Microfinance and financial Inclusion: Role of microfinance SME’s development in Tanzania

The Tanzanian microfinance industry has undergone some sporadic changes over the
past few decades (Banks et al. 2019). According to Macha et al. (2018), the microfinance
roots in this country can be traced back to the 20th century’s past decade. Kapiga et al. (2019)
argued that these institutions have been pivotal in providing the necessary financial and
monetary services to the growing number of corporations in Tanzania and other East African
states. The structure of the microfinance industry in Tanzania is also unique, with this market
being an oligopoly (Lindvert et al. 2019). While there exist a large number of dominant
players in the industry, only a few firms dominate this space. The criticality of the role of
such institutions in nurturing and supporting the Small and Medium-Sized Enterprises
(SMEs) remain irrefutable as they supply a steady flow of financial resources, provide the
necessary financial advice that aid in the growth and development of the SMEs, and provide
platforms through which the small enterprises can find other sponsors with unbeatable skills
in a given field.

Problem Statement

A study by Nyamrunda and Freeman (2021) established that two-thirds of SMEs fail
within their first year of incorporation and operation. Nyamrunda and Freeman (2021) also
stated that the number of SME firms registered annually has increased, given the massive
growth in infrastructure and technological penetration within the nation. Finance remains the
backbone of SMEs’ operations. Newly-established SMEs experience significant challenges
with accessing financing options. Consequently, the inadequacy of resources forces these
institutions to either merge to shut down. The central problem that the proposed study aims to
explore is the paucity of information regarding how microfinance aid in stabilizing the SME

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sectors given the slim survival rates of the latter group of enterprises. The second problem to
be solved by this study is the impact of the current pandemic on the operations of both
microfinance entities and SMEs. According to Saleh (2021), Tanzania is among the nations
with unique coronavirus strains that destabilized its financial sector. The nation was initially
sceptical regarding the virus. However, the ravaging impacts of the pandemic affected the
relationship between customers and financial institutions such as microfinance entities and
banks as the slowed economic activity affected the capacity of customers to repay their credit
and increased the appetite for debt. The pandemic is would most probably affect the
relationships between SMEs and microfinance institutions.
Rationale and Significance

The rationale for conducting this study is to fill the knowledge gap that exists in the
identified research area. Past research such as Nyangarika et al. (2020) and Mwashiuya and
Mbamba (2020) demonstrates that microfinance is critical for the development of the SME
sector. Most microfinance institutions have minimal requirements when providing funding
and flexible repayment modes (Nyangarika et al. 2020; Mwashiuya and Mbamba 2020).
While previous studies by Nyamrunda and Freeman (2021) and Nyangarika et al. (2020) have
demonstrated the unique relationships between microfinance and SMEs, a significant
percentage of these studies have been conducted outside Tanzania. Consequently, the
findings may not be replicated in the Tanzanian context. The study aims to solve this gap by
presenting findings that apply to Tanzania, and that could be replicated to other East African
states and other developing countries.
The proposed study’s significance is that it explores a rather unique and critical
dimension of the Tanzanian economy. Despite SMEs’ existence being traced back to several
decades, the relationship between these enterprises and microfinance remains sketchy. The
proposed study will utilize a wide array of techniques to establish the dynamics of such

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unions and the accomplishments made by both entities within this relationship. Lastly, the
study is conducted at an instrumental time when Tanzania is struggling with flattening the
Coronavirus curve and striving to attain smooth transitions after the demise of the country’s
head of state. The pressure to get financial resources has increased, with several SMEs
shutting down. Baporikar (2021) argued that the Tanzanian case is not isolated, as most East
African SMEs witnessed immense losses that forced them to shut down within the past year.

Research Questions

The proposed research’s principal aim is to investigate the role that micro finance, in
general, plays in Tanzania’s SME development. The specific questions that the study seeks to
explore include:
 How has the micro finance paradigm changed within Tanzania?
 What other sources of funding are available for SMEs within the country?
 To what extent has the recent pandemic destabilized the relationships between
microfinance institutions and SMEs?
 What other dimensions of SME operations do microfinance institutions aim to
develop?