A Dissertation Submitted in Partial Fulfillment of Requirements for the Degree of Master

THE CONTRIBUTION OF MICROFINANCE INSTITUTIONS ON POVERTY REDUCTION AMONG WOMEN IN DAR ES SALAAM: A CASE OF ILALA MUNICIPALITY

PETER NDEGE

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION (FINANCE) OF THE OPEN UNIVERSITY OF TANZANIA

2014

CERTIFICATION

The undersigned certifies that he has read and hereby recommend for acceptance by the Open University of Tanzania this dissertation titled; The Contribution of Microfinance Institutions on Poverty Reduction Among Women in Dar es Salaam in partial fulfillment of the requirements for the degree of Master of Business Administration (Finance) of the Open University of Tanzania.

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Dr. Severine Kessy

(Supervisor)

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Date

COPYRIGHT

This dissertation is a copyright material protected under the Berne Convention, the copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property. It may not be reproduced by any means, in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or disclosure with an acknowledgement, without written permission of the Directorate of Postgraduate Studies, on behalf of both the author and the Open University of Tanzania.

DECLARATION

I, Peter Ndege, hereby declare that, this dissertation is my own work. It has not been and is not currently being submitted for a degree or any other award in any other University.

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Signature

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DEDICATION

This dissertation is dedicated to my parents Ms Regina Antony and Mr Deus Ndege, my late uncle Joshua Ndege, friends Flora Mrema and Judith Mlwale and my neighbour Faustina Nyamwala who have always encouraged and supported me.

ABSTRACT

MFI sector plays an important role in poverty reduction in the economy especially of the less developed countries. This role is like the heart to the human body to pump the financial resources that are necessary for the economic growth and well being of a nation and its people. This research focused on the contribution of the microfinance sector on poverty reduction efforts among women in Dar es Salaam. Poverty reduction was looked at four major variables namely income, employment level, saving and assets ownership by female entrepreneurs.

In order to analyze the contribution of the microfinance institutions on the above mentioned parameters, primary data were collected through questionnaire from 100 respondents. The research found that, there was a significant decrease in poverty among women as recognized and proved by an increase in income, employment level, saving and assets ownership to them as a result of loans from the MFIs.

Despite of these achievements, it is recommended that the microfinance sector should invest in advertising its services so that more poor people are recruited by them. Again there is a need for them to expand their services to rural areas where a rate of poverty is higher rather than concentrating in urban area

AKNOWLEDGEMENT

Various people have helped me in different ways through various stages of this work. It is impossible to mention all of them by names, but it would show a lack of gratitude not to mention those whose help I could not have done without.

I would like first to express my sincere heartfelt thanks to my supervisor, Dr Severine Kessy of the University of Dar es Salaam Business School for his critical and constructive suggestions that have helped to shape this dissertation.

Throughout the preparation of this study, I have been enjoying the privilege of working with my fellow students James, Mwela, Neema, Doreen, Bahati, Msangi, Malick and others. I thank them for their tireless and valuable encouragement that helped to make this work complete.

This dissertation is a creation from human capital. It is absolutely impossible to have a hundred percent precision. As such, I must however admit that any mistake that might be found in this work is solely my own responsibility.

TABLE OF CONTENTS

CERTIFICATION ii

DECLARATION iv

DEDICATION v

ABSTRACT vi

AKNOWLEDGEMENT vii

TABLE OF CONTENTS viii

LIST OF TABLES xii

LIST OF FIGURE xiii

ABBREVIATIONS AND ACRONYMS xiv

CHAPTER ONE 1

1.0 INTRODUCTION AND BACKGROUND INFORMATION 1

1.1 Introduction 1

1.2 Background Information 1

1.3 Statement of the Research Problem 5

1.4 Research Objectives 7

1.4.1 General Objective 7

1.4.2 Specific Objectives 7

1.5 Research Questions 7

1.6 Significance of the Study 8

1.7 Limitations of the Study 8

CHAPTER TWO 10

2.0 LITERATURE REVIEW 10

2.1 Introduction 10

2.2 Conceptual Definitions 10

2.2.1 Microfinance 10

2.2.2 Micro finance Institutions 11

2.2.3 Micro and Small Enterprises 11

2.2.4 Poverty and Poverty Alleviation 12

2.3 The Relationship between MFIs and Poverty Reduction 13

2.4 Theoretical Review 15

2.4.1 Transaction Cost Theory 15

2.4.2 The Theory of Blocked Minorities 16

2.4.3 The Theory of Information Asymmetry 16

2.4.4 Gender Differences and Poverty Reduction through SMEs Growth Theories 17

2.4.5 The Poverty Alleviation Paradigm 19

2.5 Empirical Literature Review 20

2.5.1 Studies Conducted Outside Of Tanzania 20

2.5.2 Studies conducted in Tanzania 24

2.6.2 Conceptual Framework 29

CHAPTER THREE 30

3.0 RESEARCH METHODOLOGY 30

3.1 Introduction 30

3.2 Research Design 30

3.3 Population and Sampling Procedures 31

3.4 Data Collection and Instruments 32

3.5 Data Validity and Reliability Issues. 32

3.6 Data Analysis Plan 33

CHAPTER FOUR 35

4.0 FINDINGS AND ANALYSIS OF DATA 35

4.1 Introduction 35

4.2 Profile of Respondents 35

4.3 Borrowers Loan Taking Capacity 36

4.4 Understanding of the Borrowing Procedures and Conditions by Clients 38

4.5 Utilization of the BELITA Loans by Clients 38

4.6 MFIs’ Contribution to Poverty Reduction 39

4.6.1 Clients Capacity to Save 39

4.6.2 Contribution of MFIs Loans on Households Income 39

4.6.3 Contribution of BELITA on Employment Creation to Women 40

4.6.4 Contribution of BELITA on Women Assets Ownership 41

4.7 Loan Delivery and Repayment Process. 41

4.8 Findings from BELITA Staffs 42

4.8.1 Approaches and conditions for Provision of Loans 42

4.9 Discussion of Major Findings in Relation to Existing Literature 44

CHAPTER FIVE 46

5.0 CONCLUSIONS AND RECOMMENDATIONS 46

5.1 Introduction 46

5.2 Conclusion 46

5.3 Recommendations 47

5.4 Areas for Further Studies 47

REFERENCES 49

APPENDICES 57

LIST OF TABLES

Table 4.1: Profile of the Respondents (staffs and clients) 36

Table 4.2: Borrowing Capacity by Clients 37

Table 4.3: Understanding of Loan Procedure and Conditions. 38

Table 4.4: Usage of Loans 39

Table 4.5: Contribution of BELITA to Customer’s Savings 39

Table 4.6: Contribution of BELITA on Income to Women 40

Table 4.7: Contribution of BELITA on Employment Creation to Women 40

Table 4.7: Contribution of BELITA on Assets Ownership 41

Table 4.8: Difficulties with Loans Delivery and Repayment Processes 41

Table 4.9: Appropriateness of Collaterals 43

LIST OF FIGURE

Figure 2.1: Conceptual Framework 29

ABBREVIATIONS AND ACRONYMS

BDS - Business Development Services

BELITA - Better Life for Tanzania Trust Fund

C.B.O - Community Based Organization

CBN - Central Bank of Nigeria

DSM - Dar es Salaam

MFI’s - Microfinance Institutions

MSMES - Micro, Small and Medium Enterprises

NMFP - National Microfinance Policy

SIDO - Small Industries Development Organisation

TGT - Tanzania Gatsby Trust

UNCDF - United Nations Capital Development Fund

URT - United Republic of Tanzania

WMSEs - Women, Micro, Small and Medium Enterprise

CHAPTER ONE

1.0 INTRODUCTION AND BACKGROUND INFORMATION

1.1 Introduction

The chapter describes the background history, statement of the research problem, general objective and specific objective. It further presents research questions, significance of the study and limitations.

1.2 Background Information

Across the African continent almost every country is affected by the problem of poverty and it has been a talk by the developed countries on how to help the continent to have solution on it. Poverty is the condition in which low-income people cannot meet the basic needs of life. This is associated with many fold difficulties like decrease in health facilities, high illiteracy rate, decrease in quality of life, immoral behaviours and the likes. These difficulties motivate human beings to commit heinous crimes and at times suicide (Zaman, 2000).

In 1970’s the biggest developments in microfinance services occurred (Weiss et al, 2004; Lindsay, 2010). It was the invention of Grameen Bank in Bangladesh which started as an action-based research project by professor Muhamad Yunus who conducted an experiment on credit program (Lindsay 2010; Sengupta et al., 2008). The objective was to eliminate poverty through small enterprises development among the low income earners. While describing his thoughts professor Yunus wrote that “I felt that the greatest challenge of the economists now lay in the growing problem of poverty. What could we do about the 1.2 billion people around the world living in less than a dollar a day or the 2.8 billion populations of people living in less than 2 dollars a day (Stigltz, 2002).

Microfinance can be a critical element on poverty reduction strategy and in the early 2000’s over 7000 microfinance institutions (MFI’s) existed all over the world, serving more than 25 million of the world’s poor, majority of them being women (Faseke, 2001). A study by the Central Bank of Nigeria (CBN) once identified 160 registered MFIs in 2001 and by 2008 the number had increased to over 700 (Obunya, 2009). A simple interpretation of this exponential growth trajectory is that “the more the MFIs, the more access to credit” for the poor people especially women who should subsequently be empowered and insulated against poverty and social exclusion (Halkias et al., 2005).

Poor people participate in microfinance programs with expectations that borrowing will increase their income and sustain self employment that enhances their good living standard. According to Rutherford (2000), access to savings and credit facilities is very important as it enables the poor to own and accumulate assets and smooth their consumption expenditures. Also the United Nations Capital Development Fund (UNCDF) 2006 suggested that, one of the principles for poverty reduction efforts to have long lasting impact is by developing the financial system which includes microfinance so that the poor people and low income earners can have access to sustainable financial services. This means that, the MFIs involve the provision of credit and saving as well as other financial services to the low income people and poor households, to create or expand their economic activities as a way towards their better life.

Again for example, Rubambey (2001) also argues that, improved access and efficient provision of savings, credit and insurance facilities in particular can enable the poor to smooth their consumption, manage risk better, build assets, gradually develop microenterprises to enhance their income earning capacity and enjoy improved quality of life. This sets the notion that the microfinance has a significant deal on poverty reduction.

Indeed, it is recognized that women are affected more by poverty than men (Government of Kenya, 1965).Microfinance as one of the range of innovative financial arrangements was designed to attract the poor in particular the women as either borrowers or savers to combat the capital access problem (Weiss et al., 2004). They also serve as the micro-credit window to women than men as the women have traditionally been disenfranchised by the formal system due largely to the undue disadvantages brought on them by existing socio-cultural and economic institutions (Oke et al., 2004). MFIs tend to support mainly informal activities that often have low return and low market demand (Shahidul, 2005). A central concern in Tanzania is the need to eradicate poverty through empowering the people for self development and informal sector is an important part of the strategies (Nkya, 2007).

Kilindo et al. (2006) argue that, some decades after independence following a socialist period and various attempts at more market oriented reforms, Tanzania remains a country still struggling to find an effective development path. The condition for business are also not such much viable and poverty is still a common phenomenon in Tanzania, both in rural and urban areas. In order to cope with poverty reduction program through MFIs, different countries have adopted different policies. In Tanzania, the introduction of microfinance services had similar reasons as those of other countries that, poor people faced hardship in accessing loans from commercial banks (URT, 1991). For example the government of Tanzania introduced the national microfinance policy (URT 2000). The policy was in favor of the low income earners of the society whereby contributing to economic growth as well as poverty reduction.

The policy was also formulated to improve microfinance system in Tanzania that serves the low income segment of the society. After the financial sector reform, the policy embodied the enactment of the cooperative society Act 1991 which provided the basis for the development of saving and credit cooperatives that expected to contribute to a more effective regulation framework for lending to Micro, Small and Medium Enterprises (MSMEs). All of these efforts intended to improve the availability of microcredit to low income earners segment of the society in Tanzania.

Despite the recognition of the dynamic role of the MFIs on the SMEs, few business owners and the poor of rural areas in Tanzania have access to, and benefit from the MFIs and their activities remain centered around urban areas. Their operational performance reveals low loans repayment rates and most of them are donor driven and government funding dependants with limited coverage (Chijoriga, 2000). It was thus the focus of this study to examine the contribution of the MFIs on poverty reduction among women in Dar-es-Salaam.

1.3 Statement of the Research Problem

The financial sector plays a positive role on economic development and poverty reduction among people as the sector opens a room for people to engage in entrepreneurial activities which at a time enhances assets ownership, savings, increases household expenditures and generally improve peoples’ living standard (Rubambey, 2001). However, the essence of microfinance sector development and poverty alleviation to women has not been examined extensively and in fact, the majority of the previous studies on this subject have concentrated in general perspective, mainly on Asia and Latin America avoiding the poorest Sub-Saharan Africa countries (Odhiambo,2009).

It is also unclear from empirical point whether financial development, which results from financial sector reforms, really helps female gender economic empowerment in terms of poverty reduction in developing countries (Odhiambo, 2009). Further, little is known about the actual contribution of business run by women for their poverty reduction, the concentration of Women Small and Medium Enterprises (WSMEs), their capacity, networking and collaboration, the involvement of communities in identifying and managing poverty alleviation programs (Government of Kenya, 1965).