CERTIFICATION I have supervised this research paper entitled “Assessing the accessibility of commercial bank loans to SMEs” and

here by recommend this research paper for the acceptance by Tumaini University Iringa University College as partial fulfillment for the requirement of bachelor of business administration major economics.

Signature: ……………………………….. Date: ……………………………….. Mr. Sibo Mwakoko (Supervisor)

Internal Examiner: ……………………………. ………………………………………………… Date: …………………………………………..

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DECLARATION I BARAKAELI S. MASSANGWA, declare that this research is the result of my own findings to the best of my knowledge. This research has not been presented as a dissertation or thesis in any higher institution within or outside the country.

Signature………………. ……………………….. Date……………………………………………...

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COPY RIGHT ©Barakaeli S. Massangwa, 2011. All Rights Reserved. No part of this work may be reproduced, restored in any retrieval system, or disturbed in any form or by any means: electrical, mechanical, photocopying, recording, or otherwise, without the prior written permission of the author’s or Tumaini University Iringa College on behalf.

DEDICATION

I dedicate this research paper to;
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Rev. Solomon J. Massangwa (father) and Mrs. Janeth Massangwa (mother)

ACKNOWLEDGEMENT

I would like to thank my almighty God for giving me peace, strength and health for all the three years of my bachelor program. I also appreciate the strong support I always get from
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my beloved parents Rev. S. Massangwa and Mrs. J. Massangwa. They have always been on my side through support I have acquired especially in financial assistance and prayers. I also acknowledge the support I always got from my teachers as they have been pouring their knowledge to me for the fulfillment of my BBA-Economics program, not forgetting my supervisor Mr. S. Mwakoko, our faculty dean. I would also like to extend my gratitude to all my friends who have no doubt been of a great support during my writing of this research. Last but not least, all the research respondents who responded to my questionnaires and interviews.

ABSTRACT The general presentation of this research is divided into six chapters. Chapter one comprises of: introduction to the study, background of the study, statement of the problem, research objectives, conceptual frame work, limitations of the study and significance of the study. The following were specific objectives of this research: To examine bank requirements for the acquisition of their loans and the ability of SMEs to meet them, to determine banks

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attitudes towards SMEs lending and lastly. Chapter three deals with the methods employed by the researcher in conducting the whole research. At the end. They are discussed in relation to the specific research objectives. theoretical reviews and empirical reviews. Chapter four deals with research findings processing. vi . sampling design and techniques. analysis and presentations. The researcher also gives a slit explanation of the presented table’s figures and their implications. the researcher concluded that. research sample. The researcher employed a descriptive research design where as questionnaires and interview were the tools used to collect the primary data. accessibility of commercial bank loans to SMEs is still a problem to majority of SMEs in Tanzania. data collection methods and data analysis methods. In this chapter. It includes research design. Chapter two basically deals with literature review. to assess government efforts/contribution on SMEs accessing CBLs for their growth and development. the research findings have been presented in table forms. Secondary data were collected from various scholars publications. The chapter includes introduction. Chapter six is comprised of conclusions and recommendations of the research finding in relation to the general and specific research objectives. Chapter five deals with the discussion of the research findings as they are presented in chapter four. respondent’s population. according to the research findings. It states what other scholars have said in relation to this research objective.

……………...25 vii .........22 Table 13: A profile showing banks with and without SMES lending risk assessment.. Table 01: CRDB SMES loan profile from 2006 to 2009……………………………..............20 Table 11: Factors affecting commercial banks lending to SMES…………………….....21 Table 12: SMES loans performance in relation to other loan customers in terms of profitability...........18 Table 09: A profile of SMES failing to meet bank loans requirements………………19 Table 10: Banks with and without separate units managing bank relations with SMES ……………………………………………………………………………………….....…................16 Table 05: Reasons to why some SMES don’t apply for commercial bank loans ……16 Table 06: SMES loan applicants with and without bank loan collateral ……………....23 Table 14: Commercial banks risk and cost control measures to SMES loans……...........23 Table 15: Banks with government SMES financing policy (2002) support towards SMES lending .......17 Table 07: SMES judgments on bank loan requirement conditions..18 Table 08: Banks requirements for acquisition of SMES loans……………………...............15 Table 04: Application for bank loan………………………………………………….........................................04 Table 02: Successful and unsuccessful SMES loan applicants…………………….......... risk and cost……………………………………………………………......LIST OF TABLES TABLE PAGE No.14 Table 03: Capital invested in business………………………………….......

.............................i viii ............................... trade and marketing National micro finance bank research and education for democracy in Tanzania small industry development organization small and medium enterprises statistical package for social sciences United republic of Tanzania TABLEC OF CONTENT CERTIFICATION .......................................................LIST OF ABBREVIATIONS CBL CRDB GDP MFI MITM NMB REDET SIDO SME SPSS URT commercial bank loans corporate and rural development bank gross domestic product micro financing institution ministry of industry.

.......5 1......................................................................................................................2 COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING ..................................................................................................................v LIST OF TABLES .....10 ix ................................6 1.........................................................2 INTRODUCTION..........................................................................6 2........6 CONCEPTUAL FRAMEWORK...............................................................................ii COPY RIGHT.....4...................8 SIGINIFICANCE OF THE STUDY..........................iii ACKNOWLEDGEMENT..............iii DEDICATION.......................................................................................9 2...........................................................................................................................viii 1......................................................................7 LIMITATIONS OF THE STUDY..................................5 RESEARCH QUESTIONS:..........................................................................................iv ABSTRACT......1 1.............................................................DECLARATION.........................................................................................................................3 STATEMENT OF THE PROBLEM......4 RESEARCH OBJECTIVES....1 LITERATURE REVIEW.......................................................................2 1...................................................................................5 1.4....................................................2 SPECIFIC OBJECTIVES:.................................................vii LIST OF ABBREVIATIONS...........5 1..............0 CHAPTER TWO................................................................7 2.............................................1 1............................................................................................................................................7 2..................7 2.......................1 INTRODUCTION...............viii TABLEC OF CONTENT........................................................................4 EMPIRICAL REVIEW ..........................................1 GENERAL OBJECTIVE....................7 2...........................................................................................2 BACKGROUND OF THE STUDY.....................................................................1 COMMERCIAL BANK REQUIREMENTS FOR ACQUISITION OF LOANS AND THE ABILITY OF SMES TO MEET THEM.........................5 1........................................................4.....10 2.4........................................0 CHAPTER ONE...................4................3 1...5 1........9 2..........................................................3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING ......3 THEORETICAL REVIEW.........................

.........................................15 4.....................................................................................13 3..1...............................4 AREA OF THE STUDY..............................................14 4.............11 3................1........1 POPULATION ..................................................................2 CLOSED QUESTIONS.....................................3...............16 4..................17 4................1 A PROFILE OF SMES WHO GET AND THE ONES WHO DON’T GET THE APPLIED CBL..............1...................................1............................13 3.........13 3......8 RESEARCH INSTRUMENTS...15 4......3................................................1...8.................................................3 APPLICATION FOR BANK LOAN ........................2 INTRODUCTON.......................1.........................2 INTERVIEW.............3 PRIMARY DATA.3.12 3............................8........15 4......................1.................0 CHAPTER FOUR .......................2 INTRODUCTION ......................1 RESULTS AND PRESENTATIONS .................8...........................15 4................................1 COMPLETELY OPEN-ENDED QUESTIONS....................... 17 x ..............................................1.......13 3...12 3................................11 3...............1 FINDING FROM SMES...................................................................15 4.........................................................................................3 RESEARCH DESIGN..........................................................................................................................................................4 REASONS TO WHY SOME SMES DON’T APPLY FOR BANK LOANS .......................................................5 POPULATION AND SAMPLE SIZE............3.............................................12 3...........................................1.................................................15 4.11 3.....1..........................................12 3.3.....................................11 3.....................5...................................1 QUESTIONNAIRES.2 CAPITAL INVESTED IN SMES BUSINESSES.9 DATA ANALYSIS .......1...........1 TO EXAMINE BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM......0 CHAPTER THREE.......11 3....................................................................................................2 SAMPLING SIZE....................8...3.....................13 3.............................................12 3...............6 SAMPLING TECHNIQUE..........................................1 RESEARCH METHODOLOGY................................3........7 DATA COLLECTION................5...........................15 4......

......3..........19 4....................3.............22 4....23 4.........1.....22 4.......2.......4 SECONDARY DATA......1.......25 4.2............1.........1...........3.2..........2...3.........3.........22 4......3...................................2 A PROFILE SHOWING BANKS RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES FINANCING .4...1..............20 4.....1 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SMES AMONG THEIR CUSTOMS AND THE KIND OF INVOLVEMENT THEY HAVE WITH THEM...............1.....28 4..................................................2................ RISKY AND COST................1..................24 4......3.................1.1...3.... 28 4...........29 xi ..........................3 A PROFILE SHOWING SOME DRIVING FACTORS WHICH INFLUENCE COMMERCIAL BANKS INVOLVEMENTS WITH SMES ........18 4...........3............2 RESEARCH FINDING FROM COMMERCIAL BANKS ...3.........................3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING.....3...............3........5 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE RISK ASSESSMENTS OVER SMES LENDING ................3......20 4......2 A PROFILE OF SMES FAILING TO MEET COMMERCIAL BANKS REQUIREMENTS FOR LOAN ACQUISITION .2....................1...3......................4 A PROFILE SHOWING HOW SMES PERFORM IN RELATION TO OTHER BANK CUSTOMERS IN TERMS OF PROFITABILITY....27 4...........................1 BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS......2..2 TO DETERMINE COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING ..............6 A PROFILE SHOWING HOW COMMERCIAL BANKS MITIGATE SMES LOANS RISKS AND COSTS .....................................3.5 A PROFILE SHOWING WHETHER SMES HAD THE REQUIRED COLLATERALS FOR BANK LOAN ACQUISITION ..........1..........1...............26 4...................2 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SEPARATE UNITS DEALING WITH SMES RELATIONS ...3.......................................2...1 A RESPONSE FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING ..1.......................6 THE RATE OF SMES JUDGMENTS ON THE BANK LOANS REQUIREMENTS FOR THE ACQUISITION OF BANK LOANS .....................................1...................3........................21 4..

............1 RESEARCH FINDINGS FROM THE MITM ........1 Vision.................29 4.......................................2...........................................................34 6....................................4................5 GOVERNMENT EFFORTS/CONTRIBUTION ON SMES ACCESSING COMMERCIAL BANK LOANS FOR THEIR GROWTH AND DEVELOPMENT.........................3 CONCLUSION.....5 Strategies:............1......................................................32 5.................2 Mission.......35 6..4................4 Policy Statement:.......................35 6.....35 6..............................4 COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING ................3.........................................4..........2 SETBACKS ...................................................5..............1 Examining bank requirements for the acquisition of their loans and the ability of SMEs to meet them.................29 4...........31 5..............................2.....33 5..........................2 SIDO’S VISION....................3 Overall Objective.4.............................................................4.................29 4....................................................2 INTRODUCTION ...............35 6..................4.....35 xii ................................................................2.............2 FINDING FROM SIDO .........................3 BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM..............1 CONCLUSION AND RECOMMENDATIONS........................................................4..............4...................4....................................29 4...1 FINDING FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING............................................31 4.................30 4.....29 4.......................5.....................1......................................................4......................2 INTRODUCTION .......1.........................................4.............1 ACHIEVEMENTS..................0 CHAPTER SIX.................................30 4..........................0 CHAPTER FIVE................................................1 SIDO’S BACKGROUND ...........31 5..........................5.....................................2.................................................................31 5.....34 5............32 5........................................3 SIDO’S MISSION STATEMENT...........................................................34 5...........31 5..............1..........................................1...1 DISCUSSION AND IMPLICATION ........29 4.............

..................................................................5.........36 6...................35 6......36 6................5......5 RECOMMENDATIONS ...........................................................................2 Determining commercial banks attitudes towards SMEs lending....3 Assessing government efforts/contribution on SMEs accessing CBLs for their growth and development..6..................3................36 6............................................41 xiii ..............................3 TO THE GOVERNMENT (MINISTRY OF INDUSTRY...........................................................................................................................................................3..............................35 6..........................................................................36 Reference ........2 TO SMES ......................37 Appendix A....................... TRADE AND MARKETING) ...................39 Appendix B ........................................4 GENERAL CONCLUSION .........5..........36 6............1 TO COMMERCIAL BANKS ...................................................................................................................................................................

small enterprises often have to rely on their own funds. this study investigates some of the problems associated with SMEs accessing loans from commercial banks. Despite the efforts undertaken by the government and non governmental institutions as an attempt to simplify accessibility of bank loans to SMEs. The Tanzanian government recognizes the importance of SMEs to its economy and associates SME with more equitable distribution of income and hence poverty alleviation (U RT. The access to finance and the quality and cost of the service that small businesses receive from banks are key to their profitability and prosperity (and that of the economy). December 2003) stated that. among other systemic and institutional problems in developing countries like Tanzania. Beck and Dermirguc. Small and Medium Enterprises (SME) contribute significantly to poverty eradication in the world. A well functioning banking sector can play an important role in channeling resources to the best firms and investment projects. Over thirty percent and up to sixty percent of the total employment in manufacturing in many countries as defined by the World Bank are in SME’s firms that employ up to 250 staff hence termed SME (Ayyagari. 20. the implication of a lack of access to banking services is severe (P. For a household.1. 2003).1 INTRODUCTION Countries are faced with the challenge of increasing provision of banking facilities to firms and households alike. 2002). 2006). While large companies tend to be well catered for. No. Wattanapruttipaisan (Vol. MID. Hawkins. 1 . Thus.0 CHAPTER ONE 1. SMEs are of great socio-economic significance although their long-term growth and competitiveness has been compromised by the chronic and often acute constraints on their access to formal sector finance. 2.

Principal. SME operating in Tanzania informal sector. Small to medium enterprise play a very crucial part in the economy of Tanzania. According to Kore.10 percent of the labour force (Beck. D. on a commercially sustainable basis. The key objective of the policy was to establish a basis for evolution of an efficient and effective micro finance system that served the low-income segment of the society. Chambo. He goes on to justify this by stating that out of a total population of approximately 35 million people.24 percent of the labour force. Gross domestic product (GDP) was estimated to be US$ 22.2 BACKGROUND OF THE STUDY Tanzania remains one of the poorest countries in the World. The government has also made some efforts on developing 1 At the Third Annual National Conference on Microfinance held in Arusha in March. an anticipated pick up in global and sub-Saharan African growth. Among other things. in both urban and rural areas. the government has attempted to undertake some measures so as to promote microfinance (MF). Suleman. compared with an estimated 6. Levine and Maksimovic. opens with this sentence. Tanzania's economy is expected to grow by 6. almost 16 million are regarded as poor since they depend mainly on smallholder subsistence farming. (2005). Formal SME account for about 17 percent of the country’s GDP and employs around 32. namely microfinance. According to Prof.7 percent in 2011. Micro financing institutions (MFIs) are one among crustal components of any economy. Despite its notation. 2 .1. they need financial services suited for this kind of economic activity. Kunt. The Moshi University College of Cooperative and Business Studies. 2003). it was not until February 2001 that the National Microfinance Policy was launched. thereby contributing to the economic growth of this nation. account for 47 percent of the country’s GDP and employs around 42.2 percent in 2010.1 “Tanzania is a microfinance country”.434 billion and a GDP per capita of US$ 543 in 2010. It’s been long now ever since the government of Tanzania noted the importance of microfinance in the country. 2004. In order for this lot to sustain their small microenterprises. it also spelt out the national vision for the development of Micro finance as a tool for poverty eradication through the widespread access to micro financial services right across the country.

The study will concentrate on trying to answer the research questions as stated on page number five.the sector. This is possible if the problems are investigated in depth and proposed solutions get to be addressed by the particular stakeholders. 2 3 4 5 6 7 Small to Medium Enterprise Small to Medium Enterprise and Microfinance Institutions A state of confusion. But there still seems to be a strong fog4 between the two5 interdependent and crucial economic components leading to the inaccessibility between them. in which things are not clear.3 STATEMENT OF THE PROBLEM Despite the importance and positive contribution of SMEs to the growth of the Tanzanian economy. (oxford advanced learners dictionary 6th edition). Kunt and Levine. merely fifty percent or more fail to access the loan. Some of the sources of finance are the banks. this study attempts to investigate some of the problems faced by SMEs as they attempt accessing commercial bank7 loans in Arusha town. Small to Medium Enterprise and Microfinance Institutions Loans secured by certain forms of collateral. 1993. there still exist some more opportunities for SMEs to access more bank loans. Pandula. Evidence suggests that access to finance plays a very important role in the overall business environment. 2004).2 From the year 1999 to 2004. For a better and strong economy. Kunt.6 Despite the hardships faced by SMEs as they attempt to access bank loans. it is still unclear how much SMEs in developing countries would be able to rely on banks to obtain those products. of which most time they lead to inaccessibility of the bank loans to them. Studies indicate that in a list of SMEs applying for bank loan. the World Bank has approved over US $ 10 billion in support of SME activities (Beck. Berger and Udell. indicate. Therefore. the two3 very important economic factors should be brought together. D. potentially constraining both entry and growth (Beck and D. (2011). enough has not been done by the government and commercial banks who are the key stakeholders in supporting SMEs solving their huge constrain of commercial bank loan inaccessibility for their growth. 1996). As one among many components of MFIs 3 . 1. As the US literature (Carey et al. 2006).

this indicates a gap of knowledge on the supply side. Despite the various efforts taken by the government and banks. this study aimed at investigating the problem of inaccessibility of commercial bank loans to SMEs on the supply side. If this problem is not well investigated and addressed especially on the supply side. the Government will promote entrepreneurship development through facilitating improved access of SMEs to financial and non-financial services. 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 Mushi.6mn 22. trade and marketing (MITM) to take the overall responsibility of coordinating and implementing the SME Development Policy of 2001 which states. (2009). Also.5mn 50. 2002). TABLE 01: CRDB SMES LOAN PROFILE FROM 2006 TO 2009 Year 2006 440 2007 1. (2007).It is obvious that commercial banks have been extending more and more loans to SMEs every year. there still is a big problem of SMEs accessing bank loans. the Tanzanian economy is likely to lag behind in its growth since SMEs contributes almost fifty percent of its economy. the Tanzanian government has recognized that SME development is crucial to the development of the Tanzanian economy and thus addressed the ministry of industry.420 2008 2. (MITM. Most studies have been investigating the problem of bank loan inaccessibility to SMEs on the demand side and little has been exploited on the supply side. of Loans processed Approved Loans (USD) 5.463 April 2009 3. for example CRDB8 (see on table 1 below) Shambwe.3mn 44. Therefore.7mn 8 A big and wide covering bank in Tanzania 4 .136 Details No.

this means majority do depend on external sources of funds to initialize and run their SMEs. Commercial banks are some of the major sources of funds as loans to Tanzanian SMEs. 1. To assess government efforts/contribution on SMEs accessing CBLs for their growth and development. Basically. 2008). Mkwawa.4 RESEARCH OBJECTIVES 1. because majority of the Tanzanians are said to be poor (E. shareholders or a loan from a financial institution like commercial banks.1 GENERAL OBJECTIVE The main objective of this research was to assess the accessibility of SMEs to commercial bank loans for enterprise development or growth.P. 5 . Their effective lending to SMEs can lead to a great impact on the growth of the Tanzanian economy.4.2 SPECIFIC OBJECTIVES: • To examine bank requirements for the acquisition of their loans and the ability of SMEs to meet them.6 CONCEPTUAL FRAMEWORK For an enterprise to exist or survive. and do SMEs have the ability to meet the bank requirements? • • What are the banks attitudes towards SMEs lending? What are the Government efforts/contributions on SMEs accessing CBLs for their growth and development? 1. • • To determine banks attitudes towards SMEs lending. it requires some financial assistance whether it is in its initial stage or for its expansion for an existing one. These funds can either be from the enterprise owner.4.1. 1.5 RESEARCH QUESTIONS: • What are the bank requirements so as to access their loans.

But on the other hand. researchers in related studies and other stakeholders in this particular field. Therefore. 6 . • Irresponsible respondents. E. some respondents are normally reluctant in responding to the data collection methods used. K. 1. • Suggesting measures to be taken by the research respondents with respect to the research objective so as to attain economic growth and development of the nation.8 SIGINIFICANCE OF THE STUDY This study is aimed at making the following contribution: • Contribution of additional knowledge to SMEs. this was expected because most of the government institutions and banks are reluctant in publishing their information which are to date to the fullest exposure. SMEs face great challenges on trying to access commercial bank loans for their development and thus the development of the whole economy at large. this study was seeking to investigate some issues going between SMEs and commercial banks which might be leading to the inaccessibility of commercial bank loans to SMEs and the government contribution on solving the problem as it fulfills the SMEs’ development policy of 2002 under the MITM. this was due to the limited timetable of the researcher during the planned academic research period.7 LIMITATIONS OF THE STUDY The following were expected limitations associated to the study: • Insufficient time. commercial banks. 1. • Data inaccessibility. Bbenkele (2007).

3 THEORETICAL REVIEW A company can either be funded by a debt or equity.0 CHAPTER TWO 2. the leverage costs will be lowered (as more income can be used to repay the debt). This also paves a new idea to the Tanzanian government as an addition way of supporting SMEs. It includes theories on SMEs lending and empirical discussions and findings related to this particular research objectives. Modigliani and Miller (1963) argued against the leverage theory stating that this was not the case. Daniel et al (2006) pointed out that in the case of SMEs. since the government is a business partner with business people (as far as the corporate tax is considered). if it reduces the tax burden to companies. the expected costs of bankruptcy is quite high.1 LITERATURE REVIEW 2. one of their conclusions was that. it will reduce the bankruptcy threat to banks when SMEs apply for loans to them. the leverage theory states. the average cost of capital decreases with the use of leverage and the value of the firm (the value of the debt and equity combined) increases while the value of the equity remains constant. therefore if this is done to SMEs.2. But 7 .2 INTRODUCTION This chapter discuses theoretical and empirical results and opinions of other scholar’s finding in their literatures. In their analysis. Under its assumptions. 2.

Pandula. Hence. This implies that SMEs should rely on their own source of financing which is often adequate. also pointed out contract enforcement problem to be another cause of credit rationing which eventually leads to insufficient funds to all the needy (as far as SMEs are concerned). G. property verification and ownership are weak. but in real situation. the main reason for the contract enforcement problem is the poor development of property rights. This argument is based on the fact that suppliers of finance such as banks may choose (due to asymmetric information. This implies that. In these countries. banks may have negative attitudes towards lending to their stakeholders. Although the author did not point out this problem directly to SMEs. but cannot obtain finance from the formal financial system such as commercial banks. This problem is likely to affect most of the developing countries like Tanzania which are not well equipped to legal facilities. (2011). adverse credit selection and monitoring problems) to offer a collection of different interest rates that would leave a significant number of potential borrowers without access to credit. 8 . They termed this condition as credit rationing. According to Stiglitz and Weiss (1981) agency problems such as asymmetric information and moral hazards can impact on the availability of credit to SMEs. SMEs are the victims of this problem compared to large firms. The Stiglitz and Weiss’ theory therefore suggests that there is a good number of SMEs that could use funds productively if they were available.Andree and Kallberg (2008) found out that this type of tax shield is not appropriate to SMEs because majority do not have enough profits which can lead to visible funds from the tax shield and attract them to borrow more from banks. This is because majority of them are said to lack loan supportive instruments like collaterals.

M. lack of collateral security (33.0 per cent) and high risk (25. fifty two banks were rated sound/satisfactory. the major reasons attributable to the SMEs that have made accessibility to credit difficult include. as at 2005. Obamuyi further found that. SMEs need to maintain an open communication with banks in both situations when the SMEs are doing well or when they are in difficulties. many studies indicate that lack of collaterals. lending to SMEs are constrained due to largely regulatory/market requirements and the soundness of the banking sector. poor project package (33.3 per cent).7 per cent). lack of adequate record (25. and generally SMEs need to be honest in how they conduct their financial transactions by managing their cash flow to reduce unwanted overdraws on their accounts. although not limited to. However. And this is not only in Tanzania but worldwide. Bbenkele. invest more time to know bank loan requirements and provide the required information by banks. Apart from the above motioned bank requirements. Liquidity Ratio (LR). poor financial statement records and a maintained bank account with a good cash flow to be major problems SMEs encounter as they try to access commercial bank loans. Reserve Requirements (RR).4 EMPIRICAL REVIEW 2. These requirements have varied degrees of influence on the amount of money available for lending by the banks. Obamuyi (2007). while thirty four (34) were rated marginal/unsound 9 . He further stated that SMEs are reported to be requested the following by commercial banks: To Keep their accounts in order and maintain a positive cash flow.0 per cent). T. poor credit worthiness (41. Interest Rate Developments (IRD) and the lending policies of the banks.3 per cent). based on capital adequacy and other rating parameters. For example T. on the supply side.4. For instance.1 COMMERCIAL BANK REQUIREMENTS FOR ACQUISITION OF LOANS AND THE ABILITY OF SMES TO MEET THEM The main problem facing the development of small and medium enterprises in both developed and developing countries is finance and this has been supported by the work of E.2. Obamuyi also stated that. found out that. He also found out that the supply of loan able funds by banks depends on the soundness of the sector and based on the various regulatory requirements like Capital Adequacy Ratio (CAR). All these problems have combined in several ways to make lending to the SMEs sector very difficult by the commercial banks. (2007).

Shambwe.3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING The Tanzanian government has engaged it’s self in supporting SMEs by setting out policies to help them. R. thereby displaying ‘negative attitude’ towards small lending. For this case. leading to mutual benefit. they revealed that SME segment is a risk one however profitable. and thus prefer to administer fewer larger loans. the government should act directly by developing them. (2004) also stated that there is no explicit policy in favor of SMEs. E.4.4. Ellid and Pecotich. 2. Bbenkele. both SMEs and commercial banks have to meet the required criteria so that both sides to be served appropriate. But on the other hand. Bbenkele.2 COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING For an effective relationship to exist.2. The reasons forwarded for this are that the clients are regarded as high risk and unprofitable. Pisarovic. In addition. Tisˇma and A. S. But at the end. Marignani. and Sande. Borgarello. (2004). D. 9 A bank official in Tanzania 10 . (2001) argued that overall policies on SMEs in sub-Saharan Africa are more macro-economic policies that somehow do not benefit the development of SMEs. according to their survey. (2007) recommends that further information is needed to assist both banks and SMEs to build long term profitable business relationships. Czira´ky. E. This is evidence that commercial banks have a negative attitude towards SMEs lending. But on the other hand. there are certain roles expected from the partners in the relationship to determine the nature of the benefits to be realized Binks et al (1992). weak banking tradition might cause suboptimal behavior of the lenders who might consider profit-maximization that requires administration of a larger number of smaller loans administratively too costly or simply too troublesome to deal with.9 (2009) pointed out that basically. (2007) points out that the nature of bank and SME relationship is that the commercial banks tend to operate without a good knowledge of needs and how the SMEs run their businesses.

amount of capital employed and sales. 3. 11 .4 AREA OF THE STUDY The study was carried in Arusha municipal located in Arusha region northern Tanzania.0 CHAPTER THREE 3.3. the research was conducted as a case study. trade and marketing were also available in the town at the regional office. Its results were expected to reflect how the real situation is to majority of Tanzanian SMEs as they try to access commercial bank loans for their development. 3. data collection methods and data analysis. Government officials responsible to the ministry of industry.1 RESEARCH METHODOLOGY 3. The town is a host to commercial bank branches of almost all commercial banks in Tanzania. There is also a regional library and universities with libraries where secondary data was acquired. population and sample. This is because the area is comprised with enough number and with full characteristics of the research variables/respondents. Due to the limitations of economic resource such as time and finance to the researcher. There are also a good number of SMEs with various characteristics in terms of number of employees.2 INTRODUCTON This chapter outlines the methods that were used by the researcher in order to attain the objectives of the research.3 RESEARCH DESIGN Descriptive design is the type of research design used for this study. sampling techniques. The chapter therefore explains about: research design. area of the study.

3. a sample was required from the existing population. there are merely more than one thousand registered SMEs in Arusha municipal. For SMEs. From the above stated population.2 SAMPLING SIZE Due to the limitation of time and financial constrains. the study employed the following sampling techniques. publications from the internet and other supporting documents and records from the research respondents. a simple random sampling technique (under the probabilistic sampling method) and purposive sampling technique (under the non-probabilistic sampling method). According to Arusha time (23 April 2011). Arusha municipal council business department points out that.5. Simple random technique was used to select SMEs and commercial banks. Purposive technique was used to get the officials who are responsible to the MITM and commercial bank officials who are concerned with the research problem. 3. Arusha hosts nearly twenty (20) commercial banks outlets. Primary data 12 . it was difficult to extract data from the whole population. two officials were to be interviewed but only one was interviewed. six commercial banks were selected but only five of them responded to the questionnaires and from MITM. sixty SMEs owners were expected to be questioned but only twenty nine responded positively.6 SAMPLING TECHNIQUE To obtain the sample variables from the population. trade and marketing in Arusha. Secondary data was collected from different: books. commercial banks in Arusha municipal and government officials’responsible to the ministry of industry.5 POPULATION AND SAMPLE SIZE 3. journals.7 DATA COLLECTION The study included both primary and secondary data. Therefore.5. the following sample was extracted: From SMEs. presentations and articles. there were seven officials responsible to the MITM. 3. 3. For MITM.1 POPULATION The study aimed to collect data from the following population: SMEs in Arusha municipal. from commercial banks. papers.

but intended the interview to be conversational. See a sample of questionnaires at appendix B. To do so. They had to go through the questions. bank officials and SMEs owners). Sixty copies of questionnaires were distributed to SMEs owners and six copies to each of the six commercial bank. 3.2 CLOSED QUESTIONS Closed questions had a list of possible options or answers from which the respondents were able to choose their appropriate choices of answers. The researcher also gave explanations or left out questions that appeared to be 13 .1 QUESTIONNAIRES Prepared set of questions were distributed to the randomly selected SMEs and purposive selected bank officials.2 INTERVIEW A semi-structured type of interview was employed in this study. understand them (ask the researcher questions where required) and answer them appropriately. SIDO.8 RESEARCH INSTRUMENTS The following research instruments/tools were applied as for this research: 3.8. Such questions were useful for obtaining in-depth information on: facts with which the researcher was not very familiar.was collected from all the research respondents (officials responsible to the MITM.8. the researcher was able to change the order of the questions or the way they were worded. attitudes and suggestions of informants.1. In it. the researcher had a worked out set of questions beforehand.1 COMPLETELY OPEN-ENDED QUESTIONS Open-ended questions permitted free responses which recorded in the respondents’ own words. opinions. 3. The respondents were briefed on what the questionnaires were all about and on how to undertake them. 3.1. Below are research instruments which were be used to collect primary data.8. or sensitive issues. The Questionnaires included the following formats: 3.8.

After processing the primary data. 14 . Data analysis was then conducted including both. Arusha branch. So. they were presented in table forms. the main job was to get the interviewee to talk freely and openly while making sure the in-depth information on the research problem was obtained. the results were discussed leading to conclusion and recommendations. 3. data analysis was conducted after processing the primary data.redundant. primary and secondary data. This type of tool was applied to the officials responsible to the MITM at Arusha regional office and to SIDO official. Primary data was processed with the help of computer program named SPSS.9 DATA ANALYSIS After all the data had been collected. At the end.

8 20.8 34.5 100.3 PRIMARY DATA 4.0 Source: Research data (2011) Out of all respondents.1 FINDING FROM SMES 4. Table 02: SUCCESSFUL AND UNSUCCESSFUL SMES LOAN APPLICANTS Frequency YES NO I have never applied for a bank loan Total 4 6 19 29 Percent 13. 4.1 A PROFILE OF SMES WHO GET AND THE ONES WHO DON’T GET THE APPLIED CBL The following is a table showing the respondents results as to the ones who got and the ones who didn’t manage to get the commercial bank loans after their applications.0 Valid Percent 13.0 CHAPTER FOUR 4.1. and do SMEs have the ability to meet the bank requirements?” The following are research finding in relation to the above objective. 65.5 100. out of the ones who applied for the loans.8 20. analysis and presentation of the research finding from the research respondents and from secondary sources.0 Cumulative Percent 13.7 65. 13.3. 4.7% appeared to have failed to access their applied loans. Therefore.1. only 40% got the loans while 60% failed to accesses the loans.4.5 100.8% are the ones found to have got the applied loans while 20. The rest of the applicants/percent are the ones who did not applied for the bank loan.1 TO EXAMINE BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM The aim of the above objective was to answer the research questions stating. 15 .3.2 INTRODUCTION This chapter comprises of the research findings.3. “What are the bank requirements so as to access their loans.1.1 RESULTS AND PRESENTATIONS 4.7 65.5%.

In fact. 2000 and Carter and Van Auken. 4. majority of the ones with above ten million had specified their investment to have covered an average of a range between 30 to 90 million.9 100.0 Source: Research data (2011) The findings show majority of the SMEs were found to have invested an average of 1 to 5 million where as 44. 2000.8 31. therefore majority also fail to meet bank requirements for the acquisition of the loans for their development. because majority of SMEs are found to invest small amount of capital in their business.0 24.1 100.8% where found to cover this interval of capital invested. small firms are unable to successfully compete and often face difficulties in meeting banks requirements for financing.8 31. several studies confirm that poor capitalization is a leading cause for small firm failure (see for example. According to the questionnaires.The aim of this question was just to portray the general profile of the real situation of accessibility of commercial bank loans to SMEs. Wiklund and Shepherd.0 24.1. Without sufficient capital. 16 . This implies. The table below shows the response from the respondents.1% where found to have invested above ten million.3.2 CAPITAL INVESTED IN SMES BUSINESSES The following data was collected in viewing of how much capital was invested in to the responding SMEs. Table 03: CAPITAL INVESTED IN BUSINESS Frequency 1 to 5 million 6 to 10 million Above ten million Total 13 9 7 29 Percent 44. 2006).1 100. especially during periods of high capital demand and yet it is capital that provides firms the slack to experiment with new strategies and innovative projects (Coleman.1.0 Cumulative Percent 44.0 Valid Percent 44. 31% where found to have invested an average of 6 to 10 million of capital and only 24.8 75. 2005). Coleman.

4 REASONS TO WHY SOME SMES DON’T APPLY FOR BANK LOANS The following are some results as to the reasons why some SMEs don’t apply for commercial bank loans.3.5 100.5 % of SMEs go for commercial bank loan while 65.5 65. The reasons to why some SMEs don’t apply for commercial bank loans as results show in the above finding are stated in the following question below.5% don’t. The following are the respondent’s findings.0 Valid Percent 34.1. 17 . 4.4.0 Source: Research data (2011) The findings shows that majority of the SMEs don’t go for commercial bank loans.3 APPLICATION FOR BANK LOAN This part targeted to find out what proportion of SMEs applies for commercial bank loan for their growth and development.3.5 65.1.1. The results show that only 34.0 Cumulative Percent 34.5 100. Table 04: APPLICATION FOR BANK LOAN Frequency YES NO Total 10 19 29 Percent 34.1.5 100.

2 Cumulative Percent 48.0 20. upon their own judgments and evaluation of their own values.3% disqualify themselves to be able to meet the required bank conditions so as to acquire the loans.3 13.2% do not know how to get the bank loans and 20. Therefore.5 A PROFILE SHOWING WHETHER SMES HAD THE REQUIRED COLLATERALS FOR BANK LOAN ACQUISITION The following are the finding to whether SMEs could meet the required collaterals for the acquisition of commercial bank loans. 85% of them appear to be aware of the requirements.0 Source: Research data (2011) Out of the while sample of respondents.2 Valid Percent 48.8% are not in need of commercial bank loans.1 79. From the open ended questions which asked the respondents if they knew the bank requirements for the acquisition of the loans.Table 05: REASONS TO WHY SOME SMES DON’T APPLY FOR COMMERCIAL BANK LOANS Frequency I can’t meet the Bank requirements I don’t need a bank loan I don’t know how to get a Bank loan Had once applied for a bank loan Total 14 4 5 Percent 48. 17. 18 .1.3% do not apply for bank loans because they cannot meet the bank requirements. 48. 13.3 62. 48.3 6 29 20.7% had once applied for the loans but did not manage to access them.3 13.3.1. 4.0 100.7 100.8 17.8 17.7 100.

4.1% never applied for the bank loans. it is open that majority of SMEs are subjected to commercial bank requirements which are out of their standard (higher level) to the extent that they cannot afford the requirements leading to failure of majority SMEs applicants of commercial bank loans.Table 06: SMES LOAN APPLICANTS WITH AND WITHOUT BANK LOAN COLLATERAL Frequency YES NO Had never applied for a bank loan Total 4 7 18 29 Percent 13. 19 .1 100.0 Source: Research data (2011) The finding shows that.0 Valid Percent 13.1% don’t have the required collaterals.8 24.8 24.1 62.0 Cumulative Percent 13.6 THE RATE OF SMES JUDGMENTS ON THE BANK LOANS REQUIREMENTS FOR THE ACQUISITION OF BANK LOANS The following are the finding on how SMEs judge the bank conditions kept forth so as to acquire a bank loan.1 62.8 37.1.9 100. The rest.1 100. 62. only13.1.3. For this reason.8% of SMEs tends to have the commercial bank loans collaterals required for the acquisition of loans and 24.

7 10.3 100. only 10. A business complying with regulatory authorities. BANK B Proceeding business. Asset account performance statistics.0 Source: Research data (2011) Majority of the SMEs found the bank conditions to be difficult to be met. BANK D Business license.7% found it to be difficult. 2 A legal business (certified and licensed). BANK A 1 At least a three years operating business.3% found the requirements to be simple.3.9 89.1 BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS The following are responses of commercial banks as they answered a question “what are your main requirements for SMEs lending?” Table 08: BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS No.7 10.0 Cumulative Percent 37.9 51. Among the respondents. 20 . 37. But on the other hand.3.0 Valid Percent 37. Registered and at least three years operating business.9% found the conditions to be very difficult and 51. 4.3 100.9 51.2. BANK C A business that is operating for at least three years.2 RESEARCH FINDING FROM COMMERCIAL BANKS 4. BANK E Brief business plan with projections. Business plan.7 100.Table 07: SMES JUDGMENTS ON BANK LOAN REQUIREMENT CONDITIONS Frequency Very difficult Difficult Simple Total 11 15 3 29 Percent 37.

21 . Source: Research data (2011) The table above shows commercial bank requirements according to the research respondents.2. Resolution to borrow. Valuations. 4 Good history in the bank. 4. A business must be banking with as for at least a year. Financial statements. As the tables above shows. 5 Bank statement for the past six months. Business plan and cash flow projection. Annual financial statements.3 Financial statements for the past three years. Possession of fixed assets for securities. Securities. Certificate of registration. most of the requirements are difficult to be fulfilled by majority of SMEs which are informally conducted (putting apart the fixed asset requirements). Securities.2 A PROFILE OF SMES FAILING TO MEET COMMERCIAL BANKS REQUIREMENTS FOR LOAN ACQUISITION The following are finding from commercial banks responding to what percent of SMEs fail to meet their requirements when applying for their loans. These are the conditions which majority of the SMEs tend to judge them to be difficult to meet.3.

This shows commercial banks have a positive attitude towards SMEs lending as them being their customers (just like other customers). bank deposit accounts service and loan products to SMEs. This is still a huge rate of failure among SMEs. Another 40% of commercial banks have a range of 31% to 60% SMEs failures while 20% of them have a range of 61% to 90% of SMEs failures.2 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SEPARATE UNITS DEALING WITH SMES RELATIONS 22 .2.0 80.0 Valid Percent 40. Apart from been their clients.2.3.0 20.1. 4.0 100. 100% of the respondents have SMEs as part of their clients. 100% of the respondents were also found to offer both.Table 09: A PROFILE OF SMES FAILING TO MEET BANK LOANS REQIREMENTS Frequency 0% to 30% 31% to 60% 61% to 90% Total 2 2 1 5 Percent 40. 4.0 100.3.1 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SMES AMONG THEIR CUSTOMS AND THE KIND OF INVOLVEMENT THEY HAVE WITH THEM The results show that.0 40.1.3.0 Cumulative Percent 40.1.0 100.0 40.0 Source: Research data (2011) The results show that 40% of commercial banks have a range of 0% to 30% of SMEs failing to meet the bank requirements.2 TO DETERMINE COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING 4.0 20. This means 80% of commercial banks have an average of more than 50% SMEs failing to meet their requirements for the loans.

These factors include: perception of profitability in the SME segment. This shows majority of commercial banks have a positive attitude towards their relations with SMEs. intense competition with large corporation and intense competition with retail customers.0 100.0 20. 80% of the respondents have separate units dealing with SMEs relations while 20% of the respondents do not have special units managing their relationships with SMEs.0 20.2.0 Valid Percent 80. 4.0 Source: Research data (2011) The results shows that.1. The following are finding of the five respondents (commercial banks).The following are results showing whether the respondents (commercial banks) have separate administrative units dealing with SMEs relationships with them.3. Most of them have a separate unit to manage their relations with SMEs. Table 11: FACTORS AFFECTING COMMERCIAL BANKS LENDING TO SMES Not significant 23 significant Extremely significant /crucial .0 100.0 100. Table 10: BANKS WITH AND WITHOUT SEPARATE UNITS MANAGING BANK RELATIONS WITH SMES Frequency YES NO Total 4 1 5 Percent 80.0 Cumulative Percent 80.3 A PROFILE SHOWING SOME DRIVING FACTORS WHICH INFLUENCE COMMERCIAL BANKS INVOLVEMENTS WITH SMES The following are results showing how significance some factors are in driving commercial banks involvements with SMEs.

The above findings show that commercial banks perceive SMEs to be very profitable customers and it is one of the major factor driving their involvement with them. 40% find it to be not significant while 60% term it to be significant. When considering competence with retail customers.. SMEs loans compete with the same chance with other bank customers. in other words. In this segment. When considering competence with large corporate. when it comes to competition. 40% find this factor to be extremely significant. RISKY AND COST The following are respondent’s results showing how SMEs perform in relation to other commercial bank customers in terms of profitability.. 100% of commercial banks involve themselves with SMEs because they perceive them to be profitable. to others 24 SME loans are more … than others . Table 12: SMES LOANS PERFORMANCE IN RELATION TO OTHER LOAN CUSTOMERS IN TERMS OF PROFITABILITY. But on the other hand. 40% term it to be not significant while 60% term it to be significant (within the 60%. there are no priorities.1. This implies that.Perceived profitability in the SME segment Intense competition for large corporates Intense competitions for retail customers 0% 40% 40% 60% 40% 60% 40% 20% 0% Source: Research data (2011) The table above shows that. 4.2.4 A PROFILE SHOWING HOW SMES PERFORM IN RELATION TO OTHER BANK CUSTOMERS IN TERMS OF PROFITABILITY. SMEs loans are affected by large corporate and other retail customers.3. risky and costs. RISK AND COST SME loans are less … than others SME loans are equally . Therefore. 20% term it to be extremely significant). commercial banks offers SMEs an equal chance with other customers when applying for loans.

2.1. 60% of commercial banks rates SMEs loans to be less risky than other loan customers and 20% rate them to be equally to other loan customers while the other 20% find them to be more risky than other loan customers. 25 . In terms of risky. 4.5 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE RISK ASSESSMENTS OVER SMES LENDING The following are the results showing whether commercial banks have risk assessment over SMEs lending to them.3. it is obvious that they treat SMEs loans like very risky loans to them. 40% of commercial banks rate SMEs loans to be less costly than other loan customers while 60% of commercial banks rate them to be with equal cost to other loan customers. When considering costs.Profitable Risky Costly 0% 60% 40% 20% 20% 60% 80% 20% 0% Source: Research data (2011) The finding shows that 20% of commercial banks are found to rate SMEs loans to be equally to other loan customers in terms of profitability while 80% were found to rate SMEs loans to be more profitable than other loan customers. But when considering the measures they employ to overcome the risk (table 14). The above findings shows that majority of commercial banks consider SMEs loans to be less risky than loan customers.

All costs are directed to the customers and not the bank.0 Valid Percent 80. Risk is one among factors affecting SMEs financing.0 20.0 20. Below is a profile showing how commercial banks try to mitigate SMEs loans risk. 2 3 Well planed and organized man power to execute operations and processing loans at efficiency & 26 .0 100.0 Source: Research data (2011) The results shows that 80% of commercial banks do make some risk assessment of SMEs lending to them while 20% of the commercial banks don’t conduct risk assessments of SMEs lending. BANKS 1 RISK COST Introduction of processing fees and all legal and other costs are taken by the borrower before loan disbarment.0 Cumulative Percent 80.0 100.0 100.1. (2004) risk appears to be one of the causes for the failure to establish sufficient financing from commercial banks. 4. higher risk firms have greater difficulty in obtaining capital form banks than lower risk firms and must seek for other sources of financing. According to Cassar. For example. BANK A Proper documentation of the collaterals (legal mortgage & comprehensive insurance of collateral & stocks) BANK B BANK C Making sure that loans are secured by strong collaterals.2. Table 14: COMMERCIAL BANKS RISK AND COST CONTROL MEASURES TO SMES LOANS No.3.Table 13: A PROFILE SHOWING BANKS WITH AND WITHOUT SMES LENDING RISK ASSESSMENT Frequency Yes No Total 4 1 5 Percent 80.6 A PROFILE SHOWING HOW COMMERCIAL BANKS MITIGATE SMES LOANS RISKS AND COSTS The following are results of how commercial banks control risks and costs of SMEs loans.

This adds a burden to SMEs. 4. This is because these measures are away far with reference to how SMEs conduct their business.3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING 27 .1.effectively at reasonable costs. commercial banks have a negative attitude towards SMEs loans. increasing the cause of their failure to access commercial bank loans. most SMEs are conducted informally. As it has been seen above. SMEs are prized at higher interest rates. With reference to the above measures. 4 5 BANK D Perfect and registered securities and permanent physical address. When considering the way commercial banks control SMEs loan costs. it is obvious that commercial banks term SMEs as very risky customers. Source: Research data (2011) With reference to the above measures kept forth so as to undertake SMEs loans risk. The conditions imposed act as a barrier to most SMEs in accessing loans. BANK E Lending to specific industry which is profitable. the measures taken are also directed to the customers (SMEs).3.

1 A RESPONSE FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING 4.0 Source: Research data (2011) From the results above. “Kilimo kwanza program” This shows that.0 Valid Percent 40. Agro-inputs loans and 3. the government implementation of the SMEs development policy of 2002 on SMEs financing is not well implemented on helping SMEs acquire commercial bank loans for their development.3. The results are answers from the question.1.2 A PROFILE SHOWING BANKS RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES FINANCING The following are results showing the presence of government efforts in supporting commercial bank loans to SMEs in relation to the government’s SMEs financing policy of 2002. 28 .3. “Juhudi loans”.0 100. The 40% of the commercial banks have stated the following programs to be related to them with the government in supporting SMEs financing: 1.0 100.4.0 60.0 Cumulative Percent 40. “Does the existence of government SMEs financing policy (2002) facilitate your bank SME lending?” Table 15: BANKS WITH GOVENMENT SMES FINANCING POLICY (2002) SUPPORT TOWARDS SMES LENDING Frequency Yes No Total 2 3 5 Percent 40. 40% of commercial banks are the ones experiencing the government efforts in supporting SMEs lending while the rest 60% of commercial banks are completely not connected to any government activities in supporting SMEs financing.3.1. 2.0 60.0 100.3.

4 SECONDARY DATA 4. The following is the policy statement and its strategies: 4.4. The SME sector has a significant role to contribute towards attaining this goal. One of the key areas which were stated to be dealt with was the SMEs financing issue. enhanced service provision and creation of conducive legal and institutional framework so as to achieve competitiveness.4.4. The policy stated it clear that it aimed to developing strategies that will facilitate provision of financial and nonfinancial services to SMEs.1.1.1.4 Policy Statement: The Government will enhance financial reforms aimed at further liberalization of the financial sector and the creation of financial intermediaries to cater for SMEs. 4.4.1 Vision The vision of the SME Development Policy is to have a vibrant and dynamic SME sector that ensures effective utilization of available resources to attain accelerated and sustainable growth. 4.1.5 Strategies: To take care of this concern the following strategies where to be implemented:• Promote transferring lessons and good practices from traditional financing mechanisms into suitable financial products for financing SMEs 29 .4.2 Mission The mission of this Policy is to stimulate development and growth of SME activities through improved infrastructure.4. 4. 4.1.3 Overall Objective The overall objective of this policy is to foster job creation and income generation through promoting the creation of new SMEs and improving the performance and competitiveness of the existing ones to increase their participation and contribution to the Tanzanian economy. The following are the vision.1 RESEARCH FINDINGS FROM THE MITM The objective of the National Vision 2025 is to transform the predominantly agricultural economy to a semi-industrialized one.4. mission and general objective of the SMEs development policy (2002).

Saving and Credit Schemes. To date remains the main government arm for promoting SMEs.1 SIDO’S BACKGROUND Small industries development organization (SIDO) is an independent parastatal organization established by an act of parliament in 1973 to plan. 4. coordinate. All stakeholders where to be relied upon to furnish the Ministry with the relevant information. it has offices in all regions in Tanzania main land.2. small industries development origination (SIDO) is the one with SMEs financing duty. Centre for Agricultural Mechanization Rural Technology (CAMARTEC) which is involved in promotion of appropriate technology for rural development. 30 . The stakeholders include the Tanzania Industrial Research Development Organization (TIRDO) which supports local raw materials utilization. • Promote innovative financial products for SMEs such as hire purchase scheme. compile and analyzing information on the implementation of the various programmes. Board of External Trade (BET) which is instrumental in promotion of exports mainly through trade fairs.2 FINDING FROM SIDO 4.• Facilitate opening up of SME windows in financial Institutions.4. The Ministry of Industry. The ministry of industry trade and marketing had assigned various stakeholders the task of fulfilling the policy. Trade and marketing. and the Institute of Production Innovation (IPI) now known as Technology Transfer Centre which is active in proto-type development and promoting their commercialization. Tanzania Engineering and Manufacturing Design Organization (TEMDO) responsible for machine design. was given the responsibility of collecting.4. Tanzania Bureau of Standards (TBS) mandated to promote standards. leasing. • Promote improving access of SMEs to bank financing through simplification of procedures • Mobilize resources and promote development of new financial institutions for financing SMEs. being the focal institution responsible for the coordination of the policy implementation. Apart from the above mentioned institutions. promote and offer a variety of services to small and medium scale enterprises. inventory financing. venture capital SMEs and.

3 SIDO’S MISSION STATEMENT The central purpose and role of SIDO is to create and sustain indigenous entrepreneurial base through the promotion and support to the development of SME’s by providing them with Business Development Services and Specific Financial Services on demand. providing efficiently and effectively in a business-like manner quality services that unlock potentials for growth and competitiveness of SME’s in rural as well as in the urban areas.2 INTRODUCTION This chapter deals with the discussion and interpretation of the research findings as they are stated in chapter four in relation to the research objectives.The development objectives of the organization is to contribute to poverty eradication and enterprise development there by contributing to economic development through provision of demand driven services that will create employment and generate income. 4.1 DISCUSSION AND IMPLICATION 5.2.4.4. Priority is given to productive economic sectors that contribute to wealth creation.0 CHAPTER FIVE 5. 4.2. 31 . 5.2 SIDO’S VISION A leading business support Organization in Tanzania.

most of them do not maintain their financial reports. When considering the reasons for this. Findings from SMEs shows that 60% of the SMEs who apply for bank loans fail to acquire them (table 02).3 BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM The above objective targeted to examine the main bank requirements and the ability of SMEs to meet them for the acquisition of the loans. This is also reveled from commercial banks where as finding from them shows an average of more than 50% fail to acquire the loans (table 09). majority of SMEs of which the results shows that they fall under a category of 1 to 5 million Tanzanian shillings of capital investment do not go for commercial bank loans (table 03 and 04). As a result of the findings stated above. as majority of SMEs have a low capital investment which range from 1 to 5 million Tanzanian shillings (table 03). It proves that many of them run their business informally. 32 . For all of the above mixed reasons. the finding suggest that majority of SMEs don’t apply for commercial bank loans because they cannot meet the commercial bank loans requirements (table 05). From the research finding. majority (51. This is another reason to why majority of SMEs can’t meet the commercial banks loan requirements leading to inaccessibility of the loans to them (E. Another thing to note is. Hategeka. 5. On the other hand. when referring to the requirements as stated by the commercial banks (table 08) most of them are not fulfilled by informal SMEs. The findings also shows that profitability from the SMEs segments appears to be the most driving factor influencing the commercial banks relationships with SMEs (table 11). 2009). finding shows that majority of the SMEs do not have collaterals to support them for the loans (table 06). most of the SMEs fail to acquire commercial bank loans. This means. commercial banks term SMEs loans to be more profitable than other customer’s loans (table 12). When referring to the loan collaterals.4 COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING From the research findings.7%) of SMEs rate the acquisition of commercial bank loans to be difficult (table 07).5. they don’t prepare their business plans and some of them may be operating illegally (not registered).

SIDO provides some loans directly to SMEs. SIDO caries the whole responsibility of SMEs financing from the ministry of industry. the real situation shows banks seem to regard SMEs loans to be very risky compared to other customers. commercial banks tend to require more complicated securities. But with regards to commercial bank loans. commercial banks appears to be more hash than how the real situation is. This is because. This suggests that SMEs loans are termed to be normal to other loan customers and are not given a special priority when it comes to competition with other customers. 5. It has got a sections dealing with SMEs financing affairs. the results show that 60% of commercial banks SMEs loans are affected with competition from large corporate and other retail customers (table 11). In fulfilling its duty. This is by considering the measures they impose on treating SMEs loans risk (table 14). despite the findings from commercial banks risk assessment which shows banks consider SMEs to be less risky than other customers (table 12). This may highly be a force of high profits experienced from the SMEs segment. But on the other hand. majority of the SMEs are not conducted with huge amount of capital. In other words. This leads to majority of SMEs failing to meet the security requirements. SIDO takes a responsibility of linking the inneed SMEs to commercial banks in case the particular SME needs more than six million as a 33 . Another contradicting condition is.5 GOVERNMENT EFFORTS/CONTRIBUTION ON SMES ACCESSING COMMERCIAL BANK LOANS FOR THEIR GROWTH AND DEVELOPMENT As stated in chapter four. Its results shows that SMEs loans are less risky than other loans (table 12). finding shows that 80% of the commercial banks conduct risk assessments of the SMEs loans. It normally receives a sum of money from the government budget and the funds are distributed regional wise so as to lend them as loans to SMEs. The conditions they impose appear to be very difficult to majority of SMEs. But when coming to measures taken by banks in trying to mitigate the risks (table 14). It offers some loans to SMEs with a maximum of six million Tanzania shillings per loan. trade and marketing as far as the 2002 SMEs development policy is concerned. At the same time.Findings from commercial banks also show that 80% of commercial banks have separate units dealing with SMEs relations with them.

1 FINDING FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING The findings as presented in chapter four (table 15) shows that. commercial banks appear to operate without a clear blue print of how SMEs operating conditions are. In Arusha. it is open that is still not well productive. The only physical and visible achievement ever since the beginning of this program is. Most of the SMEs operate their businesses informally. 5. 5. despite the presence of the government SMEs development policy of 2002. When comparing the government response in relation to the time period ever since the set of the policy. This venture has paved a way 170 million Tanzania shillings to the nine SMEs.5. They evaluate the business and take the qualified SMEs to commercial banks for further evaluation and other bank procedures to continue with the particular SMEs. SIDO have succeeded to help only nine SMEs access commercial bank loans from NMB Arusha branch. 5.5. the main problem they encounter as they try to link commercial banks with SMEs in accessing loans is that. Their unity in supporting SMEs lending is enhanced with the “juhudi loan” program which is operated jointly between them (NMB and SIDO).2. some small failures/weaknesses from SMEs applicants make them fail to access the loans. SIDO is connected to national micro financing bank (NMB) and performs this duty by the use of memorandum of understanding (MOU) form. Out of five banks. SIDO officials assist the in-need SMEs with consultation services like financial advices and in setting the initial soft bank requirements.1 ACHIEVEMENTS This joint program between SIDO and NMB just started last year (2010). This is because only 40% of commercial banks are the ones experiencing the government efforts in assisting SMEs lending.2 SETBACKS According to SIDO Arusha regional office. 34 . commercial banks tend to be very sensitive when it comes to SMEs loans. In other words.loan. They tend to be very strict.5. the government action is still very poor on assisting SMEs financing from commercial banks. only two banks have a connection with government programs in assisting SMEs lending.

But when it comes to its implementations with regards to 35 .2 Determining commercial banks attitudes towards SMEs lending Findings show that commercial banks consider SMEs to be very profitable customers with reference to others. But on the other hand. majority of SMEs fail to meet the requirements. This can be evidenced by the existence of separate windows managing SMEs affairs in 80% of the commercial banks. it is clear that commercial banks still requires higher standards securities in reference to the level which majority of the SMEs can afford. good and clears visions.3 Assessing government efforts/contribution on SMEs accessing CBLs for their growth and development With reference to the government SMEs development policy of 2002.2 INTRODUCTION This chapter presents the conclusion and recommendation made with regard to the study findings and objectives. Basing to the research finding and analysis in chapter four and five. 6.1 CONCLUSION AND RECOMMENDATIONS 6. This is evidenced by the measures they undertake in trying to mitigate SMEs loan risks (table 14). many SMEs applying for commercial bank loans fail to acquire them. many SMEs do not apply for commercial bank loans for their development simply because they believe they cannot meet the bank requirements. missions and strategies in developing SMEs in Tanzania. As a result. The same is the case on SMEs loans cost.0 CHAPTER SIX 6.3. This is because majority of the SMEs operate informally. These measures carried by commercial banks in controlling SMEs loans risks and costs are the ones leading to failure of majority of SMEs accessing their loans.1 Examining bank requirements for the acquisition of their loans and the ability of SMEs to meet them According to the findings.6. This situation give rise to two main problems: first. And secondly. commercial banks considers SMEs to be very risky than other loan customers.3 CONCLUSION The main objective of this research was to assess the accessibility of SMEs to commercial bank loans for enterprise development or growth. the following are conclusions in regards to the specific objective: 6.3.3. 6. 6. it is open that the government have very positive.

assisting SMEs financing from different financial institutions. 6.5. the government agency responsible in fulfilling its SMEs development policy (SIDO) should widen its base in case of commercial banks it is related to in assisting SMEs lending. 6. In other words. As a result. This will help them set conditions and requirements which will fit with the standards of majority of the SMEs for the acquisition of the loans.5. 6. Arusha. information and understanding on how to run their business. they should develop the habit of conducting their businesses formally.3 TO THE GOVERNMENT (MINISTRY OF INDUSTRY.5 RECOMMENDATIONS The following are recommendations to different stake holders with regards to this research: 6. TRADE AND MARKETING) • With reference to the research case study. 6. This will help them to acquire wide knowledge. the research findings show that accessibility of commercial bank loans to SMEs is still a difficult task to majority of SMEs in Tanzania. low support from the government. they will be able to meet the soft banks requirements so as to be able to acquire commercial bank loans for their growth and development.5. majority of SMEs can’t meet CBLs requirements. 36 . the government has begun dealing with commercial banks financing to SMEs in the year 2010 while the policy was set in 2002. there are so many commercial banks but SIDO is connected to NMB only.4 GENERAL CONCLUSION In general. secondly. This is due to the following: first. commercial banks specifically. Currently. according to the case study of this research.1 TO COMMERCIAL BANKS • Commercial banks should take time in making deep assessments of how SMEs operate their activities.2 TO SMES • Despite the fact that majority of the SMEs are found to be investing small amount of capital leading them to operate informally. For example. the government appears to be very slow and not productive. negative attitude of commercial banks towards SMEs lending (considering SMEs being too risky) and thirdly. the government is very slow in fulfilling its policies on SMEs financing from commercial banks.

Reference URT (2002). No. 20. Alan Fisher (2007). United Republic of Tanzania. South Africa 37 . National SME Development Policy. FEASibility Limited. California Reinvestment Coalition Thitapha Wattanapruttipaisan (2003). Vol. Ministry of Industry and Trade. Financial access and financial stability. 2 Penelope Hawkins (2006). Small Business Access to Bank Credit. Asian Development Review. Four proposals for improved financing of SME development in Asean.

Research Methodology-Methods and Techniques. New Delhi. bank of Tanzania directorate of financial markets. Shambwe( ). R. T. Opportunities and challenges for rural SMEs development in Tanzania. M. Czira´ky. Wiley Eastern Limited.html 38 . O.Tom O.com Microfinance in Tanzania. Kore (2005). (2004). Pisarovic. Fatoki and A. No. Small Business Economics. 2007.K. Which New Small and Medium Enterprises in South Africa Have Access to Bank Credit? International Journal of Business and Management Vol. Netherlands.investorwords. Proceedings of ASBBS Volume 18 Number 1. 1. micro finance in Tanzania. ILO Office. University of Tasmania. 5. Recent African experience in SME Financing – A case of CRDB Bank LTD (Tanzania) G.Pandula (2011). Volume 2. October 2010 E. ESRF. Masuke ( ). small and medium enterprises credit guarantee scheme draft policy and operational guidelines. http://www. Bbenkele (2007). Economics. S. SME Financing – A case of CRDB Bank PLC (Tanzania). C. Las Vegas. 1985. TBA Newsletter (2007).R. Obamuyi (2007). 1. Jobs. M. No. DONATH OLOMI (2006). Kluwer Academic Publishers. An investigation of small and medium enterprises perceptions towards services offered by commercial banks in South Africa. Tanzania Kothari. Senior Relationship Manager –SME D. Win2PDF available at http://www.. ILO Publications. 10. Dar es Salaam and MIT (2003). an exploratory study of loan delinquency among small and medium enterprises (smes) in ondo state of Nigeria. Geneva Switzerland.daneprairie. Odeyemi (2010). Tisˇma and A. Gender and Small Enterprise in Africa. BOT (2003). Finance and Banking Research Vol. Issue 3.com/955/commercial_bank.com. African Journal of Accounting. Win2PDF available at DR. http://www.daneprairie. E. an empirical investigation of small and medium enterprises’ access to bank finance: the case of an emerging economy.

soyouwanna.html 39 . they are primarily concerned with receiving deposits and lending to businesses. such as checking.bsp.investorwords. While commercial banks offer services to individuals.sido.go.pdf http://www. and offers related services. and time deposit.aspx?Region=Arusha http://www.go. savings.html http://www. These institutions are run to make a profit and owned by a group of individuals or governments.10 10 http://www. makes business loans.sido.com/definition-bank-loans-8514.ph/downloads/regulations/attachments/2001/circ272.com/955/commercial_bank. Commercial banks also allow for a variety of deposit accounts.tz/Web/Index.http://www.gov.tz/Reports/WEB_RPT004.aspx Appendix A DEFINITION OF IMPORTANT TERMS COMMERCIAL BANKS A commercial bank refers to an institution which accepts deposits.

Most loans have fixed rates and payment schedules. A bank loan allows one to make a purchase that he/she could not have made with cash by dividing the purchase price into smaller.5. There is no universally accepted definition of SME. he/she borrows a lump sum of money.BANK LOAN A bank loan refers to a cash amount of money offered by a bank to its client. In Tanzanian context. and once he/she makes the last payment. 40 . The majority of micro enterprises fall under the informal sector. mining. based solely on the income and credit history of the borrower. When one take out a bank loan. commerce and services. total investment and sales turnover. in most cases family members or employing capital amounting up to Tshs.0 million per annum. meaning that one’s payment will be the same throughout the life of the loan. manageable payments. the debt is satisfied. SMALL TO MEDIUM ENTERPRISE (SMEs) SMEs sometimes referred to as micro. small and medium enterprises (MSMEs).0 million and having a turnover of 12. Loans can be secured by something of value. SMEs are those engaging up to four people. The SMEs cover non-farm economic activities mainly manufacturing. According to small and medium enterprise development policy (2002). or they can be unsecured. They are mostly formalized undertakings engaging less than 50 employees. plus interest. or up to 30 years or more. the commonly used yardsticks are total number of employees. over a specified period of time. while promising to pay back the original amount borrowed. Loan repayment periods can last for a few months. Different countries use various measures of size depending on their level of development.

30% B. 61% . What percent of SMEs applicants fail to meet your requirements for the loan acquisition? A.90% B.60% C. More than 90% COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING 1. ………………………………………………………………………………………………… 5. Does the bank currently have SMEs among its clients? 41 .Appendix B QUESTIONNAIRES TO COMMERCIAL BANKS: BANKS REQUIREMENTS FOR SMES LENDING: What are your main bank requirements for SMEs lending? 1. 31% . ………………………………………………………………………………………………… 3. 0% . ………………………………………………………………………………………………… 4. …………………………………………………………………………………………………. ……………………………………………………………………………………………… 2.

Yes B. List main lending products you offer to SMEs? 1. The bank primarily offers loan product B.A. please describe and quantify: ……………………………………………. What type of involvement do you have with SMEs? A. No 2. Yes B. What is your exposure to SMEs in terms of loans? (%) A. …………………………………………………………………… 4. please specify : ………………………………………………………………………… 4. 6. SME share of total number of loans outstanding: ……………………………………………. does the bank have a separate unit managing the banking relation with SMEs? A. No 3. No If so.. Yes B. To what degree is your involvement with SMEs driven by the following? [put an X where appropriate] Not significant Perceived profitability in the SME segment Intense competition for large corporates Intense competitions for retail customers 42 significant Extremely significant /crucial . Do you have any assessment of how risk SMEs lending is to your bank? A. B. The bank offers both deposits and loan products C. ……………………………………………………………………. 2. SME share of total value of loans outstanding: ………………………………………………. …………………………………………………………………… 3. 7. Other. If yes. …………………………………………………………………… 5.

Please list the government programs that you are familiar with that directly or indirectly affect you involvement with SMEs and discuss their additionality in terms of increased financing Programs Additionality 1. qualify the effect. 2. Overall Negatively 43 . 2. If you think government programs affect your involvement with SMEs. Overall Positively C. [put an X where appropriate] SME loans are less … than others Profitable Risky Costly SME loans equally … than others are SME loans are more … than others 9.8. 4. 3. How do you mitigate risks and costs of SME loans relative to those of other loans? Risk Cost BANK’S RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING: 1. profitability and cost of the SME financing relative to the other loans of your banks. Inconsequential B. A. Provide your assessment of the risk.

.. Yes B. 6 to 10 million D. Yes B... Above 10 million B. ………………………………………………………………………………………………………… ………………………………………………………………………………………………………. No Do you know requirements for the acquisition of commercial bank loans? A. mention them. Yes B. are there any other inconveniences you faced? A. No If yes.. specify………………………………… Have you ever applied for a bank loan? A. Apart from requirements you mentioned. did you get it? A. What collateral was required for the loan? 44 .. explain how: QUESTIONNAIRES TO SMES: ABILITY OF SMES TO MEET COMMERCIAL BANK REQUIREMENTS FOR LOAN ACQUISITION: What Amount of capital have you invested in your business? A. Yes B. please mention them. Yes B..3.. No If yes. Does the existence of government SMEs financing policy (2002) facilitate your bank SME lending? A.. ……………………………………………………………………………………………………. No If yes. If the answer is c.. No If it needs to be improved. 1 to 5 million C.

how did you manage to get the loan? A. Very difficult B. No If no. Fixed assets C. Group loans (specify) C. others (specify)………………………………………………………………………… Did you have such collaterals? A. Very simple 45 .A. Others …………………………………………………………………………………… How do you rate the loan requirements conditions? A. Difficult C. Using friends collaterals B. Simple D. Bank deposit B. Yes B.

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