Literature Review on Microenterprise

A List of Acronyms:

1. SMEs- Small and Micro Enterprises
2. GDP – Gross Domestic Produce
3. PTF - Presidential Trust Fund
4. CED- Community Economic Development
5. MFI- Micro Finance Institutions
6. ICT- Information Communication Technology
7. NBAA – National Board of Accountants and Auditors.
8. ICT – Information Communication Technology
9. SWEs – Small Water Enterprises
10. REPOA – Research on Poverty Alleviation
11. MDG’s- Millenium Development Goals
12. SIDO – Small scale Development Organisations
13. VETA- Vocational Education Training Association
14. NMB- National Microfinance Bank

Table of Contents

1. Introduction--------------------------------------------Page 1

2. Theoretical Literature Review---------------------- Page 3

3. Empirical Review------------------------------------ Page 4

4. The Review of Policies ------------------------------ Page 12

5. Conclusion ---------------------------------------------Page 13

6. Annexes ------------------------------------------------Page 14

1.0 Introduction

The aim of this work is to collect and review some literature on micro enterprise development in Tanzania. There will be relevant conceptual framework, followed by the general background of SMEs in Tanzania before looking at the empirical literature review where some examples of micro enterprise endeavors will be analysed. This will be followed by a review of policies that are relevant to this subject to see how they relate to the reality of what is happening in Tanzania today in this field. The last part will be a conclusion whereby I will give my personal perspective on what has been discussed in relationship to the community economic development. For the community is the core component of development work and we look at a country’s wellbeing through the community’s eye.

According to Maleko,G.C (2005) the term micro enterprise is used to mean very small business that produces goods or services for cash income. Different countries use various measures of size depending on their level of development. The commonly used yardsticks are total number of employees, total investment and sales turnover. SME’s all over the world are known to play a major role in socio economic development. Successful small businesses are the primary engines of economic development income growth and poverty reduction in much of the developing work.

These businesses can also build foundations for stable communities, civil society and gender equality. However, poor infrastructure, weak public services, inadequate mechanisms for dispute resolution, and lack of access to markets and formal financing remain major impediments to small business growth.

This review is a collection of various researches conducted in Tanzania regarding micro enterprises, some achievements, challenges and possible institutional and policy support, all of which are relevant to Community Economic Development .

2.0 Theoretical Literature Review

In the context of Tanzania, it is reported that micro enterprises refer to those endeavors engaging up to 4 people usually family members or those employing capital amounting to 4 million Tanzanian shillings. The United Republic of Tanzania SME’s Policy stipulates that SME’s encompass non- farm economic activities like manufacturing, mining, commerce and services. While recognizing that there sis no universally accepted definition of SME’s what happens is that different countries use different measures of size depending on their level of development. The importance of micro enterprise in Tanzania can’t be undermined since an estimation of 1/3 of GDP id from the SME sector whereas the fact that it is labour intensive there is an opportunity of job creation. It is also more effective in the utilization of local resources and to establish linkages with large industries if well coordinated. There are more opportunities for the SME sector based on the ongoing reforms in Tanzania which are directed towards private sector development. Moreover, there are schemes to strengthen the SME services through SIDO, VETA, NMB and other industrial supporting organizations.

Adelante Foundation ( 2000 ) shares the common characteristics of SME’s as small scale employment, hard work, minimal capital input and locally available market.. The Business License ACT no. 25 of 1972 requires all enterprises to register in the councils where they are located (Fjeldstolat etal 2006 p.4) Businesses with a turnover above a specific threshold have to register for Value Added –Tax (VAT) at the Tanzania Revenue Authority. However many businesses do not register their activities.

3.0 The Empirical Literature Review

In Tanzania micro and small enterprices contribute more than 30% of GDP (Wangwe and Semboja 1997: Toroka and Wenga 1997) most enterprises are located in towns and cities (Bagachwa 1990) Estimates of labour force 38-56% in urban areas 10 – 15% in rural (Bendera 1997,Kessy and Urio 2004). In Tanzania the SMEs is the largest and fast growing part of the private sector contributing a lot to the economy. It is estimated to employ more than 50% of the labour force including the minority, women, the educated and providing needed products and services.

3.1 The SME Audit in Tanzania: In the African Journal of Finance and Management, Vol.8.No.2 (2000)

Kitindi E writes on “The Small and Micrco Enterprise Audit in Tanzania: Is it worth

the effort ? Evidence from Exploratory study”.

The Objective was “To obtain an understanding of the nature of the problems encountered by SMEs auditors in Tanzania, specifically to determine the common characteristics of the SMEs audit problems in Tanzania, to determine the frequency of occurrence of the small audit problems, and to test whether the problems have a significant impact on the audit work”. His sample included, 91 Authorised Audit firms 50 Individual Authorised Auditors all registered with the NBAA , 48 firms selected based on their location and accessibility and 10 firms not physically accessed. Measures used included Self reported structured questionnaires administered and followed up. 4% of 10 mailed questionnaire responsive 29 questionnaires nearly 50% responded. The secondary data was extracted from literature. Quantification and Analysis of data was done by descriptive statistics and by Frequency of occurrence of problems

The main findings indicated that more than 80% of respondents believed their small audit clients had a concentration of ownership or operational control in one or a few individuals leading to owner dominated management. More than 70% thought there was limited segregation of functions within the accounting system in the typical SME. 69% said management personnel or employees had little accounting knowledge. 65% expressed lack of proper internal auditing controls in SMEs , informal record keeping system and inadequate documentation of transactions and several others. Similar findings were suggested by IFAC (1998).

This research is relevant because SMEs contribute a lot to Tanzania economy and it justifies the importance of reviewing auditing standards that are suitable and supportive for SMEs and also capacity building needs for the small entrepreneurs on the essence of editing their businesses. Also viable community economic development entails adherence to proper financial management and accounting processes.

3.2 Business constraints of SME’s: Another research was conducted by Kolstad I, and others (2006) on “Bribes, taxes and regulations: Business constraints for micro enterprises in Tanzania”, CM1 The main objective was “To examine and identify the main constraints on the operations of micro-enterprises in Tanzania.” The sample size was 160 firms, 29 being VAT registered, 134 firms in Dar and 26 in Moshi Urban council by age. 21 Issues/variables were rated representing a categories of constraints, 66% in Trade sector, Services – 17% (27 enterprises), Hotels and Restaurants 8% manufacturing 7% other industries 3%.

Measures used were based on rating the importance of problems relating to property rights, access to finance, taxation corruption, infrastructure, institutional quality and other possible constraints.

The findings included, 6 constraints reported severe by 50% of all firms: Competition 79.4%, cost of raw materials 69.4% , regulations (licenses and permits) 67.5% high taxes 66.9 , insufficient demand 61.99% corruption 53.1. Less important constraints from the predetermined measures: property rights 11% access to finance 21% Female owners more restricted by regulations than male owners. Infrastructure (utilities) 40%. Service sector more concerned with taxes corruption infrastructure import/export regulations than trade sector. Corruption important constraint across enterprises especially in the service sector. Competition severe across all sectors. Start-up enterprises more constrained by access to capital and licenses and registration than mature ones who suffer access to inputs and possibility of election bias transport. Also firms that interact more with public officials for regulations and infrastructure were more likely to pay bribes.

These study findings are relevant towards the need to strategize consciously around reported constraints by the government designing user friendly regulations and conditions to address high taxes, regulations and corruption to improve the wellbeing of the SME operators who are already underdeveloped economically as community members. Also capacity building is necessary to minimize competition, cost of raw materials and insufficient demand or market.

3.3 Micro enterprise and poverty reduction: Another interesting research was conducted by Kessy, S.S and Urio F(2004) REPOA Publications, on “The contribution of microfinance institutions to poverty Reduction in Tanzania .”

the objective being “To establish the extent to which microfinance institutions had contributed to poverty reduction in the country and whether they were meeting their own policy objectives, specifically, whether micro-loan beneficiaries had improved their performances in terms of growth, employment creation and income generation. A Sample of 352 loan clients was surveyed.

The main findings were that 81% of surveyed micro and small enterprises realized profits after accessing loans. 52% found the loan amount and time for repayment inadequate.

High interest rates charged (up to 48%) was exorbitant to low income earners – the main target group. Also there was insufficient training in business and lack of conducive conditions for loan management. Moreover, most enterprises were owned by family ties. >50% of borrowers were youth and had positive outcomes.

This study is very relevant because Micro enterprise is an important part of solution to poverty reduction in the community. Moreover, micro enterprise will flourish with increased access to capital. Equally crucial, difficult conditions of accessing loans for micro enterprises may retard community economic development. As observed in the study by Kolstad, etal ibid. capacity building to MSEs operators in small business management and institutional support like reviewing the interest rates and conditions for loan refunds in a participatory manner which includes the loan beneficiaries..

3.4. The impact of credit on attitudes towards risks: Next is the article by Selejio, O and Mduma(2005) J.K. on “The Impact of Credit on Attitudes towards Risks among Micro enterprise Operations: A case of Morogoro in Tanzania .University of Dar es salaam.

Their sample was a Multistage sampling targeting the 2 major providers of credits to SMEs like PTF and PRIDE Tanzania and 2 groups of borrowers and non borrowers control group whose initial conditions before credit were almost similar. Sampling was limited to food vending sub sector which is the largest and easily accessible. A random sample of 132 respondents was selected.

The Study design included a Questionnaire which obtained both qualitative and quantitative information on household, micro enterprise and credit. The Measures used were that the data collected included variables on SMEs costs, sales other expenditures, entrepreneurs participation in farm activities and management, markets (type of customers ) and opinions of SMEs operators on MFI services.

The Main findings indicated that many SMEs operators in rural areas also engage in farming activities. SMEs in urban areas tend to work on full time and 91.7% SMEs depended on them for household income. Also, the sustainability of SMEs increased with access to credit and to fill the gap of unemployment. The repayment rate was = 96%. However, the majority would prefer a sure but low minimum salaried job to this risky income from operating an SMEs as was proved by the econometric results of risk parameters of the SMES operators. Also SMEs risks appeared to be higher among borrowers than non borrowers.

Again, this study as relevant and especially at policy level since there was a clear skills gap among credit clients in business and entrepreneurial ship, pros and cons of borrowing especially for the SMEs operators in rural areas who are more risk inclined than those in urban areas. The lending institutions are to be conscious of this and aim at meeting these varying needs in order to realize community economic development.

3.5. The impact of electricity on enterprise: The next research was by Maleko,(2005) G.C, The impact of Electricity on Enterprise. University of Twente, Enshade, The Netherlands.

The Objective was “To identify the impact of electricity services on Micro enterprises

Establishment, expansion, growth, survival, decline and closure in rural areas in Tanzania.” Sampling was by observation made of different types of small enterprises that existed in the study area in Kilimanjaro that were accessing grid electricity for production or for providing services. Semi structured interviews were used to assess accessibility of electricity, use of electricity and expected changes within MSE. 43 units of observation were selected using criteria of nature of production, processes, technology used, type of services provided, nature of ownership, and purpose of electricity, location, number of employees and year of establishment.

A Triangulation approach was used through individual and group interviews.

Both quantitative and qualitative data was collected. Reliability and Validity of data was included. PRA Tool used to collect quick information from community on use of electricity before and after. The findings were that the situation before uptake of electricity a few MSEs were using diesel, kerosene or candles to provide service. Number of MSEs in electrified area was higher in un electrified area in businesses, households, service centres. Other benefits, increased earnings. Limiting factors were lack of market, capital and high connection fees. There was a small decline and closure of some MSEs due to high competition and market saturation.

Conclusion

Increased access to grid electricity services leads to changes like growth and expansion of MSEs, improved livelihood and modern physical assets and services.

3.6. The impact of training on women entrepreneurs: Another study was on “The Impact of Training on Women’s Micro Enterprise Development” by Facilitating Women’s entrepreneurship: Lessons from The ILO research and support programmes (2000) Finnegan G Senior Specialist Women’s Entrepreneurship Development IFP/SEED, ILO Geneva.

The Objective was “ A discussion panel organized to consider findings emerging from recent research findings on women entrepreneurs”. The ILO did country and region specific research in Tanzania and other countries by interviewing 360 women.

Some Findings were that women are significant employers employing an average of 7 persons per enterprise in the MSEs covered, they have a greater presence in the informal economy and micro enterprises and less represented in formal registered MSEs and many women entrepreneurs use a limited range of marketing skills in their businesses and may relay on word of mouth promotion.

Also they have limited access to technical education , training, productivity and serious problems in accessing finances and are less likely to be members of business associations than men entrepreneurs. Also policies, programmes and actions in support of enterprise creation are designed to reinforce longstanding gender –based inequalities detrimental to women entrepreneurs.

Conclusion: Push more women entrepreneurs into growth opportunities, unlock their potential and provide more conducive legal and regulatory framework. Help them expand in employment investments, markets and profits,

3.7: Micro enterprise and village women: The next research was by Maurizia ,T on” Micro enterprises among village women in Tanzania. Small Enterprise development Vol. No.2. March 1991 p.p.30-31(12).

The study objective was, ”To identify the extent to which rural women were engaged in income producing activities”. Also it looked at the significant characteristics of women entrepreneurs and their enterprises in the Tanzanian village, assistance received from the government and training gaps. The study was preceded by an Action research project which was followed by training on entrepreneur skills focusing on rural areas and targeting women. Although the findings were not readily available, the study is believed to have shed some light on the impact of economic reform measures on the most vulnerable part of the population( rural women and their children) and provides guidance to future policy changes. Since the study was also curious about government support to and capacity building gaps for village women entrepreneurs it was of policy relevance.

3.8. The adoption and appropriation of ICT in SME: Another moving study was that of Molony, T.S.J (2005) on “Food, Carvings and Shelter: The Adoption and Appropriation of information and Communication Technologies in Tanzanian Micro and Small Enterprises. The University of Edinburgh. The objective was ” To find out how and why ICT is being adopted for use in micro and small enterprises and explores the changes they are bringing about to the existing business culture of the marginalized economies.

He selected 3 case studies to represent a national picture, a wide geographical range and gender sensitivity. The study covered the Tanzanian economy sub sectors of; perishable foodstuffs trading, the informal construction industry and the Export of African’s black wood carvings. The study design involved a 15 month fieldwork observation and data analysis after administering a qualitative semi structured interviews and using a triangulation of techniques. The entrepreneurs gave own comparisons between traditional pre ICT situation and improved IT access today.

It was found out that ICT is gradually being integrated into the existing business culture whereby the mobile phones are improving the exchange of information on supply and demand and the email is helping with information of the source of market outside the country. However, ICT mobile phones seem to be more put to social use than they are explicitly for the generation of capital. Also, some pre ICT aspects of African business culture still remain with the face to face interaction.

It is important for Tanzania to be conscious of the fact that domestic business is undergoing transformation through use of ICT as a trading tool and provide the necessary supportive infrastructure especially for email access, CED notwithstanding!

3.9. Enterprise characteristics and constraints in developing countries: Another article was related to Kolstad (2006) by Satta, T.A on “Enterprise characteristics and constraints in Developing countries: Evidence from a sample of Tanzanian micro and small scale enterprises. The International Journal of Entrepreneurship and Innovation Vol. 4 No.3 1 August 2003 pp175 -184(10) IP Publishing Ltd. The Objective was “To examine enterprise characteristics and identify external constraints that influence growth of enterprise” A total of 136 micro and small scale enterprises in Tanzania were surveyed. The abstract could not reveal the full results on current productivity, competitiveness and actual constraints. However, the full article displayed the identified constraints and some policy measures relevant to formulation of supportive programmes for MSEs growth in Tanzania a this critical moment when Tanzania is strategizing on the promotion of the MSEs sector. The bottom line is that enterprise promotion and growth is one of the viable strategies for achieving socio economic development and poverty reduction goals what CED is all about.

3.10. Small water enterprises contributing to the MDG’s: The last reading is a book by McGranahan,G and others, (2006) entitled, “How Small Water Enterprises can contribute to Millennium Development Goals for Water. Evidence from Dar es Salaam, Nairobi, Khartoum and Accra. WEDC Publications. The objective was “ To identify and test constraints, opportunities and strategies for enabling SWEs to deliver an acceptable water service to the urban poor consumers”. A sample was picked from 5 African cities where dependence on SWEs for supplying a large share of water market was relatively high. A fieldwork was undertaken in the named cities.

Although there were elements of SWEs that had extended water services to informal settlements that had little prospects of being supplied with piped water from the local utilities it was also noted that there was generally poor documentation on the dependence of SWEs in Dar es Salaam and other cities. In all cities > 75% of the urban poor obtained domestic water from the SWEs but the SWEs service tended to be overlooked by the governments.. This study is very relevant to Tanzania especially because the SWEs have proved themselves economically viable and competitive. The findings are useful as invaluable resource for water utility managers. Its important for the responsible Ministry and policy makers to identify ways of improving the water services delivered to the urban poor through SWEs for water is a basic need for most of the Community Economic development anywhere in the world.

4.0 Policy Review

4.1 The National SME Policy (2003) offers a good introduction of other relevant policies to the micro enterprise development in Tanzania. The Tanzania Development Vision 2025 aims at transforming the current agricultural economy into a semi-industrialized one. Although this may sound promising, it will take years before poor rural farmers realize this by moving from a hand hoe to oxen plough at least. The vision lacks ownership from the preparation stage and no resources have been allocated to support the communities. The principles of CED emphasize programmes that are people led and no skills and technology have been transferred as planned since the people aren’t aware.

4.2 The Sustainable Industrial Development Policy SIDP (1996-2020) emphasizes promotion of small and medium industries through simplifying taxes, Licensing registration of SME’s and access to finances. CED believes in community identifying and utilization of local resources to attain sustainability. This is not supported by the policy.

4.3 The National micro finance Policy addresses provision of financial services as well. The SME’s however, especially women lack the negotiation skills and security bonds to access finance and the related high interest rates. The principles of CED emphasize inclusion, here women and other marginalized groups are left behind.

4.5 The Agricultural and Livestock Policy of Tanzania recognizes the contribution of the artisans and small scale miners and aim at supporting them in several ways from finance to equipment marketing and the like. CED aims at building collaborations and synergies in the community to facilitate capacity building and access to resources. This has not been done for the small scale miners, especially those in Mererani!

4.6 The SME’s Policy : The general objective of the policy is “To foster job creation of new SME’s and improving the performance and competitiveness of the existing ones to increase their participation and contribution to the Tanzanian economy”. Looking at the strategies one wonders if policy makers are serious at all. A random pick: “Train and sensitize SME’s on intellectual and property rights”; Develop industrial clusters and trade centres”; “Support training and information technology”. Who formulated the strategies and who is to inform the SME’s and where are the resources? CED principles address community participation and involvement, if the community is not involved in policy dialogue, the bottom up approach will persist and the implementation will be a dream. All these polices need a review with the eyes of the community.

5.0 Conclusion:

As it can be seen there have been very powerful attempts by several academicians and researchers into the field of micro enterprises. Some worked with easy to reach research subjects, others mixed the samples, some went in person to collect data while others posted the questionnaire and each approach has advantages and disadvantages. Some authors looked at the role of supportive infrastructure, others at the resources necessary for micro enterprise and others at the internal factor affecting the success of micro enterprises. Each study or research is unique in terms of research objective for micro enterprise development and relevancy of findings to the micro enterprise policy formulation and practice in Tanzania especially in terms of regulations for loans, interest rates, markets, taxes, corruption, prices and friendly working environment. At the centre of it all is the community whose wellbeing is important for any nation. For a true community economic development initiatives based on the policy strategies are necessary to uplift this sector which caters for the economic wellbeing of the poor majority in Tanzania. Community economic development has to consciously take advantage of this opportunity of rich knowledge by promoting the good lessons and working strategically around the constraints and weaknesses the micro enterprises experience in order to give more Tanzanians a better place to be to.

Annexes:

Annex 1: A List of references:

1. Kitindi E. The African Journal of Finance and Management, Vol.8.No.2 (2000)

2. Kolstad I, Nygaard K, Felstad O.“Bribes, taxes and regulations: Business constraints for micro enterprises in Tanzania”, CM1(2006).

3. Kessy, S.S and Urio F (Year ? Journal ?)

4. Maleko, G.C, The impact of Electricity on Enterprise. University of Twente, Enshade, The Netherlands (2005)

5. Selejio, O and Mduma J.K. on “The Impact of Credit on Attitudes towards Risks among Micro enterprise Operations: A case of Morogoro in Tanzania University of Dar es salaam (2005).

6. Maurizia ,T on” Micro enterprises among village women in Tanzania. Small Enterprise development Vol. No.2. March 1991 p.p.30-31(12).

7. Molony, T.S.J on “Food, Carvings and Shelter: The Adoption and Appropriation of information and Communication Technologies in Tanzanian Micro and Small Enterprises. The University of Edinburgh. (2005).

8. Satta, T.A on “Enterprise characteristics and constraints in Developing countries: Evidence from a sample of Tanzanian micro and small scale enterprises. The International Journal of Entrepreneurship and Innovation Vol. 4 No.3 1 August 2003 pp175 -184(10) IP Publishing Ltd.

9. McGranahan,G and others, entitled, M “How Small Water Enterprises can contribute to Millennium Development Goals for Water. Evidence from Dar es Salaam, Nairobi, Khartoum and Accra. WEDC Publications. (2006).

10. “The Impact of Training on Women’s Micro Enterprise Development” by Facilitating Women’s entrepreneurship: Lessons from The ILO research and support programmes. Finnegan G Senior Specialist Women’s Entrepreneurship Development IFP/SEED, ILO Geneva.

Annex 2: Some of the Small Enterprise Micro Financials in Tanzania:

1. SACCOS MUFINDI – District Iringa

16 Savings & Credit Groups (SACCOs) 8,220 members.

Loan given worth 3 billion

Period January – July 2006

Purpose: Agriculture, petty business and house construction.

Refund so far 1.7 billion

Pending refund 1.5.bn

Benefits to members: Skills building , working tools study tours inside and

outside district.

2. Small Enterprise Development Agency (SEDA) a micro finance institution with HQ in Arusha. Purpose to provide (micro-credit savings mobilization and loan insurance) to mainly women operating micro enterprises in Urban and rural areas. Banking reforms in Tanzania are supportive to private sector growth and investment.

3. FINCA Tanzania.

Clients 37,292

Average Loan US 197

Coverage 60% of Tanzania.

Services: Village banking and Business loans.

Services: Through village Bank loans FINCA empowers women in leadership

skills and facilitate community’s access to loans, and turu they access medical

services nutrition, education for their children and decision making power.

4. Kurugenzi SACCOS – Arusha Capital: 382m

Shares worth 129.6m

Membership – 537

Loans issued: Worth 363.2m to 236 members Jan – August,07

Grand total issues: 1,573,334,000.

Problem: Small repayment of loans

Success due to the values of honesty, very high sense of accountability in safe keeping of the members money.