Microfinance faces liquidity, regulatory pressure

Dar es Salaam. Tanzania’s microfinance sector, long seen as a lifeline for small businesses, farmers and low-income borrowers, is facing mounting pressure from liquidity constraints, regulatory demands and rising loan repayment challenges.

Industry players warn that these factors are slowing the sector’s growth and limiting its ability to meet the increasing demand for credit among entrepreneurs who often lack access to traditional banking.

Microfinance institutions play a critical role in expanding access to finance, particularly for micro and small enterprises in rural and peri-urban areas. However, many lenders say limited access to capital is restricting their ability to extend new loans.

With reduced liquidity, institutions are increasingly forced to scale back lending activities, particularly in agriculture and informal businesses where financing needs remain high.

For many small entrepreneurs and farmers, this means fewer opportunities to access the credit needed to sustain or expand their operations.

Tax pressures add to operational costs

Operators also point to tax policies that are increasing operational costs at a time when many institutions are already operating on tight margins.

Among the issues raised are the tax treatment of loan write-offs when borrowers default, the application of Value Added Tax (VAT) on administrative and service fees, and thin capitalisation rules that limit the amount of debt institutions can use to raise funds.

While such regulations are intended to strengthen fiscal discipline and oversight, some stakeholders argue that they can unintentionally constrain institutions that serve financially vulnerable groups.

Repayment challenges persist

Loan repayment remains another significant hurdle. Delays and defaults weaken the capital base of microfinance lenders and reduce the funds available for new lending.

Sector participants say repayment problems are often linked to limited financial literacy among borrowers as well as the unpredictable income patterns faced by small traders and farmers, whose earnings depend heavily on market conditions and weather cycles.

As non-performing loans increase, institutions must devote additional resources to recovery efforts, further limiting their lending capacity.

Need for balanced regulation

Industry observers say a more balanced regulatory approach is needed to ensure that consumer protection and financial stability measures do not inadvertently undermine the sustainability of microfinance institutions.

Some smaller operators have already struggled to remain viable, while others have reduced lending activities due to financial and regulatory pressures.

Implications for financial inclusion

The challenges facing the sector could have broader consequences for financial inclusion in Tanzania.

Microfinance institutions remain the primary source of credit for many micro and small enterprises, particularly in rural communities where formal banking services are limited.

If liquidity constraints and regulatory pressures persist, the sector may struggle to meet the growing demand for credit among entrepreneurs and smallholder farmers — groups widely recognised as key drivers of employment and economic growth.

Stakeholders are therefore calling for greater dialogue between policymakers, regulators and industry players to review tax policies, strengthen borrower financial literacy and explore funding mechanisms that can improve liquidity within the sector.

Such reforms, they argue, could help restore momentum in Tanzania’s microfinance industry and ensure it continues to support small businesses and expand access to finance across the country.

Joseph R. Waryoba is the CEO at Export Credit Financial Services (ECFS)