Assessment of Factors Affecting Small and Medium Enterprises in Accessing Business

Financing from Formal Financial Institutions in Tanzania: A Case of Paddy Processors in

Rukwa Region.

Theresia Deus Kato

A Proposal Submitted in Partial Fulfillment of the Requirements for the Master Degree of
Finance and Investment of Institute of Financial Management.

January, 2023
1.0. Introduction and Background of Research Problem
Small and Medium Enterprises are the main contributors of job creation, household incomes,
innovations as well as a catalyst for urban and rural area’s growth. According to the World
Bank report (2019), it was reported that SMEs represent about 90% of businesses and more
than 50% of employment worldwide. Further, the sector contributes up to 40% of National
income (GDP) in emerging economies and therefore the main contributor of national income
and improvement on the standard of living in the economy. The study by Heliyon (2020) in
Turkey, found that the quality of life and socio-economic development has a very close
relationship with the existence of small and medium investments and manufacturing
enterprises. Addae-Korankye and Aryee (2021) and Bialobrzheskyi et al. (2022), SMEs are
the engine that propels an economy forward.

Despite the contributions, SMEs are facing many challenges ranging from internal
management of the enterprise, resources capacity, market, finance and external factors.
Accessing to financing from formal financial service providers has been reported as one of
the critical challenge for the SMEs growth (Olomi and Urassa, 2008). According to World
Bank (2014) Small and Medium Enterprises need access to credit services in order to meet
their business demands such as finance purchase of equipment, growth, improve
infrastructure and working capital. Due uncertain environment, lack of proper legal
framework, high illiteracy and perception towards borrowing, credit service providers find it
hard and risky to finance most of the SMEs. Most of the financial providers’ assertions that
these SMEs are not investment ready with reference to different bankability metrics.
Different studies have conducted to assess challenges affecting SMEs growth and access to
finance challenge is identified among others. Yet, these studies did not empirically measure
the extent to which the access to finance affects SMEs from the rural setting perspective
particularly in agriculture sector because the concentration areas of food processing
enterprises are in Dar es Salaam, Arusha, Kilimanjaro and Tanga. Moreover, the specific
factors that limit the formal credit financing access for small and medium food processing
enterprises remains uncovered. Given the paramount contribution of SMEs to economy it is
necessary to conduct an empirical study to examine challenges in accessing finance from
formal financial institutions and approaches to manage these challenges taking paddy
processors operating in Rukwa region.

2.0. General and specific objectives

General objective
The general objective of this study is to assess Factors Affecting Small and Medium
Enterprises in Accessing Business Financing from Formal Financial Institutions in Tanzania
- a case of paddy processors in Rukwa region.

2.1. To determine the effect of enterprise characteristics on Small and Medium

Entrepreneurs (SME’s) access to finance
 2.2. To examine the extent to which financial institutions loan requirements affect the
access to finance of Small and Medium Entrepreneurs (SME’s)
2.3. To examine the extent to which costs of funds charged by the financial institutions
affect access to credit finance by Small and Medium Entrepreneurs (SME’s)

3.0. Literature review

3.1. Theoretical – theory of financial intermediation that focus on efficient allocation of
funds between persons with surplus and those having deficits of funds. The
intermediation theory has been built on the models of resource allocation based on
perfect and complete markets by suggesting that it is frictions such as transaction
costs and asymmetric information that are important. Additionally, the financial
providers exist for the management of risks. It is therefore within this premise that
banks assess thoroughly the borrowers that pose a challenge for SMEs to qualify on
accessing finances.
3.2. Agency theory – banks work on behalf of the fund providers (savers), manage risks
to maximize wealth and get rewarded through profits generated. Banks and other
financial providers with comparative information advantage fill as agents and as
delegated monitors information gaps between ultimate savers and investors.
4.0. Methodology
4.1. Design
4.2. Population and sampling
4.3. Tools
4.4. Analysis
5.0.