Performance of semi-formal microfinance institutions in Tanzania: A case of selected SACCOs and BRAC Tanzania in Arusha region

Tanzania is classified as a low income country, with a high proportion of its population below the poverty line. As in most developing countries, access to financial services, especially those provided by formal microfinance institutions (MFIs), is very limited. This is mainly due to the lack of collateral among the low-income borrowers. On the other hand, semi-formal MFIs can be considered as a better option to provide services to the low-income borrowers, the majority of whom are excluded from the formal financial sector. Based on a field survey conducted in the Arusha region from January to March 2015, this paper analyzes the performance of semi-formal MFIs in Tanzania, using the selected savings and credit cooperatives (SACCOs) and BRAC Tanzania as the representative semi-formal MFIs. It examines the performance of these institutions by focusing on their outreach, as well as efficiency in terms of operating cost. The study found notable differences between the selected SACCOs and BRAC Tanzania in various aspects. First, the selected SACCOs offer both credit and saving facilities, while BRAC Tanzania offers only credit facility; this is because NGO MFIs in Tanzania are not allowed to accept savings. Second, the selected SACCOs use the individual lending method, while BRAC Tanzania uses the group lending method with joint liability. Third, BRAC Tanzania offers smaller size of loans than the selected SACCOs. Fourth, interest rates charged by BRAC Tanzania are considerably higher than those charged by the selected SACCOs. Regarding financial performance, the selected SACCOs and BRAC Tanzania have been successful in increasing outreach through credit expansion. SACCOs offer saving facilities, whereas BRAC Tanzania is barred from doing so by regulations. The study did not find a clear trend in terms of efficiency during the period analyzed. To confirm this, a regression analysis was conducted. The results show that there was no efficiency gain, suggesting that selected semi-formal microfinance institutions in Tanzania should adopt innovative methods for reducing the operating cost.