MICRO, SMALL AND MEDIUM ENTERPRISES IN TANZANIA

SMALL BUSINESS

There is no single universally recognized definition of small business. Different countries use
various measures of size depending on their level of development. Generally, a definition
depends on the purpose of definition and environment of small business in the country.

There are many alternative definitions of smallness range from the following:

 Monetary measures (sales, volume, profit etc)

 Employment measures (number of employees)
 Social and quality of life measure (size of assets employed)

It is generally accepted, however, that in descriptive sense, small businesses:

 Are owner operated; managers are owners or part owners

 Are independent of outside controls
 Have one or two persons making all major managerial decisions
 Have a small share of a relevant control
 Employ few persons, usually less than 50 people

In that case:

Small business is one which is independently owned and managed by one or few persons
and employing a few workers.

REASONS TO ESTABLISH THE SMALL BUSINESSES

 Small business is simple to manage

 Individuals feel very secure to run small business especially when the business has
limited liability
 The owner of small business can easily maintain a personal contract with his
customers
 Small business requires a small capital and most of people have small capital.
 A person with a small capital will prefer to have his own business rather than buying
shares in large businesses.

CHARACTERISTICS OF SMALL BUSINESS

1. It is independent

It does not form part of larger enterprise and the owner managers are free from outside
control in making key decisions.

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 2. It is owner operated

Usually managers are also owners. It is managed by the owners in personalised way, and not
through the formalized structure.

3. Has small market share

In economic term it controls a relative small share of its market.

4. Employs few workers

A small business employs less than 50 employees to work for the business.

5. Has localized operations

The operations of the business are localized with workers and owner in one home
community. However, markets need not be local.

6. Has small size of business

The relative size of the business within its industry is small. It’s not dominant in its field of
operation.

7. Presence of an entrepreneurial spirit

Involves innovation, initiative and risk taking

Other characteristics include:

1. Cash based businesses;
2. Ease of entry and exit;
3. Small scale nature of activities;
4. Self-employment with a high proportion of family workers and apprentices;
5. Require little capital and equipment to start and run;
6. Use of labor intensive technology;
7. Require and employ low level of skills;
8. Entail low level of organization with little access to organized and international
markets;
9. Often engage in unregulated and competitive markets;
10. They have limited access to formal credit;
11. Owners and workers have low levels of education and training;
12. A limited focus on value addition
13. Have a very high turnover rate; many new businesses are created, many fail, and a
few grow.

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MICRO, SMALL AND MEDIUM ENTERPRISES IN TANZANIA

In Tanzania the Micro, Small and Medium enterprise (MSMEs) development policy defines
MSMEs’ as follows:

 Micro enterprise employs 1-4 employees and capital of up to 5 million.

 Small enterprise employs 5-49 employees and capital between 5-200 million
 Medium enterprise employs 50-99 employees and capital between 200-800 million
 Large enterprise employs at least 100 employees and capital above 800 million.

ROLES OF SMALL SCALE BUSINESS

1. Job creation

Establishment of new business creates jobs in the business formed; the more enterprising
people are the more the chances of investing in new ventures and creating new jobs.

2. Promote health competition

Entrepreneurs enable the country to produce quality products and services which are sold
at reasonable prices. Consumption of high quality goods at low prices improves the
consumers’ standards of living.

3. Generate wealth and spread prosperity

Creation of new business creates wealth, which is eventually distributed to all members in
various forms. Business owners, suppliers, financiers, distributors and other interested
parties are all beneficiaries to the wealth created.

4. Growth

Small businesses develop new products from new ideas. Every business strives for growing
profits and in a way that is made possible through newly and increased quality of product.
Moreover, competition dictates that great strive be made in technology.

5. Maintain free enterprise

Free enterprise is an economic system in which individuals are free, singly or collectively, to
own capital and undertake economic activity within the framework of social legislation
designed to protect the interests of the individual. In its extreme form it is the direct
opposite of the state planned economy. There is no interference by the state in production
and distribution that is where the composite demand of all consumers determines what
entrepreneurs shall produce.

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 6. Ensures innovation and creativity

Innovation and creativity consist of ability to seek new ways on how to do things or solve
problems. Entrepreneur as an agent of change brings about new resource combinations.

7. Social progress

New enterprise becomes taxpayer, thus returning revenue to the government. More
revenue is also accruing to the government from business employees when they pay income
tax. Revenue generated may well be used for social progresses in education, health,
security, clean water and other social activities.

8. Encourage grassroots development

There is been a notion that those who form a small business are likely to have previously
worked in small firms and to have used them as role model. For one thing, it may become
easier for potential entrepreneur to envision a role comparable to that of his boss. An
employee can be convinced that if the owner manager can do it, he should be able to do it
equally or even better.

Empirical works show that new companies are more likely to originate from small corporate
decisions that come from large ones. This is referred as small business divisions as
‘incubators’.

9. Stimulating growth and development particularly in the rural areas; with about 70
percent of such enterprises located in rural areas, the sector has a high potential for
contributing to rural development.

10. Complementing the process of adjustment to large enterprises by bringing linkages

for products and services; they form dynamic supply-chain linkages between small-
scale producers and lucrative urban, national, or export markets.

GOVERNMENT EFFORTS TO STRENGTHERN SME’s

Government established institutions to support SME such as:
 Small industry development organization (SIDO)
 Vocational education training authority (VETA)
 National microfinance bank (NMB) cover the provision of financial services that will
reduce transaction cost of lending to small and micro enterprises in rural and urban
areas
 Various industrial support organisations such as Tanzania Camber of Commerce,
Tanzania Investment Centre

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PROBLEMS HINDERS EXPANSION AND GROWTH
1. Scarcity of funds: expansion require additional funds for investment in both fixed
assets and current assets. Funds for fixed assets and working capital are not easily
available.
2. Technology: in order to expand, it is necessary to upgrade technology and replace
plant and machinery since modernization of technology is time consuming and
expensive process. If it becomes essential for the firm to recruit new staff or retrain
existing staffs in the use and operation of new technology, they have to do so.
3. Marketing: The small and medium enterprise has very small budget to market their
products, this leads to unfamiliarity and non selling of the said products. This goes to
the extent of product quality, packaging, place of distribution and pricing strategies
for the said products.
4. High production costs: Small and medium enterprises face challenges in selling and
distributing their products to market since production cost to is higher compared to
large enterprises.
5. Risk of expansion: Expansion involves additional risks, few enterprises have the
ability or willing power to assume this risk, particularly where the compensation is
sensitive and raw materials have to be imported.
6. Lack of innovation skills
7. Failure to explore new opportunities
8. Lack of tolerance to failure

PROBLEMS CAUSING MSMEs FAILURES

1. Inefficiency, bureaucracy and regulatory environment

Business registration and reporting environment has led most of small business to operate
in informal sector. Long procedures for registration, high tax rates, corruption and
registration costs.

2. Inadequate financial services for small business sector

Lack of access to finance, lack of wide coverage by commercial banks, commercial banks
giving priority to large business, weak financial infrastructures, weak financial markets and
weak financial institutions.

3. Poor physical and business support infrastructure

Poor telecommunication infrastructure, road, airline, railway, ports and international trade
services, Poor infrastructure present barrier to market entry and growth of small businesses.

4. Lack of government business support service

Due to privatization policy, organisations like SIDO are losing their autonomy, most small
business owners cannot afford to pay the cost of consultants and inadequate business
advisory services.

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 5. Lack of skilled staff (lack of training)

Poor trained or untrained personnel, lack of management skills

6. Inadequate quality control

The quality of the product is too low to compete with low cost imports

7. Poor management

Due to lack of management skills, poor management of accounting, finance, marketing,

purchasing and other endogenous functional areas.

8. Under capitalization

Lack of sufficient initial capital, low operating capital and excessive drawing by the business
owner which reduces business capital.

9. Inaccessibility to market intelligence

Lack of marketing information in terms of market size, customers behaviour, product

preferences, competitive strength and weakness lead to inadequate sales and business
failure.

10. Serial and historical traditions

Gender inequality leads to poor participation of women in business, lack of ownership right
for women make their participation in small business being low.

11. Inadequate government policy to support small businesses

High taxes and education curriculum does not put emphasize on entrepreneurship

12. Lack of access to modern technology due to lack of fund

Technology is expensive, the small businesses strive due to lack of funds to finance
technology for their businesses. Poor quality of products resulting from inferior technology,
low capital and production skills.

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SOLUTION TO THESE PROBLEMS

1. A continued regulation reform

 Relaxation of taxes and regulatory environment
 Procedures for licencing and registration should be relaxed
 Improvement of physical and business support infrastructure
2. Business services must be scaled down to meet the need of MSMEs’
3. Facilitate accessibility to credits i.e financial sector reform
4. Capacity building at all levels; training programmes about entrepreneurship and
small business development.
5. To reform policies that limit access to financial services
6. Provision of non-financial services to small business such as business advisory
services
7. Introduction of credit scheme for small businesses, to enhance capacity of both
users and providers of micro-finance services.
8. Technical assistance by private sector and public sector.
9. Marketing information NGO’s system; Creation of enabling environment to
encourage growth of MSMEs.

SIMILARITIES BETWEEN MALE AND FEMALE OWNED MSMEs’ IN TANZANIA

Women are over represented in some sectors and underrepresented in others. Most
women entrepreneur engages in trading, food processing, textile and clothing and service
business. They tend to undertake activities that are in harmony with their traditional roles.
These also happen to be least profitable. There are also some types of businesses that are
common to both men and women as shown below.

Gendered (Typical female) Neutral (ungendered) Gendered (Typical male)

 Food vending  Retail shops  Manufacturing
 Tailoring/batik making  Crop dealers  Import/export
 Beauty saloon  Horticulture  Transportation
 Decorations  Kiosks  Tour agencies
 Local brewing  Charcoal retailing  Wholesale trade
 Informal catering  Estate agents (informal)
 Pottery  Hawkers
 Basket making  Charcoal whole selling
 Informal food processing  Restaurants
 Bars
 Formal food processing
Source: Rutashobya (1995), Nchimbi (1999) and Olomi (2001)

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WOMEN AS ENTREPRENEURS

Women’s entry in business in Tanzania is a recent phenomenon, mainly a result of the

economic crises and restructuring programmes has led to drastic decline in real wages as
well as formal employment opportunities (Rutashobya, 1995).

As a result of a recent nature of women’s involvement in business, much of research that

has been carried out was aimed at making general description of women in the sector along
with a cross-section of the barriers that they face.

The women entrepreneurs differ in many ways in terms of age, religion, ethnic, wealth,
education, literacy marital status, social status, experience and socio-economic position.

This makes them different in terms of motivations to start and develop businesses. The poor
and uneducated women will be found in informal sector operating small eating places
(mama lishe), while the richer women have more capital and hence run relative large
enterprises, employ more labor and using appropriate technology.

PERSONAL ENTREPRENEURIAL CHARACTERISTICS OF WOMEN ENTREPRENEURS

In Tanzania, women have been socialized to be subordinates to men; they are treated as
just wives and mothers. They are raised to be non-argumentative, passive and easy to
accept defeat.

This may have significant effects in their self-confidence, achievement motivation and even
their willingness to take risk,; qualities that are closely linked to success of business.

WHY DO TANZANIAN WOMEN START BUSINESS

PUSH FACTORS PULL FACTORS

 To meet basic economic needs, either due  To have something she have control of
to the woman is single and has no formal  To raise her social status and earn the
employment or the spouse’s income is respect of husband and community
inadequate to meet basic family needs.  To have greater flexibility (compared to
 To supplement the income from the employment) to combine work and her
woman’s salary in order to meet her and household responsibilities
her family’s basic needs  To be able to access credit offered by
 Creating breathing space for the woman. some donor supported project. In some
Staying around the house all day long cases the money borrowed is not used in
invites quarrels with neighbours and the business, but rather to meet other
family members. pressing needs

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FACTORS AFFECTING WOMEN CHOICE OF ACTIVITIES AND IMPLICATIONS FOR THEIR
CHOICES

1. Reproductive role:
 They choose activities that make it easy to combine work with household
responsibilities
 They choose activities which complement their household needs
2. Limited knowledge/skills:
 They choose activities which utilise the skills they have mastered as part of
their socialization process like food processing, personal care and food
vending.
3. Limited initial capital:
 They choose activities which require minimum initial capital
4. Limited access to credit for working capital:
 They choose activities which they can easily get credit from suppliers (eg
shops will provide food items on credit to food vendors)
 They choose activities where customers pay in advance eg tailoring
5. Limited capacity to absorb consequences of failure:
 They choose activities for which there is a ready, tested and large market

REASONS FOR WOMEN BUSINESSES FAILURE

1. High collateral requirements and lack of assets to secure loans

2. Lack of infrastructure or specific products for type of business
3. Lack of information on financial products and services
4. Perceived risk by financial institutions to lend to female-run MSME’s
5. Restrictions on opening bank accounts or requesting credit
6. Risk of harassment or corruption
7. Lengthy registration, licensing, or permit process
8. Weak property rights
9. Lack of information on formalization process
10. Lack of childcare & higher burden of household responsibilities
11. Limited participation in business networks
12. Mobility restrictions
13. Lack of access and knowledge o f ICT

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