of respondents surveyed with their percentages. Out of 51 respondents, the study surveyed respondents from CRDB Bank were 19 (37.3%), followed by National Microfinance Bank (NMB) 19 (37.3%), and National Bank of Commerce (NBC) 13 (25.5%). Situation before Advanced Loan for Business to Start-up: Generally, the study revealed that many financial institutions financing a business which already existing in the operations at least a year. This implies businesses should deploy own resources before looking for financial assistance. The study observed 100 percent of businesses were started from funds. Available online at

11 Page11 other than loans from financial institutions, with majority using own savings. In Tanzania, microcredit has emerged as an important development paradigm, which is being used as an effective tool for poverty alleviation. It was observed that only 2 percent of rural population in Tanzania had access to microcredit services. The findings observed that most business start-ups are funded through own savings or borrowing from family friends as opposed to funding from formal financial institutions. However, the large percentage of owned start-ups business shows microcredit institutions mostly targets on-going businesses rather than funding start-ups Amount Requested and Disbursed Credits: Surely, one of the major complaints about credit issued by credit recipients (borrowers) is the low ceiling amount fixed by providers compared to actual business needs. Results from the study sample show that the amount of the first loans received ranged from 50,000 shillings, to 500,000 shillings, with a mean loan value being 275,000 shillings. Majority of businesses (80%) however, received loans of between 50,000 shillings and 500,000 shillings. About 34 percent of the businesses managed to get a second loan. To qualify for a second loan, firms must have performed well on the first loan. Borrowers shouldn t become defaulter or else shouldn t commit any faults during first loan. The value of the second loan was around 500,000 Tanzanian shillings, with the highest amount received being 1,000,000 Tanzanian shillings. Less than 6 percent of the businesses in the sample managed to get a third loan. It is obvious that in loan allocation, preference is given to first time applicants. The Role of Microcredit in promoting SMEs Development: After examined how business start-ups and amounts of credit issued for the business performance, the study selected business successful indicators. This section examines the role of microcredit has played to promoting or enhancing SME s development in the sample. To examine impact of credit towards SMEs development, the study used the following success indicators to measure SMEs success: growth of employees (permanent and part-time employees), increase on sales volume, increase on size of capital structure, open another business outlets and changes on business management structure after loan advanced. Strengthening Business Survival: The post important role of the credit is to sustain business to survive. Mere surviving in business under a severely competitive environment could be taken to be successful SME development criteria. Table 1 indicates business experiences.. Available online at

12 Page12 After loan received most of the business can compete with other business firm, can be able to meet customers expectation and even changing with the environment changes. Economic reforms in Tanzania were both a blessing and a curse to the enterprise depending, among other things on the business characteristics and the nature of market. For example, Tanzanian government through Ministry of industry trade and marketing made SMEs policy 2003 not only that was putting down land reform act so as to enable small business to access micro credit. So, enhance small business to access credit and compete with rivals to the best fit of the survival. The age of the businesses that were covered in the sample ranged from two years to four and above years old, with the mean age being two years old. Increased Employment Levels: An increase in employment is also a measure of growth. It has at the same time been associated with business survival. But also creating own employment that pays more than other alternatives elsewhere is one of the goals of starting small business, and as is seen as success indicator of small business development. The sample survey indicates that as a result of the loans taken, averages of about 77 percent jobs per business were created, and people employed in. The average increase in employment could be seen to be too small, reflecting the nature of many micro-enterprises than normally employ only one or two persons. But to some firms this increase is more than 100%, and therefore very significant. Business employs permanent and part-time employees. Whereby, part-time employees indeed were many than permanent workers. This is because most of the business owner tends to avoid pay necessary government contribution, so they want to maximizing profit by suppress workers as the cheap labour. The results were significant using the Chi-squared test at 5% level of significant. Increased sales volume: The study reveals credit access improves sales of the business. From the sample studied sales volume appears to increase tremendously due to credit. To prove this the study used chi-squire tactical to verify at 5 percent. Although an increase on sale volume might be caused by other causes like business location. Business location can have an influence on a business both in terms of influencing its costs (where distance from raw materials and other inputs could impact costs) and sales revenue in terms of market availability.. Available online at

13 Page13 Increased Business Outlets: Undertaking new investment or expansion of existing business to meet unsatisfied demand is considered successful SME development. While banks funding did not target start-ups and were not meant for capitalization, about 30% of the funds ended in new investment. For example, business was able to buy new equipment to switch business from current to new one business. The results by Chi-squared test are is significant at 5%. Increased Wealth business or Capital Size: The study observed that access to loan improve business capital structure. The sample interviewed shows first business was constrains with working capital and it was very difficult for them to meet customer expectation. After earning credit business is able to meet day to day its expenses. The mean values of machineries, implements and inventories increasing from Tshs. 2,250,000 to 2,600,000. Improved Business Management: Also, It was detected that many business employed an individual to run the business, not only that but to make decision on business. The study was assessing management situation before and after credit, comes to reveal that after credit business expands. With this expansion, business owner employed someone to run the business and assist him on decision making. Therefore, management structure of the business was changing from the first one. 4.2 The Role of Credit in Improving Community Development Table 2 indicates to what extents credits improve community development. The study reveals credit plays more significant role in developing community economy. For example, the study observed credit creates employment by 31 percent, send children to school (education) were 21%, Improve service quality were 13 percent and improve standard of living were 15 percent as table 2 indicates: Table 2: The Role of Microcredit in improving SMEs Owners Development Variables Frequency Percent Creating Employment Loose Property Improved Education Improved Business Services Available online at

14 Page14 Improved life Standard Overall Source: Field Data (2011) Table 2 expresses on the significant of credit toward the SMEs Owner development in Morogoro Municipal using employment, education, quality services and improved standard of living. 4.3 Factors constraining Development of Tanzanian SMEs from the Credit Credit plays pivotal role in promoting business growth. The businesses were constraints to grow when the credits having some elements of gender violation, high interest rate, shorter grace period, fewer amounts issued and business illiterate. The table 3 below indicates interest rates gender violation, interest rate, grace period, initial ceiling amount and business training were 5, 47, 19, 21, and 5 percents respectively. Table 3: Factors Constraining SMEs Development and Loan Repayment Variables Frequency Percent Avoid gender violation Reduce interest rate Increase grace period Increased initial amount Business Training Overall Source: Field Data (2011) The Table 3 above indicates most of the business ventures were constrains to grow due to high interest rate. Interest rate imposed on principal amount seems to be high compared to the market price. Grace period is too short compared with the nature of the business. Given thirty days to start pay first instalment from date loan received is not enough. Also, initial ceiling amount was too little for many business firm compared to amount requested. Many banks initial ceiling amount is Tshs. 50, 0000 to 500,000 for normal business loan. This limits other. Available online at

15 Page15 business firm to meet market demand by then. Then, Business training or knowledge observed to be challenging for many business owners. Many owners have less knowledge concern loan allocation. They fail to makes proper allocation of the loan and hence repayment problems. Therefore, majority complains on interest rate said it is too high, gives them challenges during loan repayments. 4.4 Institutional Constraint facing Small Enterprises in Tanzania Although this research was devoted to examining the performance of firms after receiving credit, it was also thought important to consider constraints facing firms that had received credit. The intention was to see the other contexts at which credit was received and hence likely to influence the impact of credit on business performance. It was denoted that other institutional constraints that had effect on their businesses. Most SMEs identified more than one problem, but overall four categories were dominant. 4.5 Demand for final products The enterprises complain market to be too competitive with too many other firms operating in the same business. This is not surprising given the retail businesses, which are normally depicting monopolistic competition. Seasonality has been more significant in the garment sector and to some extent poultry in which demand is relatively higher during holiday seasons. Seasonality problem is also experienced by general enterprises owners complained about low business turnover during the rainy seasons as when construction work tend to be slow. 4.6 Supply of Raw Material Overall majority of businesses were very positive about supply of raw materials, more respondents complaints about the costs of raw material and not on supply of raw materials. Trade liberalization has a positive impact on small businesses when it comes to availability of raw materials, even though it hurts them when it comes to competition with final imported goods. 4.7 Infrastructural Support Majority of respondents complains about infrastructural support to be inadequate, in the sense that it charged high costs. High transport cost has been indicated to be a major problem in those businesses that are in trade, and have to procure stocks from Dar-es-Salaam or other major towns.. Available online at

16 Page Test Goodness of Fits The Chi-square statistical testing used to tests if there is difference between access to microfinance and increased capital, sales, business outlets, business management, and employment. Table4 expresses the relationship between explanatory variables as follows: Table 4: Chi-Squire used to measures if there is difference between microcredit accesses and increased in SME Capital, Sales, outlets, business management, as well as employment size Chi-Squire Dependent Variables Increased Business Outlets Increased Capital Increased Sales Size Expand Business Management Increased Demand for New Employees Df Asymp.Sig a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 17.0 The Table 4 above indicates that there is significant association between increases on current employees, business outlets, sale volume and changes on business management and microcredit at a level of significant 5% (P 0.05). Beside, of the significant association found, capital structure found had insignificant association with the microcredit at a level of 5%. This implies that increases on capital structure might be caused by other variables out of credits. Although, not necessary always credit does not influencing capital to increase. Despite of increasing on capital being influenced by other variables till credit has an impact on improving working capital. Credit always used to reduce poverty of people rural and urban areas. Because credit in most times used to buy raw materials, implements and technologies so as to enhance business to run its operations properly. 4.9 Government Intervention in promoting credit for SMEs development Generally, business to grow needs business environment to be conducive for the business to operates. The government of Tanzania stretch to promoting informal sectors to become formal sector through registering them. It is obviously less than 2% of people located in rural area access to credit (URT, 2008). Surely, the government to promoting SMEs established. Available online at

17 Page17 SME development policy 2003 and land reform policy of This was aiming to connect small business to financial industry in Tanzania. However, the study surveyed 51 respondents to suggest area of improvement by the governments. The following is the findings: Table 5: Areas which needs Government Intervention Variables Frequency Percent Control Interest Rate Improve Business Infrastructures Reduce Tax Rate Provide Entrepreneurship Skills Provide Credit Education Overall Source: Field Data (2011) Table 5 above indicates that the majority of respondents surveyed noticed that the Tanzanian government should improve first infrastructures (social and physical infrastructures). Social infrastructure involves electricity, business training and physical infrastructures such as roads and transport noted by 16 (31%). The study surveyed respondents, out of 51 respondents surveyed 14(27%) said interest rate should be reduced. However, respondents who said tax rate should be reduced were 7(13%) compared to those said government should intervene on entrepreneurship skills were 6(11%t). Lastly, the government should intervene on providing credit knowledge were 8(15%). 5. CONCLUSION AND POLICY IMPLICATIONS 5.1 Conclusion The paper assessed SMEs Owners who have received credits only from financial credit. Findings show that increased on business profits, employments, outlets, sales volume, all these, were observed to be statistically significant improved by microfinance. Except increased of capital structure has no direct related to microfinance access. Furthermore, the. Available online at

18 Page18 enterprise whose owner received business training, tax exemption, fair interest rate, enough grace period and infrastructures performed better than those that did not. It revealed that many problems faced by Tanzanian enterprises are not related microfinance received, but related to macro-economic institutional constraints, such demand and supply problems, tax regime and energy problems. However, microfinance instrument seems to promote Tanzanian SMEs in different stages of a business life. The study finds that many businesses in the stage of starting-up have funded by owner s resources. Request for microfinance is made mainly when business intends to grow. With that, demand for finance increasing with business growth. In line with business growth, chances for employment increases and management changed. 5.2 Policy Implications The study confirms the view that credit still important for SMEs development, the conditions needed to promoting SME development (macroeconomic factors, microcredit and constraining factors) should be given due attention. In other words an integrative approach needs to be taken in managing credit. Business environment should be created and improved for informal and quasi-informal financial institutions to continue offering credit services to small and medium enterprises. Financial constraints need to be removed by make favourable credit policy which can lead to entrepreneurial development in Tanzania. For example, improve environmental conditions for the business to operate including market, and infrastructures. REFERENCES Brealey, R and Myers, S. (2003). Principles of Corporate Finance, International Edition. Chicago: McGraw Hill. Johnson, K. (2001). Microfinance Regulation in Tanzania: Implications for Development and Performance of the Industry. Africa Region Working Paper Series No. 51. Kangero, G. (2004). Capital Structure and Financing of SMEs: Australian Evidence. Journal of Accounting and Finance, 16(4): Koutsoyyiannis, J (1982). The Impact of Internal Factors on the Export Success of Dutch Small and Medium-Sized Firms. Journal of Small Business Management, 32(8): Kuzilwa, J. (2003). The Role of Credit for Small Business Success: A study of the National Entrepreneurship Development Funding in Tanzania. Working paper, Mzumbe University, Morogoro, Tanzania.. Available online at

19 Page19 Megginson, J. (1997). Micro Credit Empowering Farmers in Developing Countries. Ottawa: Canadian Federation of Agriculture. Stanley, G. (2008). Micro Finance is it either a problem or a solution?. World Development Journal, 24(6): URT (2003). Small and medium Enterprises (SMEs) Development Policy. Tanzania: Ministry of Trade, industry and Marketing. URT (2008). The land Reform in Tanzania: Opportunities for Agriculture and Mortgage Finance, Tanzania. Weston, K. and Brigham, A. (1990). Size, Financial Structure and Profitability. New York: The Free Press. WBES (2004). Internationalization and the Smaller Firm: A Review of Contemporary Empirical Research. Management International Review, 39 (3): World Bank (2001). How are small firms financed? Evidence from small business investment companies. Tanzania: World Bank.. Available online at