Factors Affecting the Growth of Microfinance Institutions in Tanzania

factors Affecting The Growth Of Microfinance Institutions In Tanzania

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The strain of poverty has always been a crucial factor hampering the economic growth of Tanzania. And since 1990, microfinance has been at the forefront of helping the poor and dragging down poverty with sustainable economic activities. However, there are several factors affecting the growth of Microfinance Institutions in Tanzania, which is similar to many African nations. 

Given the current economic condition, Tanzania is one of the most potential microfinance markets in the African peninsula. On the other hand, the untapped market size increases the opportunities for MFIs even further.

But there are not enough MFIs to reach that market. Or maybe some drawbacks are resisting those MFIs from success and higher profit.

Despite a big market size, Tanzanian MFIs only provide loans to fewer people and SMEs. But don’t you think they can do better than that? Of course, they could do better.

Whatever the number is, have you ever thought, what are the reasons that resist the growth of microfinance institutions in Tanzanian? Well, that is something we intend to discuss in this blog.

Let’s not waste any time and move forward with the main topics.

Microfinance group in tanzania
Image: BRAC

7 Factors Affecting the Growth of MFIs in Tanzania

There are countless factors affecting the growth of microfinance institutions in Tanzania. But we are going to discuss seven of the most crucial points. Moreover, the points we will discuss are common among MFIs in many other African nations.

So, let’s get to the point!

1. Cost Of Outreach

One of the most important factors affecting the growth of microfinance institutions in Tanzania is the cost of outreach. It is not only this African nation, but many other nations are facing a similar issue.

But the question is, what is outreach cost anyway?

Well, outreach is the expense you spend to reach your customers. In other words, it is the expense your company spends for marketing purposes.

Now another question is, why the outreach cost is high in Tanzania?

Tanzania is a developing nation with the most unbanked population. Besides, most people taking microloans are from rural areas. On the other hand, the loan amount is very small. 

When you see all these facts, what comes to your mind? It tells me that serving sparsely populated areas with small loans and door-to-door operations can be very dangerously unprofitable.

It is what actually happens with most microfinance in the country. And this is the reason most MFIs fail to operate.  


2. Lack Of Scalability 

Scalability is an important factor that helps MFIs sustain and become successful in any market. But most small MFIs struggle to scale according to customer needs and make a profit at the same time.

Tanzania is a place where only a small number of MFIs have the majority market share. On the other hand, small MFIs are struggling. Why is that? Well, it is because those big MFIs do not have scalability issues.

Therefore, the lack of scalability is one of the most important factors affecting the growth of Microfinance institutes in Tanzania. If you are one of the small MFIs in the country, make sure you get the service delivery right.

3. Geographic Factors

Without any doubt, Tanzania is a vast place. But it doesn’t mean a vast place will ensure vast profit. Isn’t that right?

Well, yes. Similarly, when it comes to Tanzania, most people are living scattered. Unlike many other Asian nations, they live in small communities and live miles apart from one another. 

It is a disadvantage for small microfinance companies to operate remotely, especially in door-to-door operations.

You might say how?

Well, physically running MFI operation in distant communities increases cost and risk of fraud. Besides, due to the size of the borrowers in a community, there is no good growth and expansion.

Diversity in Microfinance
Image: Y9 Bank

4. Diverse Business Models 

Bringing diversity to the microfinance business is another important aspect of growth. But in Tanzania, most small MFIs lack a diverse model affecting the growth of microfinance institutions.

Ask why?

Well, a diverse model needs proper planning. They also need to test out some options in the market before they launch the product.

On the other hand, a diverse model requires a significant amount of funding. And small MFIs do not have that.

5. High Transaction Cost

High transaction cost is the most challenging factor affecting the growth of microfinance institutions in Tanzania. Though we have already discussed why, but let us go through this again.

A microfinance institute provides loans to SMEs or individuals in a very small volume, and when it comes to repayments, that even become very tiny.

But it doesn’t matter how small or big the amount is; the transaction cost is fixed. From disbursement to repayment collection, an MFI needs to bear that cost.

Moreover, when the geographical factor of Tanzania is added to the transaction cost, it becomes very difficult for MFIs to make a profit. 

6. Security Challenges 

In one of our previous blogs, we discussed the major challenges of MFI operation. There we also discussed the security challenges in general. However, regarding Tanzania, the security issue even becomes more concerning.

But why?

In most cases, MFIs serve customers with very limited official identification. Besides, they don’t take any security like the formal banks. So, all these make microfinance operations more vulnerable in Tanzania. 

On the other hand, the lack of awareness raises many other security issues throughout the customer journey.

Microfinance software

7. Lack of Technology Solutions

Last but not least, the lack of technology solutions is another factor affecting the growth of microfinance institutions in Tanzania. For example, with a core banking solution specifically built for MFIs, you could optimize your microfinance in many ways. It could help you ease the challenges mentioned above.

You might be asking yourself a question, how?

Well, a core banking solution automates your entire MFI operation. It can help you reduce the outreach, transaction and operational cost with branchless and mobile banking. Besides, a good CBS can also help you evaluate customers, reduce geographical distance, and diversify your business model.

In simple words, if you automate your business, you fully scale your MFI and increase your profit.

Hope you understand what are the factors affecting the growth of microfinance institutions in Tanzania.   

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