Academic journal article Indian Journal of Economics and Business

Financial Linkages and Performance of Rural Microfinance Cooperatives: Tanzanian Case

Academic journal article Indian Journal of Economics and Business

Financial Linkages and Performance of Rural Microfinance Cooperatives: Tanzanian Case

Article excerpt

Abstract

Despite the significant number of microfinance institutions (MFIs) targeting people in rural areas, majority of them seem unsustainable and have limited outreach. These weaknesses are, among others, associated with limited funds and management skills. Linking MFIs to commercial banks is viewed as an option to overcome them. Previous studies on selected cases of commercial banks reported a positive relationship between financial linkages and MFIs' outreach. This paper utilises a survey of MFIs to associate the outreach and income of MFIs with their linkages with commercial banks. It reveals limited association, which might be explained by immature financial linkages and or stringent conditions faced by MFIs when accessing loans from commercial banks. On the other hand, the paper reveals that MFIs' outreach and income generation are significantly associated with internal finance, hence the need to promote internal mobilisation of funds.

Keywords: banking financial linkages, rural microfinance cooperative societies, income generation and outreach

1. INTRODUCTION

In 2000/01, 39 per cent of around 80 per cent of population living in rural areas in Tanzania was below the basic needs poverty line, compared to around 26 per cent in urban areas excluding Dar es Salaam. (1) Before the financial sector reforms, the majority of population in the rural areas had no access to financial services offered by formal financial institutions. Located in inaccessible areas and involved in seasonal and fluctuating income generating activities, rural microcredit clients have been regarded as costly and risky (Kirsten) (2) as their request for loans, their savings and deposits are in small amounts and keep on fluctuating. Costs related to administering services to them are viewed by commercial banks as relatively high.

The role played by rural microfinance institutions (MFIs) in offering financial services to poor people has been acknowledged worldwide, hence the Tanzanian Government and donors (e.g. International Fund for Agricultural Development (IFAD), OPEC and Swiss Government) have been supporting their initiatives by offering training and facilitating capacity building of MFIs and their stakeholders, addressing their issues in the microfinance policy (see Randhawa and Gallardo, 2003). Despite the several reforms that have taken place in the financial sector, people in the rural areas still face limited access to financial services. For example commercial bank credits to the agricultural sector have ranged between 3.3 and 4.8 per cent during 1996-2001; for the month of January 2004, the National Micro Finance Bank (NMB) allocated only one per cent of loans to MFIs; and during 1994-2003 SIDO offered around 12 per cent of total loans to rural areas (Semboja, 2004). FSDT (2007) reported that only 2% of people in Tanzania access semiformal sector financial services including SACCOS & MFIs. Jones et al. (2000) report the same experience in Ghana.

The principle providers of microfinance services in Tanzania are SACCOs and nongovernmental organisations (NGOs) (Basu et al., 2004). As at Dec. 2008 there were about 5,230 registered SACCOS serving about 773,172 members with savings of Tshs (3). 119.5 billion share value of Tshs 30 billion and loan value of Tshs. 354.7 billion (Ministry of Agriculture Food Security and Cooperatives, 2008). Despite the significant number of MFIs, they in general still have limited outreach.

Randhawa and Gallardo (2003) contend that among the factors explaining limited performance in terms of outreach and sustainability of MFIs are lack of skills of managing and running MFIs' activities, inadequate policy to promote MFIs as some of them are not allowed to take deposits while funds from donors are unviable and dwindling (Randhawa and Gallardo, 2003). Those which accept deposits also still lack capacity to mobilise enough funds as their credit demand is relatively higher than their share capital and deposits. …

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