UNIVERSITY OF GRONINGEN
FACULTY OF ECONOMICS & MANAGEMENT AND
ORGANIZATION
GROUP LENDING AND SUSTAINABILITY
OF MICROFINANCE IN TANZANIA
(A case study of Tanzania microfinance institutions)
By
MR. ALEX K. MGENI s.1660608
A THESIS SUBMITTED IN PARTIAL FULFILMENT OF
THE REQUIREMENTS FOR THE MASTERS OF
SCIENCE IN BUSINESS ADMINISTRATION - FINANCE
OF THE UNIVERSITY OF GRONINGEN (RUG).
TABLE OF CONTENTS
LIST OF TABLES--- i
LIST OF APPENDIXES ---ii
LIST OF SYMBOLS AND ABBREVIATIONS---iii
ACKNOWLEDGEMENTS ---v
ABSTRACT---vi
CHAPTER ONE ---1
Introduction---1
1.1 Background of the Study---1
1.2 Problem Statement ---3
1.3 Research objective ---4
CHAPTER TWO---6
An Overview of Microfinance in Tanzania ---6
2.1 Background of Microfinance in Tanzania ---6
2.2 The Players of Microfinance in Tanzania --- 12
2.3 Solidarity Group Lending OR Group Lending in Tanzania --- 16
CHAPTER THREE--- 18
Literature Review--- 18
3.1 Prior studies on Microfinance in Tanzania --- 18
3.2 Studies done outside Tanzania --- 21
CHAPTER FOUR --- 26
Research Methodology and Data Set --- 26
4.1 Data collection--- 26
4.2 Limitations of Data collection--- 27
4.3 Research model--- 27
CHAPTER FIVE --- 33
EMPIRICAL RESULTS AND FINDINGS --- 33
5.1 First Hypothesis: Operational Self-Sufficiency VS MFIs Control Variables 33 5.2 Second Hypothesis: Group Lending to Outreach level --- 37
CHAPTER SIX --- 43
General Observations, Conclusion and Suggestions for Future Research--- 43
6.1 General Observations--- 43
6.2 Conclusion and Suggestions for future research--- 45
LIST OF APPENDIXES --- 52
Appendix 1 --- 52
Appendix 2 --- 54
Appendix 3 --- 56
LIST OF TABLES
Page
Table 1The total number of MFIs in Tanzania by 2005………..13
Table 2 Number of surveyed MFIs and their responses……….26
Table 3 Descriptive statistics for Operational self-sufficiency test …...33
Table 4 Regression results when Operational self-sufficiency is the dependent variable.……….35
Table 5Correlation coefficients for Operational self-sufficiency test…...36
Table 6 Descriptive statistics for Group lending
interest………...38
Table 7Regression results when Group loan is the dependent Variable…….39
Table 8Robust test for Group loan as Dependent variable………....40
LIST OF APPENDIXES
Appendix 1 List of Microfinance Institutions surveyed
Appendix 2 List of Microfinance responded; including selected variables
Appendix 3 Donors and Government Agencies and programs which offers wholesale credit to MFIs
LIST OF SYMBOLS AND ABBREVIATIONS
ACB Akiba Commercial Bank ADB African Development Bank ADF African Development Fund BOT Bank of Tanzania
CRDB Cooperative Rural Development Bank
CAMEL Capital, Assets, Management, Earnings and Liquidity CGAP Consultative Group to Assist the Poorest
DCB Dar es Salaam Community Bank DMFI Directorate of Microfinance Institutions EG Enterprise Group
FINCA Foundation for International Community Assistance GPS Grameen Pension Services
MBB Micro Banking Bulletin MFCs Microfinance Companies MFIs Microfinance Institutions
MDGs Millennium Development Goals
MKUKUTA Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania MKURABITA Mkakati wa Kurasimisha Rasilimali na Biashara Tanzania NGOs Non Governmental Organizations
NMB National Microfinance Bank NMP National Microfinance Policy
NSGRP National Strategy for Growth and Reduction of Poverty PBFP Property Business Formalization Programme
PTF Presidential Trust Fund
PRIDE Promotion of Rural Initiative and Development REPOA Research on Poverty Alleviation
ROSCAs Rotating Savings and Credit Associations SACAS Savings and Credit Associations
SACCOS Savings and Credit Cooperative Societies
SEDA Small Enterprise Development Tanzania SELF Small Entrepreneurs Loan Facility
TGNP Tanzania Gender Networking Programme Tshs Tanzanian Shillings
ACKNOWLEDGEMENTS
Many people have contributed in the accomplishment of this thesis. Lecturers, my fellow students, friends and relatives have made excellent and useful suggestions.
Lecturers include Prof. Bert Scholtens, Dr. Auke Plantinga, Dr. Peter Smid, and Prof. Frans M. Tempelaar.
Special thanks to my thesis supervisor Prof. Bert Scholtens for advice,
guidance, and for his enthusiasm readings; from the proposal to the final draft of my thesis.
My fellow students are I. Hassan, R. Kiangi, and S. Fumbuka. Friends are L. Ishemoi, J. Yonazi, W. Mwiga, B.Masamila, D. Orondo, K. Mongi, B. Makunja, R. Ibengwe, E. Kihanga, E. Kapteni, and F. Njuu. I will always remember you for the support both morale and intellectual wise, especially during data collection, you were ready to forego your fruitful time to help me.
Relatives include N. Abwene, M. Jilo, A. Mgeni and G.Ngúmbi. I am particularly grateful to my relatives for academic encouragement, moral support, and for tireless and tolerance during my absence.
ABSTRACT
A major challenge of Microfinance Institutions is to achieve sustainability. Microfinance Institutions serve contradicting objectives; that is to reach many unbanked people and to make profit. Lending to unbanked people has an important role in combating chronic poverty. An unbanked person belongs to the group of people without assets to be used as collateral, and if they have assets, those assets are not formally registered. Therefore the possible lending approach to unbanked people is to use Group lending approach, under the assumption of joint liability.
In this paper, sustainability is evaluated by 21 Microfinance Institutions through operational self-sufficiency and group lending approach – for the case of Tanzania. Operational self-sufficiency is used as proxy of sustainability; when a firm achieves operational self-sufficiency is said to have economies of scale – hence sustainability. Group lending approach is a proxy for outreach. An Institution need to grow in business in order to continue making profit, for the growth to happen it has to go out and lend money to untapped market.
The regression model is used to test the two hypotheses formed for both operational self sufficiency and group lending against selected control variables. Control variables tested against Operational self-sufficiency are Gross loan portfolio, Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers. Control variables used for test against Group lending include Gross loan portfolio, Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers.
CHAPTER ONE
Introduction
1.1 Background of the Study
“The great challenge before us is to address the constraints that exclude people from full participation in the financial sector” (Kofi Annan - International Year of Micro credit 2005). United Nation’s Millennium Development Goals emphasize that microfinance fosters financially self-sufficient domestic private sectors and creates wealthy for low-income people. Microfinance stands as one of the most promising tools in the fight against poverty undermining the world.
Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients.
Recognizing the role of microfinance in poverty reduction the government of Tanzania in collaboration with donors took actions to facilitate microfinance success. The draft of National Microfinance Policy document was set by year 2001 together with deliberate financial sector reforms. Reforms included liberalizing interest rates, restructuring state owned financial institutions, eliminating administrative credit allocation, allowing entry of private banks into the market, and strengthening Bank of Tanzania’s role in regulating and supervising financial institutions.
which intend to facilitate growth outreach and depth of pro-poor of financial services.
The growth and sustainability of microfinance services in Tanzania depends on the performance, self-sustaining and success of Microfinance Institutions Rubambey, G.C (2005). Therefore microfinance providers must establish measures to avoid taking risks which may endanger the prospect of micro-lending business. These risk measures seems to contradict with the objectives of microfinance programs.
Microfinance programs intend to raise incomes and accessibility of small-scale entrepreneurs, specifically women and people in rural areas. This group of people in developing countries like Tanzania is the largest one, about 75% from the population of 36 million Tanzanians in 2005. This is the group with no property rights, extremely poor and looking for financial accessibility to develop them.
The best way to access financial services such as small loans is to form small groups of people say from five and above, as a guarantee for borrowing. Through government initiatives in most developing countries microfinance institutions provide loans to this group of people with no collaterals by means of group lending.
Paxton (1996) report drawbacks in group lending that were not yet in microfinance literature; called a long-term mismatching problem. The problem is caused by repayment difficulties experienced by groups after several loan cycles under dynamic incentive system, the problem not foreseen during group formation.
As loan size bolster due to dynamic incentives favoured loan terms and volumes will differ with the consequence that borrowers with smaller loan volumes will refuse joint-liability. This will happen when borrowers with higher loan volumes in the same group face difficulties in loan repayment. Likewise, Godquin (2002) observe that borrowers ability to repay loan tend to deteriorate with the age of the group. Because of the failure to recover full costs most countries in Latin America and Eastern Europe moved from Group lending to Individual based lending.
1.2 Problem Statement
The role of Microfinance in combating poverty has been widely acknowledged for its outstanding performance in reaching people in rural areas (International Year of Microcredit, 2005). Group lending is considered to be the appropriate way for lending to unbanked group. MFIs need to achieve operational self-sufficiency and hence sustainability while lending to people with no collaterals.
Recognizing this, the paper focuses to examine factors associated with operational self-sufficiency, group lending and hence outreach level by microfinance institutions in Tanzania. Knowing the association between the factors, operational self-sufficiency and the proportional components of portfolio loan renders us to know the prospect and sustainability of microfinance in Tanzania.
keeping low default numbers and enjoying positive return on assets for them to achieve sustainability.
If a firm is able to cover all costs relating to loan provision it is assumed to enjoy economies of scale, and hence sustainability1. To be more precise that an MFI is likely to attain sustainability, the study on Group lending as an approach used by lenders to issue loan is conducted. Group lending as a method of lending is considered to be appropriate proxy for outreach2.
The study is motivated by the recent Tanzanian government initiatives to emphasize microfinance institutions to extend loans on group lending basis3.
1.3 Research objective
The thesis objective is to examine the determinants of microfinance sustainability for the case of Tanzanian MFIs. Statistical analysis is used to describe both operational self- sufficiency and the contribution of group lending in the practices of MFIs in Tanzania. Group lending and operational self-sufficiency are variables used to explain the level of sustainability.
1.3.1 Research Hypothesis
To investigate the determinants of an MFI sustainability; Operational self-sufficiency and Group lending ratio are used as proxies for sustainability by relating them with multiple variables considered as suitable indicators of sustainability. The following two hypotheses are used:
1
Crabb (2006)
2
Crabb and Keller (2004): In page 4, they point out that, the model is especially effective at reaching out to women from low income groups since borrowers do not need collateral.
3
First hypothesis
H1: Operational self- sufficiency is associated with; Gross loan portfolio,
Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers.
H2: Operational self- sufficiency is not associated with; Gross loan portfolio,
Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers.
Second hypothesis
To test group lending relationship with outreach variables of microfinance institutions in Tanzania, the following hypothesis is used.
H3: Group lending is positively associated with outreach level
H4: Group lending is negatively associated with outreach level
In chapter four more details are provided for the variables used; the relationship between Operational self-sufficiency, Group Lending and Microfinance sustainability
CHAPTER TWO
An Overview of Microfinance in Tanzania
This chapter presents the general overview of Microfinance practice in Tanzania.
The part of Overview of Microfinance in Tanzania gives details on initiatives taken by the government to boost up microfinance, how microfinance operates in Tanzania and finally is Group-lending overview as practised in Tanzania.
2.1 Background of Microfinance in Tanzania
Tanzania is a large and sparsely populated country with poor physical and financial system. Tanzania is a typical developing country, with large and growing informal sector supporting about 60% of the population whom entirely earn less than 1 US dollar a day4.
Recognizing the poverty alarming in the country, the Government of Tanzania has taken several initiatives for eradicating poverty in rural and urban areas. The initiatives include;
(i) Financial sector reforms
(ii) Establishment of National Microfinance Policy (NMP) (iii) Poverty reduction schemes
(iv) National Economic Empowerment and Job Creation Programme (v) Conducting seminars and workshops
2.1.1 Financial sector reforms
Financial sector reforms started in 1991, by deregulating the financial sector from fully state owned to partly private owned. Deregulation was intended to
4
develop sustainable, efficient and effective financial system. It included liberalization of interest rates, abolition of administrative credit allocation, reinforcement to the Bank of Tanzania regulatory and supervisory role, reorganization of state owned financial institutions and allowing entry of privately owned financial institutions5.
The reforms increased efficiency and competition in the financial sector which unfortunately increased gap of poor people to access financial sources. The situation pushed the government in 1996 to initiate the public awareness initiatives in respect to microfinance institutions through the central bank. This enabled some banks and non-banking (like NGOs and SACCOS) financial institutions to widen the outreach level and financial products offered to the lower end of the market.6
2.1.2 National Microfinance Policy (NMP)
In 1997, government initiatives through the central bank (Bank of Tanzania) started the process of formulating the National Microfinance Policy (NMP). The policy is anticipated to provide a structure for exploiting microfinance stakeholder involvement in the development of the industry. The underlying guidelines of the NMP are based on sustainability and best practices in the industry. The policy is aimed to enable low income earners to access financial services, in which Microfinance institutions will become the sources for financing in place of formal financial institutions like banks. The policy further aims at increasing income of both households and enterprises by enforcing savings, payments insurance and credit services7.
From year 2000 World Bank carried a four-year project (2000-2004) to its member states in the African region, titled “The Rural and Micro Financial Services Project”8. Its objectives were
5
Bank of Tanzania 1991 Act
6
G.C Rubambey : Bank of Tanzania, 2005
7
URT, 2000
8
(i) Development of a common policy framework, based on internationally recognized best practices, for rural and microfinance initiatives in the country which would establish an enabling environment for rural and microfinance and increase the quality and returns of subsequent investments by the government agencies and other donors.
(ii) Increasing the level of knowledge and skills within the industry and Instituting a program of systematic tracking and analyzing of all related initiatives against a set of common criteria.
It offers a vision as well as strategies for both practitioners and donors in several areas including pricing delinquency control, financial reporting and information administration, suitable techniques and products, as well as gender impartiality and governance. As a result, the government of Tanzania gradually divested from several projects and is no longer a direct provider of microfinance services. Government of Tanzania has selected to focus on providing facilitative atmosphere for private sector investment in microfinance.
The policy helps the Bank of Tanzania (BOT) better supervise the microfinance industry and to make newly-licensed Microfinance Companies (MFCs) viable institutions. The development of a sole tracking and analysis tool permitted the Directorate of Microfinance Institutions (DMFI) of the BOT to collect input and scrutinize information on the most important MFIs, including banks, NGOs and SACCOS.
The monitoring and evaluation by BOT on the largest microfinance providers has eased the identification of an improvement in the performance of MFIs with
(a) Increased profitability and improved CAMEL (Capital, Assets, Management, Earnings and Liquidity) ratings.
(b) Increased loan portfolio quantity and quality (c) Reduced level of subsidiary for on-lending
Between 2001 and 2003, the number of new retail outlets increased by 20%, clientele grew by 72% on average, outstanding loan portfolio and savings deposits grew by 88% and 52% respectively, with a low non-performing loan ratio of less than 5% on average.9
2.1.3 Poverty Reduction Scheme
Tanzania as with other developing countries has taken several measures to do away from chronic poverty. The frameworks are based on social and economic policies, which address the problem of poverty at national and individual levels10. The schemes formed are; Tanzania Development Vision (Vision 2025), the National Poverty Eradication Strategy, Poverty Reduction Strategy Paper (2000), and the National Strategy for Growth and Reduction of Poverty (2005).
National Strategy for Growth and Reduction of Poverty (NSGRP-2005) is commonly known by its short form as MKUKUTA (Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania) in Swahili language. NSGRP 2005 is formed by aspirations of Vision 2025 and is committed to the Millennium Development Goals (MDGs). It aims at widening the space for country ownership and effective participation of civil society, private sector development and fruitful local and external partnerships in social and economic development11. The strategy allows for more sustained effort of resource mobilization, implementation and evaluation of the poverty reduction impact.
MFIs were initiated to support issues relating to poverty alleviation and improved living standards, creating conducive environment for poor people to access financing, women empowerment and developing entrepreneurial skills to business players12. In conjunction with MKUKUTA, a partner strategy for
9
Randhawa, B and Gallardo, J, (2003)
10
S.A Kessy and F.M Urio 2005
11
URT-NSGRP 2005.
12
Property and Business Formalisation Programme (PBFP) better known by its Swahili acronym; MKURABITA (Mkakati wa Kurasimisha Rasilimali na Biashara Tanzania) was established in 2005.
The Government realized that although the economy has been growing, many ordinary Tanzanians do not yet enjoys fruits. It has been learnt that, many Tanzanians own assets such as buildings, land and other valuable properties informally, they also do unregulated businesses. This informal ownership hinders the liquidity access, especially obtaining loans from financial institutions. The government aims at increasing economic participation together with formalization and documentation of the economy. To achieve this, the government will enhance legal system, and eliminate unproductive bureaucracy.
The diagnosis research undertaken, estimate that US$ 29billion of dormant capital is attached in the land, property and unregistered business in Tanzania13.
Moreover according to the daily local newspaper report (The Guardian,)14, findings shows that most of clients served by MFIs were in the informal sector. Among the surveyed MFIs 89.7 percent dealt with informal or unregistered businesses with less than 5 employees, whereas 34.8 percent of MFIs dealt with registered business and only 17.4 percent of MFIs dealt with formal businesses.
2.1.4 National Economic Empowerment and Job Creation
Programme
In the financial year 2006/2007, the government of Tanzania set aside Tsh.1billion for each political region (city) as cash deposit guarantee to major participating bank in the National Economic Empowerment and Job Creation Programme15.
13
http://otto.idium.no/desotowatch.net
14
The Guardian: June 28th 2007
15
The Programme is designed to promote, support and empower citizens engaged in economic activities in all sectors of the economy by facilitating access to credit facilities thereby creating additional employment and income. It is a grand government programme intending to empower economically the ordinary citizen from urban to rural areas. The moneys were expected to be managed by selected banks, which will make loan disbursements in accordance to respective Bank regulations and procedures.
Loan beneficiaries included individuals, economic groups and SACCOS. BOT conducted a crash-training programme to District Planning Officers, Cooperative Officers and Community Development Officers as loans mobilizer and educators16. The training aimed at strengthening the manpower that was expected to carry out loan management and supervisory role. Financial institutions participating in this programme were expected to lend the money under soft conditions.
Specific emphasis is on group lending and not individual lending, as far as the borrower is already engaged in economic production or trade. Borrowers do not pay any application fee or facility fee, interest on loan not exceeds 10% per annum, no collateral requirement and loan repayment is not more than three years. Financial institutions are covered to the extent of 75% for any default by borrowers, the loan is considered in default, if not paid after 91 days.
2.1.5 Conducting seminars and workshops
The Government of Tanzania together with donor fund institutions funded several technical workshops on Operational Risk Management for Microfinance and Business Planning and Financial Modelling for MFIs and annual conferences17. These seminars and workshops enhanced knowledge sharing as well as shaping government policy in microfinance. Notably is the
16
Bank of Tanzania: Training Institute 2006
17
Microfinance Network Conference held at the city of Arusha Tanzania in 2004, which addressed the problems of unsuitable environment for MFIs success18. The conference specifically argued MFIs adopting a commercial approach, with the aim of reducing financial dependency and subsidies.
Study tours and training for stakeholders such as policy makers, bankers, practitioners and government officials, lawmakers and members of the policy drafting team were organized19. The study tours to Indonesia and Bolivia intended at facilitating participants to observe microfinance best practices in the field. A seminar for members of parliament was conducted in order to expose the lawmakers to microfinance concepts and to share understandings with those that did not engage in the study tours.
In June 2007, the President of United Republic of Tanzania Mr. J. Kikwete invited the man behind the success of Grameen Bank and Nobel Peace prize laurette-2006, Professor Mohamed Yunus from Bangladesh20. The invitation aimed at sharing the experience and expertise with local Banks and Microfinance providers in the country.
During the conference Prof. Yunus challenged the Banks and MFIs to provide extensive training on the best business practices to prospective entrepreneurs. He advised the government to assist provision of interest free bank loans to the poor or those charged at below 10% as strategy to facilitate and stimulate small business growth. Pointed out that any bank charging interest above 10% is not helping deprived men and women to get out of that situation.
2.2 The Players of Microfinance in Tanzania
The research survey depict major lessons on the practice of MFIs operating in Dar es Salaam the largest commercial city in Tanzania. The city is the home of all business activities, and hence many MFIs are within the city, many
18
Microfinace Network: K.Hattel, 2005
19
Randhawa, B and Gallardo, J, (2003)
20
successful MFIs established in others cities have offices in Dar es Salaam. With this recognition, the survey’s findings on the practice of MFIs will be to the large extent being regarded as representing the whole country.
MFIs in Tanzania operate in the form of NGOs, SACCOS/SACAS, Commercial Banks and Community Banks. ROSCAs (Rotating Savings and Credit Associations) which is commonly known as UPATU in Tanzania.
The Number of MFIs in Tanzania by 2005
Table 1
Form No. Clients served
1 SACCOS 1,635 2 SACAS 48 130,000 3 NGOs 53 220,000 4 Commercial Banks 3 5 Community Banks 6 50,000 Total 1744 400,000
Source: PRIDE TANZANIA-2005
2.2.1 ROSCAs
Rotating Savings and Credit Associations (ROSCAs) commonly known as UPATU in Tanzania is another form of MFIs, which operates in very informal way. It mainly involves women based on mutual trust, members mobilize fund through weekly or monthly contributions to a common basket fund, which in turn the fund is given to one member.
2.2.2 SACAS and SACCOS
at institution level where employees save their money and can borrow normally two or three times of what an individual have saved.
For example, more than 1,000 registered SACCOS by SCCULT (Savings and Credit Cooperative Union League of Tanzania) are employee based SACCOS. They commonly demand compulsory savings for a member group or individual. At the grass roots level, they are considered to have greater potential for mobilization of financing sources as they depend mainly on local sources, especially in rural areas where banks are not ready to take risk21. These MFIs suffers from limited range of loan products they offer, run out of cash for on lending, effective regulatory system.
The Microfinance Companies and Microcredit Regulations of 2005, seems to exclude most SACCOS/SACAS, particularly the minimum capital requirement of Tshs. 800million22, which cannot be attained by many of them. This capital therefore limits SACCOS/SACCAS to enjoy the successful monitoring as regulated by Central Bank of Tanzania (BOT) through the Microfinance Companies Act of 2005.
Rural MFIs suffers much from cash shortage for on loan, as demand for loan tend to be high at the same period for most members, notably during rain season as farmers borrows to buy inputs23. SACCOS also borrows from other large funding institutions like SELF and CRDB bank. CRDB bank has established a specialized Microfinance Company Limited which offers loan to MFIs, which have entered into partnership agreement with the CRDB bank for onward lending to their individual clients.24
21
Tanzania Gender Networking Programme (TGNP):2004
22
E.P Mkwawa (2006)
23
Intergrating Financial Services Into Poverty Reduction In Tanzania: E .P Mkwawa, 2006
24
2.2.3 NGOs
Non Governmental Organizations (NGOs) in Tanzania are growing up at interesting pace; most of them acquire capital from international funds and donors. The donors not only provide fund, but also they do provide technical assistance for staff capacity building and technology adoption. Donors also ensure that NGOs learn and apply best practices together with sound financial principles in offering financial services.
After several years of practice, with much commercialization of financing activities, donors withdraw from supporting NGOs. Which means most NGOs passes the most difficult stage of MFIs growth with support from donors, and hence they start operating themselves after achieving substantial operational self-efficiency goal.
NGOs are considered as pioneer of Microfinance in Tanzania, as they started early in 1990s, aiming to reach poor people and woman with the emphasis put to rural areas. Although the success of most NGOs are considered to be mainly facilitated through urban lending and not rural areas lending. This success is contributed by the fact that urban borrowers have consistent loan repayment from businesses they do, compared to rural borrowers who depend mainly on selling crops, after harvesting and normally is once per annum.
NGOs are registered legal entities as Companies Limited by Guarantees or Incorporated as Trust or as Societies under Societies Ordinance25. NGOs also borrows fund from banks in case they run out of cash for on lending. They mainly use group lending system to issue loans, they ensures that borrower have savings account and insurance account with them. Insurance account is
25
used to keep the money earned as profit, which in turn, a member may draw money to finance loan repayment when difficulties arise; the account is also used to settle rent and funeral expenses.
2.2.4 Banks
Both commercial banks and community banks are still new in the microfinance industry, as most of them started to involve in MFIs early 2000s. Many banks considers poor people as most risk group to trade with, plus the tight rules and regulations of the Central Bank of Tanzania, which limits banks to reach the poor especially in rural areas.
ACB (Akiba Commercial Bank) is considered to be a role model in the banking sector for reaching unbaked group. ACB’s main mission is providing banking and financial services to small and micro businesses on commercial basis26. CRDB (Cooperative and Rural Development Bank) through its microfinance company, carry its activities based on providing financial services to SACCOS and large farmers, such as sugar cane farmers27.
2.3 Solidarity Group Lending OR Group Lending in Tanzania
Grameen methodology of lending or Solidarity group lending has been in practice from the mid 1990s in Tanzania, being pioneered by leading MFIs such as PRIDE, FINCA, PTF and SEDA28. Members usually form sub-groups commonly known as Centre/Enterprise Group (EG); the sub-group consist of five to ten members. The members are self-selected and co-guarantee each other in the centre formed.
of the peer group (PRIDE-TANZANIA)29. Loan sizes to members start at the lowest amount (e.g. Tshs 50,000 for PTF to the maximum size Tshs 800,000). Members are expected to graduate from lower level loan circles to higher level loan circles, (e.g. Tshs. 50,000 to 5,000,000 as used by PRIDE). Weekly meetings which involves loan officers and peer group members are used to collect compulsory payments and savings. The compulsory savings is part of loan insurance scheme, upon member exit it is paid back to the respective member.
Within peer group’s leaders are elected by members, leaders becomes responsible for preserving group discipline, loans assessment, endorsement and ensuring loan repayment. Peer group savings accounts are encouraged; aspired to cover default risk, emergences and finance group level transactions like bus fare to savings or loan repayment.
Members should be in business already to qualify for loan, start-up business do not qualify to borrow. National Economic Empowerment and Job Creation Programme of 2006 is intended to facilitate loans to poor people who have entrepreneurial mind but have not yet started business. The programme involves training entrepreneurs how to write project proposals, which can be used for loan applications.
MFIs in Tanzania have introduced new products in recent years aimed at covering more risks such as health, micro leasing and funeral loan; SELFINA is among the top Micro Leasing Institution. YOSEFO is another MFI which recently designed new products; savings and credit for school with only 10% interest per annum and program development for capacity building aimed at nurturing venture skills.
29
CHAPTER THREE
Literature Review
3.1 Prior studies on Microfinance in Tanzania
Small Entrepreneurs Loan Facility (SELF) undertook a study with the focus on impact results and emerging issues regarding SELF project in 2004/2005 (Ministry of Planning, Economy and Empowerment). SELF is a project under the Ministry of Planning, Economy and Empowerment with the fund loaned to the Tanzanian Government from the African Development Bank Group.
SELF-fund is intended to improve the access of the poor, particularly in rural areas, to microfinance services and thereby improve the poor people’s social well being through their engagement in income generating activities. Specifically SELF purposes are; Wholesale credit to Microfinance Institutions for onward retail lending to targeted clients, capacity building (provision of training to key MFI stakeholders and Training of trainers) finally is Outreach and Monitoring30.
By December 2004, the project had reached 18,070 beneficiaries of whom 57% were women (SELF impact assessment report, 2006). The study intended to explore and map out how SELF project micro credit services have affected the MFIs, beneficiaries, businesses, households and the community as whole. The results show that MFIs surveyed demonstrated their ability to sustain their services. Furthermore the findings indicate that;
• There is substantial improvement of institutional capacity of the MFIs that substantiate institutional support availed by the project.
• MFIs have been graduating from lower categories to upper levels which suggests institutional development
30
• Most of the MFIs that accessed credit fund from the project are still collaborating with the project.
About 67% of the surveyed MFIs mentioned loan as the most desirable source for financing the credit gaps. Although the MFIs savings and short -term deposits were observed to increase, these sources have never been adequate to carter for the overwhelming credit demand. In this thesis paper analysis on the ability of firms to repay the borrowed capital is evaluated through operational self-sufficiency variable. Specifically financial revenues net of operating expenses and financial expenses are considered when evaluating operational self-sufficiency of a particular MFI.
Furthermore, SELF report shows that loan portfolio sizes for all categories were found to increase at increasing rate. This suggests that there is increased capacity of MFIs to access loans as well as increased capacity of MFIs to manage funds. The average annual interest income as the percentage of annual operating costs was found to increase. This suggests improvement towards operational self-efficiency. The current paper has devoted much of its work to examine what has been achieved so far in terms of operational self-sufficiency. This measure enables us to evaluate the economies of scale of an MFI, which according to Crabb (2006) is an indicator of MFI sustainability.
Similar study findings show that performance of MFIs in Tanzania has achieved a slow pace.31 A study titled “Performance and Financial
Sustainability of Microfinance Institutions in Tanzania by Chijoriga (2000)”,
asses an overall institutional organization strength, financial performance and outreach level. The findings reveal that the overall performance of MFIs in the country is poor and only few of them have clear vision and strong organisational structure. It was learnt that most of them lack participatory ownership and many are donor-driven.
31
The client outreach is increasing with branches opening in almost all regions of the country, still MFIs activities remain in and around urban areas. Their operational performance demonstrates low loan repayment rates and that their capital structures are dependent on donor or government funding.
Chijoriga, further observed that both credit programmes experienced poor repayment rates, particularly in the early years of operation. Farmers have been citing poor crop yields, low producer prices and untimely acquisition of loans as reasons for non-payment. Also poor infrastructure of the MFIs led to high transportation costs, which increased the transaction costs in credit programmes. It happened so because most borrowers lived in rural areas and far from credit offices.
Furthermore, none of the MFIs surveyed does provide loan insurance services and most of them do not provide business advisory services and training services. Available institutions that offer business advisory and training services have no experienced trainers in small business operations.
According to a Consultative Group to Assist the Poorest (CGAP) MFIs best practices (2001), an Institution can be considered to have good performance if it has achieved among other things, a minimum repayment rate of 95%, 154% clients per member, and at least 88.8% operational self-sufficiency32. Kessy and Urio (2005) conducted a case study for PRIDE- Tanzania to evaluate its performance, and concluded that it has achieved operational self-sufficiency, and hence sustainability. More MFIs are evaluated using statistical measures in this thesis paper to come up with convincing conclusion to add the literature on what Kessy and Urio (2005) found.
Prior studies on Microfinance practices in Tanzania gives an overview on what is happening and the prospect of MFIs in the country. All papers mention donor reliance as source of fund by many MFIs, lack of proper management, lack of experts to train borrowers and slow growth pace.
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This paper steps further by investigating the role of Group lending on what has been achieved so far by Tanzanian MFIs. Previous studies on Tanzanian MFIs have not yet specifically provided the role of methods used by lenders in contributing what has so far achieved in the industry. The literature of Tanzanian Microfinance practice shows that group lending is one of the methods used by lenders to offer loan to borrowers. Furthermore, the background has indicated failures in some countries where group lending was in practise. Thus this paper lays the way forward to know the contribution of lending methods in what has been seen in Tanzanian MFIs.
3.2 Studies done outside Tanzania
The story and success of Grameen Bank in Bangladesh spread over the world of microfinance literature, and led to the greater applicability of group lending in the rest emerging economies. Operational and financial sustainability of microfinance institutions will guarantee the prospect of micro lending to small and medium enterprise and poor people.
It has been learnt that most microfinance providers in developing countries cannot fully cover their internal operational costs from the income generated. Group lending or joint liability has been abandoned in recent years. Grameen Bank has shifted to what they call Grameen II and discarded joint liability lending system in year 2002, (Kono, H 2006).
The pioneer of group lending with the Grameen Bank Yunus, M declares that “in 1995 large number of their borrowers stayed away from training meeting
and stopped paying on instalments”. In 1998 after huge water flood things got
much worse, as repayment rate quickly went down, and customers demanding group tax withdrawal.
Services (GPS) and improved loan contracts with terms which allow a borrower to either top up mid-term or pay off early, very poor people gets education grants and loans. Yunus, M frankly reveal weaknesses of original scheme; “Loan rigidity was a problem”, members had no choice but to follow strictly laid down borrowing and payment rules, thus once they get loss it was difficult to go back.
Probably this should be a lesson to Tanzanian MFIs, adhering to what Grameen bank has shifted too; similar failures might arise in Tanzania. Slow loan repayment rate as noted by Chijoliga (2000) will lead to huge accumulated loss portfolios. Many MFIs in Tanzania are still at infant stage, so loss numbers are still low too, but as the time passes, losses are likely to mount up and will jeopardize their sustainability. Also many MFIs neither provide loan insurance services nor did provide business advisory services and training33 which is emphasized in Grameen II.
Those who advocate group lending argue that group lending with joint liability system involved self- screening through self-selection for safe borrowers, hence reduce risk borrowers (Ghatak 2000). The lending methodology is considered to be suitable to such poor people like Tanzanian, as many of them do not own tangible assets34. This also serves the aim of reaching many unbanked people, and in combating chronic poverty especially in rural areas.
Stiglitz (1990) and Varian (1990) insist that group members have clear information about their peer members, and peer monitoring cost is cheaper than bank monitoring cost leading to lower total monitoring costs and higher payment rate.
“Microfinance is designed to combat chronic poverty and support Millennium
Development Goals campaign to halve the number of poor people. Today profit microfinance is becoming popular, Banks like Citibank, Standard Chartered, Deutche bank, ANZ bank and ABN Amro are actively involved”
(The Jakarta post, April 2007).
33
Kessy and Urio (2000)
34
“The aim for the future is the development of deep domestic financial markets
with sound and healthy financial institutions that serve the majority of poor population” (World Bank Nov. 2006). The presence of microfinance
institutions in local community has achieved to open financial access to small scale entrepreneurs and under-banked clients who seek loans for capital and investment.
Commercial banks have ability to mobilize deposits, management expertise, innovation in banking technology, awareness of poverty alleviation and social values; all these have attracted commercial banks to enter the unbanked group. To avoid failure microfinance institutions should consider how operational cost, interest rate, and transaction costs can be regulated plus building cost effective models which will help to achieve success and sustainable microfinance (The Jakarta post, April 2007).
Larger financial institutions involvement in Microfinance industry will help to make fund available for borrowers and pull down borrowing costs. Pulling down borrowing costs leave borrowers with money to expand their business and offer lenders with an assurance that the loan will be paid in future. When lenders are able to recover lent money and borrowers are able to expand their businesses, then operational self-sufficiency will be achieved and hence sustainability. On top of that lenders will be able to go in rural areas to expand businesses with the aim of increasing profit and hence outreach goal will be achieved. MFIs will be able to offer more loan services35, proper management and internal control system to monitor the loan disbursement irregularities.
Aghion and Morduch (2005) suggest that joint liability is one factor of successful microfinance schemes and thus there other factors for microfinance success such as dynamic incentives, frequent repayment instalments and public repayments.
1. Dynamic incentives refers to promise given by bank to clients on future loan accessibility subject to full repayment of current loan.
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2. Frequent repayment instalments aim at frequent meeting with borrowers, this enables loan officers to obtain information on borrowers and find out borrowers who are likely to default.
3. Public repayments motivate borrowers to repay their instalments in public, aiming to build the social stigma against borrowers who do not repay their loan promptly.
All these factors are aimed at forming a positive liaison among borrowers and lenders, which reduce defaults and hold bright prospect of MFI and borrowers too.
Gine, Pamela, Karlan and Morduch (2005) studying role of dynamic incentives, they found that it reduces moral hazard, while joint liability create a free-riding problem, and borrowers are induced to select risk investment. Some members tend to run away when they find it difficult to pay the loan. This might be very likely in countries like Tanzania, where many people leaves in areas with no official physical address.
Conning, J (1999) identifies that microfinance institutions are faced with a problem of tradeoffs between outreach, sustainability and financial leverage while trying to target poor borrowers. Poor infrastructure in many developing countries like Tanzania hinders the achievement of outreach goal; this is due to high transaction cost for both lenders and borrowers. Lenders find it difficult to reach rural areas and borrowers find it difficult to go back to repay the loan, due to high transportation cost.
Woller (2000) studies financial viability of village banking by relating the return on the institution’s loan portfolio and various operational costs. Woller finds three persuasive determinants of financial healthy; portfolio yield (return), the interest spread and number of borrowers. Other institutional factors were less important and uncorrelated with the return on the portfolio. Woller (2001) finds a relationship between return on portfolio and sustainability, but negative relationship between institutional size and sustainability.
Crabb, P (2006), points out that microfinance institutions want to cover operating costs, achieve growth and extend their outreach to the poor. Further more, the economic environment in which they operate such as government intervention can reduce their sustainability.
Here sustainability is considered to exist when these MFI are able to cover costs related to loan provision, able to pay interest plus principle for the capital borrowed and reaching many unbanked people. That MFIs are operating without any dependence from donors, or government subsidies and intended group of borrowers is able to access the loan service at manageable cost. It means borrowers will be able to pay the loan, which will turn out few defaults, and lenders will be consistently offering loan, as MFIs have trust on borrowers.
CHAPTER FOUR
Research Methodology and Data Set
The methodology used for this thesis study comprises of both quantitative and qualitative approach. Primary and secondary sources of data are applied to test the empirical models.
4.1 Data collection
Data to test the hypothesis were gathered from surveyed microfinance institutions. Letters for data request were provided by the researcher to each surveyed MFI. Online data from Mix Market TM (a microfinance information platform), and Micro Banking Bulletin (MBB) were collected. Letters were distributed to all MFIs even those with online data, the aim was to seek for the permission to use their information. Further more, not all data were available online for example specifying the type of lending (such as Group lending).
Table 1 below shows the response from the surveyed MFIs; 82.5% of 40 surveyed institutions responded. Out of the total responded MFIs, 36.4% were incomplete. The incomplete include all those MFIs with available data at less than 3 years and all MFIs with no group lending or group lending is less than 10% in their loan portfolio.
Table 2: Number of Surveyed MFIs and their Response
Source: Survey Data
4.2 Limitations of Data collection
The data collection exercise was one of the tedious and disappointing works, as the researcher was required to visit at least three times plus phone reminder to get data in each MFI.
Some MFIs staff quoted an excuse “we are too busy at this time, we cannot help you”, bad enough it was after visiting them three times with an appointment. Time shortage was a major limiting factor, the researcher had only one month for data collection, as the reason why the majority of MFIs in the sample are from the city of Dar es salaam-Tanzania (see table no.1) in the appendix.
4.3 Research model
To examine the major determinants of operational self-sufficiency and hence sustainability through group lending two hypotheses are formed.
4.3.1 First Hypothesis
To investigate factors associated with operational self-sufficiency the following hypothesis is used:
H1: Operational self- sufficiency is associated with; Gross loan portfolio,
Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers.
H2: Operational self- sufficiency is not associated with; Gross loan portfolio,
Portfolio at risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and Active borrowers
that operational self-sufficiency, the outreach and hence sustainability they have multidimensional relationship with many factors. Therefore the relationship between operational self-sufficiency and the institutional variable used to test the model depend on the way all these factors interact each other. Factors like Gross loan portfolio, Portfolio at Risk, Return on assets, Total borrowers, Women borrowers, Borrowers per staff and the Number of active borrowers are used to link the degree of operational self-efficiency and sustainability. These factors they all indicate the economies of scale in the respective MFI – higher economies of scale increase the MFI’s sustainability36. They show to what extent a particular institution is expanding the loan portfolio, able to control loan at risk, how much is generated from the capital invested and how many disadvantaged people have access to loan.
It is assumed that if the respective institution is able to cover its operational costs with positive return on assets, then the chances of continuing to offer services consistently are high. On the other way round, being able to make positive returns it means borrowers are repaying money borrowed, which guarantees that there is a continuing relationship between the lender and the borrower. Linking operational self-sufficiency and the institutional factors is therefore believed to offer better statistical results to evaluate the sustainability and the depth of outreach.
The use of this econometrics model has previously been hampered by lack of data, for example Christen et al (1995) used data from eleven MFIs, Woller (2000) nine MFIs, Woller and Schreiner (2002) thirteen MFIs. This research paper has improved the data set by increasing the number of MFIs to twenty one. Statistically significant results obtained by the previous researchers compel the reason why the model is a suitable determinant of MFIs sustainability.
The model takes the following form: Υit = α + βXit + εit
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Where Υit is the operational self-sufficiency for microfinance institution i at
time t.
Xit is the vector of institution i control variables at period t. The vector of
institution control variables are Gross Loan Portfolio, Portfolio at Risk>30 days, Return on assets, Total borrowers, Women borrowers, Borrowers per staff, and the number of Active clients.
4.3.2 Second Hypothesis
To test group lending relationship with outreach level by microfinance institutions in Tanzania, the following hypothesis is used.
H3: Group lending is positively associated with outreach level
H4: Group lending is negatively associated with outreach level
The same regression model is used but with different definition of variables.
Υit = α + βXit + εit
Υit is the Institution’s group lending ratio out of the total portfolio loan at time t.
Xit is the vector of outreach variable. Outreach variables are Women
Borrowers, Average loan size, Average group loan, Loan in default and Gross loan portfolio. The second test is designed to asses the relationship between the Group lending and the outreach variables.
collateral is not important more of the poor – especially women and those without property – can borrow37.
This means that the lending approach has greater impact on outreach goal. Crabb and Keller also point that social aspect of the group leads to higher payment rate and further lending to both the prior borrower and to the new borrowers. They further reveal that the choice of the method of lending has influence on the level of risk in a loan portfolio.
4.3.3 Variables Description
Operational self-efficiency: Financial revenue (total/financial expense + loan loss provision expense + operating expense. A total value of 1 indicates full operational self-efficiency, where as a value less than one indicates external reliance e.g. subsidies.
Gross loan portfolio: this variable is comprised with all outstanding clients loan, except loan written off; a higher amount indicates the extent of outreach. It is hypothesized to be positively related with both dependent variables; i.e. Operational self-sufficiency, and Group lending.
Return on assets is the measure of the institution’s ability to sustain its operations based on invested assets – it is a proxy for the yield on the MFI’s portfolio. It is equal to net-after tax operating income divided by average assets for the period. The higher the ratio the better. It is expected to be positively related to operational self-sufficiency.
Portfolio at risk > 30 days ratio: The value of the loan portfolio for which payments are outstanding for more than 30 days, it is divided by the gross value of the loan portfolio. It is a measure of the Institution’s ability to recover loan from borrowers. The smaller the ratio the better –
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greater risks increases cost and decreases the sustainability of the MFI38. It is hypothesized to be negatively related to operational self-sufficiency.
Borrowers per staff member: number of active borrowers divided by the number of personnel. This productivity ratio measures the total number of staff required to produce given level of output as measured by borrowers. A higher ratio implies that fewer staffs are required to produce a given number of borrowers. This ratio is expected to be positively related to operational self-sufficiency.
Active borrowers: Number of individual active clients at a given year that is the borrowers who are still transacting with a respective MFI at a particular year. The expected sign of coefficient of the hypothesized regression is positive related to operational self-sufficiency.
Total Borrowers: It is the total number of clients; they are cumulative list of borrowers. It shows how many borrowers have access to loan in the institution up to that particular year. It is the indicator of outreach. The coefficient of the hypothesized regression is expected to be positive related to operational self-sufficiency.
Women Borrowers: The total number of women borrowers, it is a cumulative list of women borrowers. It shows how the MFI has lent to underprivileged group/unbanked group. It is a proxy of outreach. Expected sign of coefficient is positive.
Group lending/loan: This variable shows the outreach level and level of loan extended under group lending terms. It is measured by taking total group loan divided by total gross loan portfolio. The higher the ratio the better, which means higher outreach level, has been attained.
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Average Group Loan: The variable is measured by taking gross group loan divide by the number of borrowers who borrowed under group loan terms in that particular year. The variable is a proxy of outreach; specifically it indicates which group of people in respect to per capital income access loan. Positive sign is expected for its coefficient, as hypothesized with group lending.
Average Loan size: It is measured by taking the gross portfolio loan divide by the total borrowers in that respective year. It is indicate how the increase in the gross portfolio is related to group lending and hence the outreach. This variable helps to signify the contribution of group lending with respect to gross portfolio loan. Positive sign is expected when the variable is hypothesized with group lending.
CHAPTER FIVE
EMPIRICAL RESULTS AND FINDINGS
The objective of this paper was to examine the determinants of microfinance sustainability in Tanzania, specifically with the group lending approach as it is gaining much emphasis from the Government.
To examine this, two hypotheses based approach were considered to achieve the objective. First hypothesis was intended to examine microfinance variables that arbitrarily cater sustainability of MFIs. With the measure of operational self-efficiency for the MFIs, the sustainability goal is supported. The second hypothesis was developed to illuminate the outreach concept from group lending system.
5.1 First Hypothesis: Operational Self-Sufficiency VS MFIs Control Variables
Table: 3 Descriptive Statistics Table for Operational self-sufficiency test
Variables Mean Median Maximum Minimum Std. Dev. Observation
s Gross Loan Portfolio
(Tshs.Billion)
2.8837 0.4800 20.6600 0.0100 5.4149 63
Portfolio at Risk>30days (ratio) 0.0385 0.0300 0.1347 0.0000 0.0287 61 Return on assets (ratio) 0.0063 0.0134 0.1200 -0.2053 0.0531 63
Total Borrowers 10327 2382 89783 84 18388 63
Women Borrowers 2449 409 37245 0.1340 6174 63
Borrowers per Staff 155 112 674 3.0000 142 63
Active Borrowers 10145 2200 89783 52 18197 63
Sufficiency(ratio)
Table 3 above shows descriptive statistics results for 21 MFIs with a total of 63 observations, except for one variable with 61 observations.
Missing data is the reason for reduced observations, caused by one MFI failure to report the Portfolio at Risk>30days for two years. The mean of the Operational Self –Efficiency is 98.08%, mean of Borrowers per staff is 155 (table 3). This shows how the majority of the MFIs in the sample have achieved an adequate level of sustainability if compared to the measures of performance according to CGAP best practices of an MFI39.
This achievement can best be explained by the fact that interest charged by these MFIs in Tanzania is very high, ranging between 14.8%-16.4%40 per annum. An average of 3.85% (table 3) Portfolio at Risk is lower than CGAP maximum level of 5%, it may support why the operational self-efficiency is better. On other way round this may be perceived as the hesitation to bear much risk for most MFIs by lending less. It is justified by looking at average Gross loan portfolio of Tshs 2.8827 billion to an average of 10,327 borrowers (see table 3). In average each borrower secured Tshs 279,239 (2.8827 billion divide by 10,327) as loan less than Tanzanian per capita income of Tshs 360,00041 in 2005.
Much work is needed to reduce the chronic poverty (consumers of less than US$1=Tshs 1,150 per day) in Tanzania, standing at 35% of the entire population by 200142. Subsequently, the caveat is in order to the fact that the cut-off point to sample data collected for the 3 years is likely to be after long period of well establishment for the most MFIs. Alternatively MFIs like SACCOS probably they started keeping formal data for external use after achieving positive performance.
Morduch (1999), reveal findings from BancoSol in Bolivia which has achieved financial self-sufficiency and encompassed with main clients being the richest
39
See literature review-Prior studies done inside Tanzania
of the poor. Operational self-sufficiency for this Institution was mainly contributed by reported profit emanating from direct grants, subsidies via soft loan and delayed loan loss provisions. Accordingly only 29% of the total borrowers in BancoSol were below the poverty line.
Table 4: Regression Results
Dependent Variable: Operational self-sufficiency
Independent Variables Coefficient Std. Error t-statistic p-value
Intercept 0.7429 0.1013 7.3338 0.000 Gross portfolio -0.0059 0.0154 -0.3812 0.7046 Portfolio at Risk>30days 2.3792 1.6553 1.4365 0.1567 Return on assets 1.3916 0.7912 1.7588 0.0844 Total borrowers 0.0001 6.6100 1.7718 0.0822 Women borrowers 0.0200 1.4100 1.4325 0.1579
Borrowers per staff 0.0002 0.0005 0.3865 0.7007
Total Active Borrowers -0.0001 6.5800 -0.7074 0.0936
R-squared 0.4654 Adjusted R-squared 0.3948 Sample 63 F-value 6.5916 Prob.(F-value) 0.0000 Durbin-Watson stat 2.0710
Table 4 shows regression results for the independent variables against operational efficiency as dependent variable. The null hypothesis was whether operational self-efficiency is associated with the microfinance variables (independent variables) as listed in the table.
At 5% significance level the p-values and t-statistic values on the table above are insignificant. F-test is not far from zero, the level of 47% R-squared and 40% for adjusted R-squared is acceptable to signify how well the model fits to explain the variation of dependent variable, backing the small sample of data gathered. Durbin-Watson statistic is 2.0710; this assures us that we can not
reject the null hypothesis, because there is no evidence of autocorrelation43.
To remain firm with the statistical results above, the null hypothesis cannot be rejected. Without enough inferences to reject the null hypothesis, then average operational self-efficiency of 98.8% noted in table 3, appropriately holds the prosperity of MFIs sustainability in Tanzania.
Table: 5
Correlation Coefficients for Operational self-sufficiency test
Variables A B G O P R T W A 1 B 0.4199 1 G 0.7659 0.3691 1 O 0.2812 0.5191 0.3819 1 P -0.1977 -0.2796 -0.0172 0.0090 1 R 0.0436 0.0028 0.1173 0.2017 -0.0779 1 T 0.9985 0.4536 0.7742 0.3083 -0.2128 0.0404 1 W 0.2176 0.7050 0.5020 0.6189 -0.0274 0.1346 0.2562 1 Key
A=Active borrowers R=Return on Assets B=Borrowers per staff T=Total borrowers G=Gross Portfolio W=Women borrowers
O=Operational Self-Sufficiency P=Portfolio at Risk >30days
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Table 5 reports the correlation coefficients between the independent variables together with operational self-efficiency variable. The coefficients independent variables are positively related with operational self-sufficiency. Gross portfolio loan, Women borrowers, Total borrowers and Borrowers per staff coefficients are the highest one. It indicates how operational self-sufficiency and hence sustainability relies on reaching more people and increasing the gross loan amount.
Similar study results were obtained by Crabb, P (2006) when examining the relationship between the success of microfinance institutions and the degree of economic freedom for the country. Return on assets and the number of active borrowers have bit low but positively related coefficients to operational self-sufficiency. However, having such absolute values it indicates the necessity of these variables in determining the sustainability of Microfinance Institutions.
5.2Second Hypothesis: Group Lending to Outreach level
This hypothesis intended to test the relationship between Group lending and Outreach level. Consequently form the evidence whether the group lending approach emphasized by the Government of Tanzania is tapping the unbanked market. Confirming the success of group lending to reach the unbanked market may lend a hand to believe that Microfinance goals are in line with poverty reduction strategy.
Table: 6
Descriptive Statistics for Group lending test
Mean Median Maximum Minimum Std. Dev. Observation s
Gross Loan
Portfolio(Tshs.Billion) 2.8837 0.4800
20.6600 0.0100 5.4149 63
Women Borrowers 2449 409 37245 0.1340 6174 63
Average Loan Size (Tshs.Mill) 0.3983 0.2400 1.3300 0.0900 151.1375 63
Average Group Loan
(Tshs.Mill)
0.3897 0.2500 1.2000 0.0500 2.6884 63
Group Loan ratio 0.7229 0.8200 1.0000 0.0253 0.2843 63 Loan in Default 0.0166 0.0100 0.1268 -0.0009 0.0243 63
Table 6, shows descriptive statistics for Group loan ratio and the selected outreach control variables. Group loan ratio average of 72% signifies acceptable level that has been achieved by MFIs approach of reaching many low income earners in their loan portfolio. Because group lending is believed to engage several borrowers and with that level of achievement means that sustainability is very likely to be attained.
Consequently, Loan in default ratio is 2% on average, indicating high loan repayment rate which support the preceding statement. Average loan size and Average group loan size of Tshs 398,300 and Tshs.389, 970 (see table 6) respectively is a bit close to per capital income of Tshs 360,000. These are enormous results meaning that the majority of borrowers under this lending approach low income earners taking such small loans.
