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

18 Table 08: Banks requirements for acquisition of SMES loans…………………….…................. risk and cost……………………………………………………………....……………..17 Table 07: SMES judgments on bank loan requirement conditions...........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 …………….................21 Table 12: SMES loans performance in relation to other loan customers in terms of profitability.............23 Table 14: Commercial banks risk and cost control measures to SMES loans……......20 Table 11: Factors affecting commercial banks lending to SMES……………………......LIST OF TABLES TABLE PAGE No...................25 vii ....15 Table 04: Application for bank loan…………………………………………………..................23 Table 15: Banks with government SMES financing policy (2002) support towards SMES lending ....04 Table 02: Successful and unsuccessful SMES loan applicants……………………..... Table 01: CRDB SMES loan profile from 2006 to 2009……………………………........................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 ……………………………………………………………………………………….....22 Table 13: A profile showing banks with and without SMES lending risk assessment......14 Table 03: Capital invested in business………………………………….......

................................................................ 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 ................i viii .........................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...........

...........................................................................................................6 2................................7 2..........................................................4...................................................4.................................................................5 1....................................................................................................................................0 CHAPTER ONE..................................................................4 RESEARCH OBJECTIVES..................................................1 COMMERCIAL BANK REQUIREMENTS FOR ACQUISITION OF LOANS AND THE ABILITY OF SMES TO MEET THEM.............................1 INTRODUCTION..........DECLARATION.................2 BACKGROUND OF THE STUDY...........................................................................................................................6 CONCEPTUAL FRAMEWORK..2 1........3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING .............................................................................4.....................................1 GENERAL OBJECTIVE...........iii ACKNOWLEDGEMENT............................................................10 ix ...........................7 LIMITATIONS OF THE STUDY.......3 STATEMENT OF THE PROBLEM...................................iii DEDICATION.................................ii COPY RIGHT...................................................................4 EMPIRICAL REVIEW .............................2 COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING ...............................5 1...............vii LIST OF ABBREVIATIONS............3 1................1 1................0 CHAPTER TWO................2 INTRODUCTION..................................9 2...........................................6 1.7 2..........v LIST OF TABLES .................................10 2...................................................................................5 RESEARCH QUESTIONS:......viii TABLEC OF CONTENT.............................................................................................5 1.3 THEORETICAL REVIEW................................................................................................1 LITERATURE REVIEW................................................................................................................................................9 2...................................viii 1........................................1 1.............................4................................................................................................................................................................7 2...........7 2...........................................5 1.......................4...2 SPECIFIC OBJECTIVES:...............................8 SIGINIFICANCE OF THE STUDY.....................................................5 1.................iv ABSTRACT..........................................................................

..................15 4.....0 CHAPTER FOUR .............................................................8..................................................................1 RESULTS AND PRESENTATIONS .........1 RESEARCH METHODOLOGY........................................................................................15 4.................................................1............15 4..........8.......3 PRIMARY DATA...............................................1................. 17 x ....6 SAMPLING TECHNIQUE.15 4.........2 CAPITAL INVESTED IN SMES BUSINESSES............5............................12 3...............................1..16 4...1........................................15 4..13 3............................................................9 DATA ANALYSIS ...........3..................................................1 A PROFILE OF SMES WHO GET AND THE ONES WHO DON’T GET THE APPLIED CBL.........................................................................................................................................................8 RESEARCH INSTRUMENTS....................2 INTRODUCTON.....................................1...........2 SAMPLING SIZE........................3 RESEARCH DESIGN.4 REASONS TO WHY SOME SMES DON’T APPLY FOR BANK LOANS ..............................1 POPULATION ....................................................................3....1....12 3......11 3....................4 AREA OF THE STUDY..................13 3..........15 4.........................1..........1 QUESTIONNAIRES............13 3.............................................................1......................................1 FINDING FROM SMES.......3.....................................................11 3.8....................2 INTRODUCTION ..........................................12 3................................11 3........12 3............................................11 3......2 INTERVIEW....................12 3.................13 3............................................5...........3........................3......................8.............................................5 POPULATION AND SAMPLE SIZE........................................15 4..3.............3 APPLICATION FOR BANK LOAN .............3.17 4.11 3..........1.......1 TO EXAMINE BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM...............................2 CLOSED QUESTIONS...................................14 4........................................................................................................................13 3......................................1.......1 COMPLETELY OPEN-ENDED QUESTIONS.............................1..................0 CHAPTER THREE.......................7 DATA COLLECTION..................................................

......23 4..............21 4........................................2.....24 4..................................2.3......6 THE RATE OF SMES JUDGMENTS ON THE BANK LOANS REQUIREMENTS FOR THE ACQUISITION OF BANK LOANS .....2.....3...................................................................3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING..1....3 A PROFILE SHOWING SOME DRIVING FACTORS WHICH INFLUENCE COMMERCIAL BANKS INVOLVEMENTS WITH SMES ......3.....18 4.....20 4. RISKY AND COST......27 4..........3..........4 SECONDARY DATA.1.......................................1............................................3...1.1..3.2 TO DETERMINE COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING .1........................3..2 RESEARCH FINDING FROM COMMERCIAL BANKS .........26 4..3.........................3...................3...22 4..................................2.......25 4.............1........2...3........20 4.......1 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SMES AMONG THEIR CUSTOMS AND THE KIND OF INVOLVEMENT THEY HAVE WITH THEM.......3.....5 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE RISK ASSESSMENTS OVER SMES LENDING ...............28 4...22 4............3.1............1 A RESPONSE FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING ...22 4..............2...................1 BANKS REQUIREMENTS FOR ACQUISITION OF SMES LOANS.2.. 28 4..............1............1......................................................................2 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SEPARATE UNITS DEALING WITH SMES RELATIONS ....2 A PROFILE OF SMES FAILING TO MEET COMMERCIAL BANKS REQUIREMENTS FOR LOAN ACQUISITION .3..2 A PROFILE SHOWING BANKS RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES FINANCING ...6 A PROFILE SHOWING HOW COMMERCIAL BANKS MITIGATE SMES LOANS RISKS AND COSTS ......5 A PROFILE SHOWING WHETHER SMES HAD THE REQUIRED COLLATERALS FOR BANK LOAN ACQUISITION ......1.......................................2......19 4.........4 A PROFILE SHOWING HOW SMES PERFORM IN RELATION TO OTHER BANK CUSTOMERS IN TERMS OF PROFITABILITY.................1...........................3..1........................4............3...29 xi ...............1........3.......

............................................5...........35 6...............................34 5..............2........................3.....................................................................4............................29 4.................34 6........35 6..........1...........30 4...........................................................................29 4..............3 Overall Objective................31 5.......................................................4...............................................2 INTRODUCTION .................................32 5...........2 SIDO’S VISION....3 CONCLUSION........3 BANK REQUIREMENTS FOR THE ACQUISITION OF THEIR LOANS AND THE ABILITY OF SMES TO MEET THEM..........2............................0 CHAPTER FIVE.................................1................29 4...............4.............................5 Strategies:...................4............................1....5.4......1.............2.4..........................4 Policy Statement:..................................................32 5..............................................................................33 5.........3 SIDO’S MISSION STATEMENT..................35 xii .............1 CONCLUSION AND RECOMMENDATIONS...................................1 DISCUSSION AND IMPLICATION ....................0 CHAPTER SIX.....2 SETBACKS ................................35 6.............31 5...........................................................2 Mission.4............1 FINDING FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING.....4.............29 4....1 ACHIEVEMENTS........2 FINDING FROM SIDO ..1 Examining bank requirements for the acquisition of their loans and the ability of SMEs to meet them..................................4..........1.................................................................4..............2 INTRODUCTION ............................................31 5.......................35 6.............31 4...............31 5...................5 GOVERNMENT EFFORTS/CONTRIBUTION ON SMES ACCESSING COMMERCIAL BANK LOANS FOR THEIR GROWTH AND DEVELOPMENT.......................................................5......1 RESEARCH FINDINGS FROM THE MITM ............4.....................................................................................2....................30 4..................................................................................................34 5...........1 SIDO’S BACKGROUND ....................29 4...29 4......4 COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING .....................1 Vision.............................................

.......................................36 Reference ...................................35 6.....39 Appendix B ........................................6..........5............................5.....1 TO COMMERCIAL BANKS ......2 TO SMES .....................36 6.......5.....................37 Appendix A..... TRADE AND MARKETING) ..................................................36 6................................................................................5 RECOMMENDATIONS ......................................................................................................36 6..................................................................4 GENERAL CONCLUSION ..........3 TO THE GOVERNMENT (MINISTRY OF INDUSTRY..................3 Assessing government efforts/contribution on SMEs accessing CBLs for their growth and development................41 xiii ..................................................................35 6..2 Determining commercial banks attitudes towards SMEs lending..............................3....3.36 6.................................................................................................................................................................................................................

MID.1. 1 . 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. 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). 2. 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. For a household. 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. No. 2006). 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. 20.1 INTRODUCTION Countries are faced with the challenge of increasing provision of banking facilities to firms and households alike. 2003). small enterprises often have to rely on their own funds. Thus. While large companies tend to be well catered for. Hawkins. among other systemic and institutional problems in developing countries like Tanzania. 2002).0 CHAPTER ONE 1. Wattanapruttipaisan (Vol. the implication of a lack of access to banking services is severe (P. December 2003) stated that. 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.

an anticipated pick up in global and sub-Saharan African growth. the government has attempted to undertake some measures so as to promote microfinance (MF). It’s been long now ever since the government of Tanzania noted the importance of microfinance in the country.24 percent of the labour force. According to Kore.1 “Tanzania is a microfinance country”. on a commercially sustainable basis. thereby contributing to the economic growth of this nation. it was not until February 2001 that the National Microfinance Policy was launched.1. Gross domestic product (GDP) was estimated to be US$ 22. Principal. Among other things. almost 16 million are regarded as poor since they depend mainly on smallholder subsistence farming. According to Prof. in both urban and rural areas. D. (2005). Formal SME account for about 17 percent of the country’s GDP and employs around 32. compared with an estimated 6. The government has also made some efforts on developing 1 At the Third Annual National Conference on Microfinance held in Arusha in March. Suleman. 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. namely microfinance. He goes on to justify this by stating that out of a total population of approximately 35 million people. they need financial services suited for this kind of economic activity. Tanzania's economy is expected to grow by 6. SME operating in Tanzania informal sector. account for 47 percent of the country’s GDP and employs around 42. Kunt. 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.7 percent in 2011. Despite its notation. Small to medium enterprise play a very crucial part in the economy of Tanzania. opens with this sentence. Chambo. In order for this lot to sustain their small microenterprises. 2003).10 percent of the labour force (Beck.2 BACKGROUND OF THE STUDY Tanzania remains one of the poorest countries in the World.434 billion and a GDP per capita of US$ 543 in 2010.2 percent in 2010. The Moshi University College of Cooperative and Business Studies. 2 . Levine and Maksimovic. 2004. Micro financing institutions (MFIs) are one among crustal components of any economy.

2004). As the US literature (Carey et al. Kunt and Levine. Berger and Udell. potentially constraining both entry and growth (Beck and D. D. 2 3 4 5 6 7 Small to Medium Enterprise Small to Medium Enterprise and Microfinance Institutions A state of confusion. this study attempts to investigate some of the problems faced by SMEs as they attempt accessing commercial bank7 loans in Arusha town. there still exist some more opportunities for SMEs to access more bank loans. merely fifty percent or more fail to access the loan. Kunt. (oxford advanced learners dictionary 6th edition). in which things are not clear.the sector. 1. But there still seems to be a strong fog4 between the two5 interdependent and crucial economic components leading to the inaccessibility between them.3 STATEMENT OF THE PROBLEM Despite the importance and positive contribution of SMEs to the growth of the Tanzanian economy. 1993.6 Despite the hardships faced by SMEs as they attempt to access bank loans. The study will concentrate on trying to answer the research questions as stated on page number five. For a better and strong economy. Studies indicate that in a list of SMEs applying for bank loan. indicate. This is possible if the problems are investigated in depth and proposed solutions get to be addressed by the particular stakeholders. Therefore. Evidence suggests that access to finance plays a very important role in the overall business environment. 2006). Pandula. Small to Medium Enterprise and Microfinance Institutions Loans secured by certain forms of collateral. 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. it is still unclear how much SMEs in developing countries would be able to rely on banks to obtain those products. the two3 very important economic factors should be brought together. As one among many components of MFIs 3 . the World Bank has approved over US $ 10 billion in support of SME activities (Beck. Some of the sources of finance are the banks. (2011). 1996).2 From the year 1999 to 2004. of which most time they lead to inaccessibility of the bank loans to them.

6mn 22.7mn 8 A big and wide covering bank in Tanzania 4 . this indicates a gap of knowledge on the supply side.463 April 2009 3. Despite the various efforts taken by the government and banks. 2002). for example CRDB8 (see on table 1 below) Shambwe. of Loans processed Approved Loans (USD) 5. the Government will promote entrepreneurship development through facilitating improved access of SMEs to financial and non-financial services. (MITM. If this problem is not well investigated and addressed especially on the supply side. Also. the Tanzanian government has recognized that SME development is crucial to the development of the Tanzanian economy and thus addressed the ministry of industry. (2009). (2007). the Tanzanian economy is likely to lag behind in its growth since SMEs contributes almost fifty percent of its economy. 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. this study aimed at investigating the problem of inaccessibility of commercial bank loans to SMEs on the supply side.5mn 50. TABLE 01: CRDB SMES LOAN PROFILE FROM 2006 TO 2009 Year 2006 440 2007 1. Therefore.It is obvious that commercial banks have been extending more and more loans to SMEs every year.136 Details No. there still is a big problem of SMEs accessing bank loans.3mn 44. trade and marketing (MITM) to take the overall responsibility of coordinating and implementing the SME Development Policy of 2001 which states. 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.420 2008 2.

6 CONCEPTUAL FRAMEWORK For an enterprise to exist or survive. it requires some financial assistance whether it is in its initial stage or for its expansion for an existing one. • • To determine banks attitudes towards SMEs lending. Commercial banks are some of the major sources of funds as loans to Tanzanian SMEs.1. 5 . These funds can either be from the enterprise owner. To assess government efforts/contribution on SMEs accessing CBLs for their growth and development. Their effective lending to SMEs can lead to a great impact on the growth of the Tanzanian economy.5 RESEARCH QUESTIONS: • What are the bank requirements so as to access their loans. because majority of the Tanzanians are said to be poor (E. this means majority do depend on external sources of funds to initialize and run their SMEs. 1. 1.4. shareholders or a loan from a financial institution like commercial banks.4 RESEARCH OBJECTIVES 1. Mkwawa.2 SPECIFIC OBJECTIVES: • To examine bank requirements for the acquisition of their loans and the ability of SMEs to meet them. 2008).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. Basically.P. 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? 1.4.

Bbenkele (2007). E. K. this was due to the limited timetable of the researcher during the planned academic research period. Therefore. • Irresponsible respondents.But on the other hand. commercial banks. • Data inaccessibility. 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. 1. 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. some respondents are normally reluctant in responding to the data collection methods used. researchers in related studies and other stakeholders in this particular field. 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. 6 .7 LIMITATIONS OF THE STUDY The following were expected limitations associated to the study: • Insufficient time.8 SIGINIFICANCE OF THE STUDY This study is aimed at making the following contribution: • Contribution of additional knowledge to SMEs.

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

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. (2011). This is because majority of them are said to lack loan supportive instruments like collaterals.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 problem is likely to affect most of the developing countries like Tanzania which are not well equipped to legal facilities. The Stiglitz and Weiss’ theory therefore suggests that there is a good number of SMEs that could use funds productively if they were available. SMEs are the victims of this problem compared to large firms. In these countries. This implies that SMEs should rely on their own source of financing which is often adequate. Although the author did not point out this problem directly to SMEs. banks may have negative attitudes towards lending to their stakeholders. 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. They termed this condition as credit rationing. Pandula. According to Stiglitz and Weiss (1981) agency problems such as asymmetric information and moral hazards can impact on the availability of credit to SMEs. This implies that. Hence. property verification and ownership are weak. 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). 8 . but cannot obtain finance from the formal financial system such as commercial banks. G. but in real situation.

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. For example T. Liquidity Ratio (LR). many studies indicate that lack of collaterals. although not limited to. poor project package (33.3 per cent). as at 2005. on the supply side. Obamuyi further found that. 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. Obamuyi also stated that. 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. poor credit worthiness (41. lack of adequate record (25. SMEs need to maintain an open communication with banks in both situations when the SMEs are doing well or when they are in difficulties. Obamuyi (2007). T. Reserve Requirements (RR). M.4. These requirements have varied degrees of influence on the amount of money available for lending by the banks. fifty two banks were rated sound/satisfactory. the major reasons attributable to the SMEs that have made accessibility to credit difficult include. 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). Interest Rate Developments (IRD) and the lending policies of the banks. And this is not only in Tanzania but worldwide. For instance.7 per cent). based on capital adequacy and other rating parameters.4 EMPIRICAL REVIEW 2. lending to SMEs are constrained due to largely regulatory/market requirements and the soundness of the banking sector.2. All these problems have combined in several ways to make lending to the SMEs sector very difficult by the commercial banks.3 per cent).0 per cent) and high risk (25. lack of collateral security (33. 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. (2007). Apart from the above motioned bank requirements. found out that. invest more time to know bank loan requirements and provide the required information by banks.0 per cent). Bbenkele. However. while thirty four (34) were rated marginal/unsound 9 .

Pisarovic.3 GOVERNMENT CONTRIBUTION TOWARDS SMES LENDING The Tanzanian government has engaged it’s self in supporting SMEs by setting out policies to help them. Tisˇma and A. For this case. (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. Marignani.4.9 (2009) pointed out that basically.4. (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. R. (2007) recommends that further information is needed to assist both banks and SMEs to build long term profitable business relationships. E. 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. leading to mutual benefit. both SMEs and commercial banks have to meet the required criteria so that both sides to be served appropriate. (2004) also stated that there is no explicit policy in favor of SMEs. Borgarello. Czira´ky. according to their survey. In addition. S. This is evidence that commercial banks have a negative attitude towards SMEs lending.2. and Sande. thereby displaying ‘negative attitude’ towards small lending. and thus prefer to administer fewer larger loans. Bbenkele. 2. But at the end. 9 A bank official in Tanzania 10 . they revealed that SME segment is a risk one however profitable.2 COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING For an effective relationship to exist. Ellid and Pecotich. E. But on the other hand. (2004). But on the other hand. Bbenkele. Shambwe. 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). The reasons forwarded for this are that the clients are regarded as high risk and unprofitable. D. the government should act directly by developing them.

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

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

but intended the interview to be conversational.8. SIDO. understand them (ask the researcher questions where required) and answer them appropriately.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 .1.8. the researcher was able to change the order of the questions or the way they were worded. Sixty copies of questionnaires were distributed to SMEs owners and six copies to each of the six commercial bank. Such questions were useful for obtaining in-depth information on: facts with which the researcher was not very familiar. 3. 3. 3. In it.8. See a sample of questionnaires at appendix B.was collected from all the research respondents (officials responsible to the MITM.8 RESEARCH INSTRUMENTS The following research instruments/tools were applied as for this research: 3.8.2 INTERVIEW A semi-structured type of interview was employed in this study. bank officials and SMEs owners). the researcher had a worked out set of questions beforehand. or sensitive issues. The respondents were briefed on what the questionnaires were all about and on how to undertake them. They had to go through the questions.1.1 COMPLETELY OPEN-ENDED QUESTIONS Open-ended questions permitted free responses which recorded in the respondents’ own words. Below are research instruments which were be used to collect primary data. opinions.1 QUESTIONNAIRES Prepared set of questions were distributed to the randomly selected SMEs and purposive selected bank officials. attitudes and suggestions of informants. The Questionnaires included the following formats: 3. To do so.

At the end. the results were discussed leading to conclusion and recommendations. 3.redundant. 14 . Primary data was processed with the help of computer program named SPSS. So. primary and secondary data. After processing the primary data. This type of tool was applied to the officials responsible to the MITM at Arusha regional office and to SIDO official. data analysis was conducted after processing the primary data. Data analysis was then conducted including both. 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.9 DATA ANALYSIS After all the data had been collected. Arusha branch. they were presented in table forms.

only 40% got the loans while 60% failed to accesses the loans.8 20.7 65. 4.8 34. 15 . 4.3 PRIMARY DATA 4. analysis and presentation of the research finding from the research respondents and from secondary sources. 13.5 100.3.8% are the ones found to have got the applied loans while 20.1 FINDING FROM SMES 4.3.2 INTRODUCTION This chapter comprises of the research findings.0 Cumulative Percent 13.1. and do SMEs have the ability to meet the bank requirements?” The following are research finding in relation to the above objective. out of the ones who applied for the loans.4.1.1 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.7% appeared to have failed to access their applied loans.1.5 100. “What are the bank requirements so as to access their loans. The rest of the applicants/percent are the ones who did not applied for the bank loan.7 65.0 Valid Percent 13.1 RESULTS AND PRESENTATIONS 4. Therefore.3. 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 13.0 Source: Research data (2011) Out of all respondents.5 100. 65.0 CHAPTER FOUR 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.5%.8 20.

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. 4. Wiklund and Shepherd. therefore majority also fail to meet bank requirements for the acquisition of the loans for their development.1.9 100.8 31.3. 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. several studies confirm that poor capitalization is a leading cause for small firm failure (see for example. The table below shows the response from the respondents. According to the questionnaires.0 24. 31% where found to have invested an average of 6 to 10 million of capital and only 24.8 75.1% where found to have invested above ten million. 2000 and Carter and Van Auken. This implies.1 100. 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.1 100. 2000. 16 .1.2 CAPITAL INVESTED IN SMES BUSINESSES The following data was collected in viewing of how much capital was invested in to the responding SMEs.8% where found to cover this interval of capital invested.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 44.0 Valid Percent 44. 2006).8 31.0 24. 2005). because majority of SMEs are found to invest small amount of capital in their business. In fact.The aim of this question was just to portray the general profile of the real situation of accessibility of commercial bank loans to SMEs. Without sufficient capital. small firms are unable to successfully compete and often face difficulties in meeting banks requirements for financing. Coleman.0 Cumulative Percent 44.

17 .5 65. 4.0 Source: Research data (2011) The findings shows that majority of the SMEs don’t go for commercial bank loans.5% don’t.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.3.5 100.1.3 APPLICATION FOR BANK LOAN This part targeted to find out what proportion of SMEs applies for commercial bank loan for their growth and development.0 Valid Percent 34.1.5 100.5 % of SMEs go for commercial bank loan while 65.5 100.0 Cumulative Percent 34.4. Table 04: APPLICATION FOR BANK LOAN Frequency YES NO Total 10 19 29 Percent 34.5 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.3.1. The following are the respondent’s findings.1. The results show that only 34.

7% had once applied for the loans but did not manage to access them.3 62. 13.8% are not in need of commercial bank loans. 17.3% do not apply for bank loans because they cannot meet the bank requirements.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.0 100. 48.3 13.3.1.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 48.3% disqualify themselves to be able to meet the required bank conditions so as to acquire the loans. 48.8 17.0 Source: Research data (2011) Out of the while sample of respondents.3 13. 18 .3 6 29 20. 85% of them appear to be aware of the requirements.1.0 20.1 79.7 100. 4. From the open ended questions which asked the respondents if they knew the bank requirements for the acquisition of the loans. Therefore.2 Valid Percent 48.8 17. upon their own judgments and evaluation of their own values.2% do not know how to get the bank loans and 20.7 100.2 Cumulative Percent 48.

0 Source: Research data (2011) The finding shows that.1.8% of SMEs tends to have the commercial bank loans collaterals required for the acquisition of loans and 24. 4. 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.8 24. only13.1 100.0 Valid Percent 13.1% never applied for the bank loans. 62.1.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 13.8 24.1 62. The rest. 19 .8 37.6 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.9 100.1% don’t have the required collaterals.0 Cumulative Percent 13.1 100.3. For this reason.1 62.

9% found the conditions to be very difficult and 51. BANK E Brief business plan with projections.0 Valid Percent 37.3% found the requirements to be simple. But on the other hand. Asset account performance statistics.3.7% found it to be difficult.9 51.7 10. BANK C A business that is operating for at least three years.7 10. A business complying with regulatory authorities. 37.2 RESEARCH FINDING FROM COMMERCIAL BANKS 4. 4.3 100. 20 . 2 A legal business (certified and licensed).9 89.0 Source: Research data (2011) Majority of the SMEs found the bank conditions to be difficult to be met.9 51. BANK B Proceeding business.3. Business plan.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.7 100.Table 07: SMES JUDGMENTS ON BANK LOAN REQUIREMENT CONDITIONS Frequency Very difficult Difficult Simple Total 11 15 3 29 Percent 37.3 100.2. BANK A 1 At least a three years operating business. only 10. Registered and at least three years operating business.0 Cumulative Percent 37. Among the respondents. BANK D Business license.

Securities. most of the requirements are difficult to be fulfilled by majority of SMEs which are informally conducted (putting apart the fixed asset requirements). Securities. Financial statements. Certificate of registration. 4. 21 . These are the conditions which majority of the SMEs tend to judge them to be difficult to meet. As the tables above shows. Source: Research data (2011) The table above shows commercial bank requirements according to the research respondents. Possession of fixed assets for securities.2.3 Financial statements for the past three years.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. 4 Good history in the bank. Annual financial statements. Business plan and cash flow projection. Valuations.3. A business must be banking with as for at least a year. 5 Bank statement for the past six months. Resolution to borrow.

0 Cumulative Percent 40. 4.0 20.3.0 100.0 Valid Percent 40.2.1.0 100. Apart from been their clients.1. 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.0 80.2 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SEPARATE UNITS DEALING WITH SMES RELATIONS 22 . 100% of the respondents were also found to offer both. This shows commercial banks have a positive attitude towards SMEs lending as them being their customers (just like other customers).2 TO DETERMINE COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING 4.0 40. bank deposit accounts service and loan products to SMEs.0 20.1. This means 80% of commercial banks have an average of more than 50% SMEs failing to meet their requirements for the loans.3. 4.2. This is still a huge rate of failure among SMEs.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.0 40. 100% of the respondents have SMEs as part of their clients.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 40.0 100.1 A PROFILE SHOWING WHETHER COMMERCIAL BANKS HAVE SMES AMONG THEIR CUSTOMS AND THE KIND OF INVOLVEMENT THEY HAVE WITH THEM The results show that.3.

0 100.0 Source: Research data (2011) The results shows that.0 100.0 Cumulative Percent 80.0 Valid Percent 80. Table 10: BANKS WITH AND WITHOUT SEPARATE UNITS MANAGING BANK RELATIONS WITH SMES Frequency YES NO Total 4 1 5 Percent 80.3. intense competition with large corporation and intense competition with retail customers. This shows majority of commercial banks have a positive attitude towards their relations with SMEs.0 20.3 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.0 100. 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. These factors include: perception of profitability in the SME segment. 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 .2.0 20. 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.1. 4.

in other words. SMEs loans are affected by large corporate and other retail customers. 4. When considering competence with large corporate. This implies that. In this segment. Therefore.. there are no priorities. 40% find this factor to be extremely significant.4 A PROFILE SHOWING HOW SMES PERFORM IN RELATION TO OTHER BANK CUSTOMERS IN TERMS OF PROFITABILITY. RISK AND COST SME loans are less … than others SME loans are equally .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. Table 12: SMES LOANS PERFORMANCE IN RELATION TO OTHER LOAN CUSTOMERS IN TERMS OF PROFITABILITY. risky and costs. But on the other hand. 40% term it to be not significant while 60% term it to be significant (within the 60%. SMEs loans compete with the same chance with other bank customers.3. commercial banks offers SMEs an equal chance with other customers when applying for loans. when it comes to competition. RISKY AND COST The following are respondent’s results showing how SMEs perform in relation to other commercial bank customers in terms of profitability.. 20% term it to be extremely significant).1. When considering competence with retail customers. 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. to others 24 SME loans are more … than others . 100% of commercial banks involve themselves with SMEs because they perceive them to be profitable.2. 40% find it to be not significant while 60% term it to be significant.

When considering costs. 25 . 4. 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.1.5 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.2.3. But when considering the measures they employ to overcome the risk (table 14).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. 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. it is obvious that they treat SMEs loans like very risky loans to them. The above findings shows that majority of commercial banks consider SMEs loans to be less risky than loan customers. In terms of risky.

Table 14: COMMERCIAL BANKS RISK AND COST CONTROL MEASURES TO SMES LOANS No. higher risk firms have greater difficulty in obtaining capital form banks than lower risk firms and must seek for other sources of financing. BANKS 1 RISK COST Introduction of processing fees and all legal and other costs are taken by the borrower before loan disbarment. For example.Table 13: A PROFILE SHOWING BANKS WITH AND WITHOUT SMES LENDING RISK ASSESSMENT Frequency Yes No Total 4 1 5 Percent 80. All costs are directed to the customers and not the bank.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. 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.0 100. 2 3 Well planed and organized man power to execute operations and processing loans at efficiency & 26 . 4.0 Valid Percent 80.2.0 Cumulative Percent 80.0 100.1.0 100. Below is a profile showing how commercial banks try to mitigate SMEs loans risk. Risk is one among factors affecting SMEs financing.0 20.0 20.0 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. According to Cassar. (2004) risk appears to be one of the causes for the failure to establish sufficient financing from commercial banks.3.

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

2.1 A RESPONSE FROM COMMERCIAL BANKS ON THEIR RELATIONSHIP WITH THE GOVERNMENT IN SUPPORTING SMES LENDING 4.1.4.1.2 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. 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.0 100.0 100.0 Cumulative Percent 40. “Juhudi loans”.0 60.3. “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 40.0 Source: Research data (2011) From the results above.0 60. 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. The 40% of the commercial banks have stated the following programs to be related to them with the government in supporting SMEs financing: 1. Agro-inputs loans and 3.0 Valid Percent 40.0 100.3.3. 28 . “Kilimo kwanza program” This shows that.3. The results are answers from the question.

The SME sector has a significant role to contribute towards attaining this goal. 4.4 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. The following is the policy statement and its strategies: 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. 4.4.1. 4.1. enhanced service provision and creation of conducive legal and institutional framework so as to achieve competitiveness.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. The policy stated it clear that it aimed to developing strategies that will facilitate provision of financial and nonfinancial services to SMEs.4.4 SECONDARY DATA 4.4. The following are the vision.2 Mission The mission of this Policy is to stimulate development and growth of SME activities through improved infrastructure. One of the key areas which were stated to be dealt with was the SMEs financing issue.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. 4.5 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 . mission and general objective of the SMEs development policy (2002).1.1.4.1.4.4.4.

Apart from the above mentioned institutions. venture capital SMEs and. being the focal institution responsible for the coordination of the policy implementation. inventory financing. compile and analyzing information on the implementation of the various programmes. coordinate. The stakeholders include the Tanzania Industrial Research Development Organization (TIRDO) which supports local raw materials utilization. Trade and marketing. The Ministry of Industry. and the Institute of Production Innovation (IPI) now known as Technology Transfer Centre which is active in proto-type development and promoting their commercialization. small industries development origination (SIDO) is the one with SMEs financing duty. promote and offer a variety of services to small and medium scale enterprises.• Facilitate opening up of SME windows in financial Institutions. • Promote improving access of SMEs to bank financing through simplification of procedures • Mobilize resources and promote development of new financial institutions for financing SMEs.2. • Promote innovative financial products for SMEs such as hire purchase scheme.4.2 FINDING FROM SIDO 4.4. Board of External Trade (BET) which is instrumental in promotion of exports mainly through trade fairs. All stakeholders where to be relied upon to furnish the Ministry with the relevant information. 4. Tanzania Engineering and Manufacturing Design Organization (TEMDO) responsible for machine design.1 SIDO’S BACKGROUND Small industries development organization (SIDO) is an independent parastatal organization established by an act of parliament in 1973 to plan. Saving and Credit Schemes. leasing. 30 . Centre for Agricultural Mechanization Rural Technology (CAMARTEC) which is involved in promotion of appropriate technology for rural development. was given the responsibility of collecting. The ministry of industry trade and marketing had assigned various stakeholders the task of fulfilling the policy. Tanzania Bureau of Standards (TBS) mandated to promote standards. To date remains the main government arm for promoting SMEs. it has offices in all regions in Tanzania main land.

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.1 DISCUSSION AND IMPLICATION 5.0 CHAPTER FIVE 5. 4.2 SIDO’S VISION A leading business support Organization in Tanzania. 5. Priority is given to productive economic sectors that contribute to wealth creation.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.2. 4. 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. 31 .4.4.3 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.

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). On the other hand.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. When referring to the loan collaterals. finding shows that majority of the SMEs do not have collaterals to support them for the loans (table 06). 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). most of the SMEs fail to acquire commercial bank loans. For all of the above mixed reasons.7%) of SMEs rate the acquisition of commercial bank loans to be difficult (table 07). From the research finding. When considering the reasons for this. It proves that many of them run their business informally. Hategeka. commercial banks term SMEs loans to be more profitable than other customer’s loans (table 12). 5.5. Findings from SMEs shows that 60% of the SMEs who apply for bank loans fail to acquire them (table 02). 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). Another thing to note is. This means. when referring to the requirements as stated by the commercial banks (table 08) most of them are not fulfilled by informal SMEs. 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). 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). majority (51. most of them do not maintain their financial reports. 2009). 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. they don’t prepare their business plans and some of them may be operating illegally (not registered). 32 .4 COMMERCIAL BANKS ATTITUDE TOWARDS SMES LENDING From the research findings.

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

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

many SMEs applying for commercial bank loans fail to acquire them. 6. 6. Basing to the research finding and analysis in chapter four and five.3.1 Examining bank requirements for the acquisition of their loans and the ability of SMEs to meet them According to the findings.1 CONCLUSION AND RECOMMENDATIONS 6. But on the other hand. And secondly. This is because majority of the SMEs operate informally. This can be evidenced by the existence of separate windows managing SMEs affairs in 80% of the commercial banks. As a result. This is evidenced by the measures they undertake in trying to mitigate SMEs loan risks (table 14). commercial banks considers SMEs to be very risky than other loan customers.2 Determining commercial banks attitudes towards SMEs lending Findings show that commercial banks consider SMEs to be very profitable customers with reference to others. The same is the case on SMEs loans cost. it is clear that commercial banks still requires higher standards securities in reference to the level which majority of the SMEs can afford. 6.6. good and clears visions. missions and strategies in developing SMEs in Tanzania. This situation give rise to two main problems: first. it is open that the government have very positive. many SMEs do not apply for commercial bank loans for their development simply because they believe they cannot meet the bank requirements. 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. the following are conclusions in regards to the specific objective: 6.3. But when it comes to its implementations with regards to 35 .3.3 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.0 CHAPTER SIX 6.3 CONCLUSION The main objective of this research was to assess the accessibility of SMEs to commercial bank loans for enterprise development or growth. majority of SMEs fail to meet the requirements.

Currently. according to the case study of this research. As a result.5. secondly. majority of SMEs can’t meet CBLs requirements. 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. Arusha.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. low support from the government. commercial banks specifically. the government appears to be very slow and not productive. This is due to the following: first.4 GENERAL CONCLUSION In general. they should develop the habit of conducting their businesses formally. 36 . TRADE AND MARKETING) • With reference to the research case study. 6. the government has begun dealing with commercial banks financing to SMEs in the year 2010 while the policy was set in 2002.5 RECOMMENDATIONS The following are recommendations to different stake holders with regards to this research: 6. For example. 6. In other words. the research findings show that accessibility of commercial bank loans to SMEs is still a difficult task to majority of SMEs in Tanzania.5. the government is very slow in fulfilling its policies on SMEs financing from commercial banks.3 TO THE GOVERNMENT (MINISTRY OF INDUSTRY.1 TO COMMERCIAL BANKS • Commercial banks should take time in making deep assessments of how SMEs operate their activities. 6. This will help them to acquire wide knowledge. 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.5. 6.assisting SMEs financing from different financial institutions. 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. there are so many commercial banks but SIDO is connected to NMB only. information and understanding on how to run their business. negative attitude of commercial banks towards SMEs lending (considering SMEs being too risky) and thirdly.

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

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

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

Different countries use various measures of size depending on their level of development. Most loans have fixed rates and payment schedules.0 million and having a turnover of 12. commerce and services. he/she borrows a lump sum of money. based solely on the income and credit history of the borrower. total investment and sales turnover. meaning that one’s payment will be the same throughout the life of the loan. mining. the commonly used yardsticks are total number of employees.5. 40 . SMEs are those engaging up to four people. In Tanzanian context. The majority of micro enterprises fall under the informal sector. The SMEs cover non-farm economic activities mainly manufacturing.0 million per annum. When one take out a bank loan. while promising to pay back the original amount borrowed. and once he/she makes the last payment. in most cases family members or employing capital amounting up to Tshs. SMALL TO MEDIUM ENTERPRISE (SMEs) SMEs sometimes referred to as micro.BANK LOAN A bank loan refers to a cash amount of money offered by a bank to its client. There is no universally accepted definition of SME. According to small and medium enterprise development policy (2002). plus interest. Loans can be secured by something of value. They are mostly formalized undertakings engaging less than 50 employees. over a specified period of time. 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. Loan repayment periods can last for a few months. the debt is satisfied. manageable payments. or they can be unsecured. or up to 30 years or more. small and medium enterprises (MSMEs).

………………………………………………………………………………………………… 3. More than 90% COMMERCIAL BANKS ATTITUDES TOWARDS SMES LENDING 1. 31% .90% B. ………………………………………………………………………………………………… 5. ………………………………………………………………………………………………… 4.30% B. What percent of SMEs applicants fail to meet your requirements for the loan acquisition? A. …………………………………………………………………………………………………. ……………………………………………………………………………………………… 2. 0% . 61% . 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? 1.60% C.

If yes. Yes B. …………………………………………………………………… 3. 7. ……………………………………………………………………. please specify : ………………………………………………………………………… 4. 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 . Yes B. Yes B. No 2. …………………………………………………………………… 4. List main lending products you offer to SMEs? 1. What type of involvement do you have with SMEs? A. 2. SME share of total number of loans outstanding: ……………………………………………. does the bank have a separate unit managing the banking relation with SMEs? A. 6. please describe and quantify: ……………………………………………. What is your exposure to SMEs in terms of loans? (%) A. Other. The bank offers both deposits and loan products C. No 3. The bank primarily offers loan product B. B. SME share of total value of loans outstanding: ……………………………………………….A.. Do you have any assessment of how risk SMEs lending is to your bank? A. …………………………………………………………………… 5. No If so.

[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. profitability and cost of the SME financing relative to the other loans of your banks. A. If you think government programs affect your involvement with SMEs. 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. Overall Negatively 43 . Overall Positively C. 2. Inconsequential B.8. qualify the effect. 3. 4. 2. Provide your assessment of the risk. 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.

……………………………………………………………………………………………………. Above 10 million B.. did you get it? A.. No If yes.3. 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. please mention them. No Do you know requirements for the acquisition of commercial bank loans? A. Apart from requirements you mentioned.. Yes B. Yes B. ………………………………………………………………………………………………………… ………………………………………………………………………………………………………. No If yes.. Does the existence of government SMEs financing policy (2002) facilitate your bank SME lending? A. What collateral was required for the loan? 44 .. No If it needs to be improved. 1 to 5 million C... 6 to 10 million D. specify………………………………… Have you ever applied for a bank loan? A. No If yes. are there any other inconveniences you faced? A. Yes B. mention them. Yes B... Yes B.. If the answer is c.

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

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