The big test for Tanzania’s credit guarantee scheme: Catalyst for growth or governance risk?

DAR ES SALAAM: THE Bank of Tanzania’s recent circular, issued on May 22, 2026, follows a meeting held on December 8, 2025 at the bank’s sub-head offices in Dar es Salaam. It is signed by the governor and invites expressions of interest in investing in the proposed independent credit guarantee institution.

Upon careful examination, it presents opportunities for private-sector investment but also increases governance risks, resembling a scheme previously managed by the central bank.

Perhaps the initiative inspired by lessons from the past represents one of the most important advancements in Tanzania’s financial sector so far.

For those who aren’t aware of the scheme, the plan involves creating an independent credit guarantee company to be registered as a Public Limited Company (PLC), with an authorised share capital of 375bn/- and an initial share capital of 150bn/-. The government would own 40 per cent of the shares, while the remaining 60 per cent would be owned by the public.

The institution, as stated by the governor when speaking on this scheme, is expected to provide credit guarantee services, business development support and advisory services to MSMEs, exporters and strategic productive projects.

I believe this proposal is timely, as Tanzania still faces a key obstacle to economic transformation: Inadequate access to affordable credit for vital sectors such as MSMEs, SMEs, agriculture, exporters, youth-led enterprises, women-owned businesses and emerging industries.

The proposal is thus strategically important because credit guarantee systems globally have proven powerful tools for reducing lending risk and crowding private-sector financing into sectors that commercial banks often perceive as too risky.

While the proposed initiative has potential, its success will mainly depend on the governance framework, operational independence, risk-sharing agreements, institutional credibility, private-sector trust and, crucially, protection from political or administrative interference.

These points are important because, for those familiar with the past under the BOT, such a procedure was filled with challenges and BOTs will be better equipped to understand the implications.

The main risk is that the institution might appear technically independent on paper but remain operationally controlled by the central bank or government institutions in practice. That would significantly undermine its long-term effectiveness.

A key strength of the proposal is its decision to establish the institution as an independent PLC rather than as a conventional government department under BOT. This is significant because successful credit guarantee institutions worldwide typically perform best when they operate with commercial discipline, professional governance, operational flexibility and strong private-sector participation.

The proposed ownership structure, which allocates 60 per cent to the public, is therefore a positive signal, as it could reduce excessive state dominance. However, as a caution, ownership structure alone does not guarantee independence. The key issue will be governance influence and decision-making power.

My research on the global effectiveness of these schemes, alongside my experience with initiatives like Japan’s twostep loan support for Japan under JICA, which I engaged in discussions before its implementation, shows that credit guarantee schemes are most effective when they achieve three key goals: Maintaining financial stability, promoting private-sector lending and advancing national development objectives.

Countries such as South Korea, Malaysia, Germany, Japan, Turkey and parts of Latin America have successfully used credit guarantee systems to accelerate SME growth, industrialisation, exports and innovation. For example, the Korea Credit Guarantee Fund (KODIT) played a major role in supporting industrial SMEs and technology firms that later became globally competitive.

Similarly, CGC Malaysia became instrumental in improving SMEs’ access to finance through partial risk guarantees that reduced lenders’ hesitation.

The lesson for Tanzania, particularly for the BOT, is that a guarantee institution should do more than simply serve as a bureaucratic approval body. It must develop into a strategic facilitator of the financial market, reducing risk perception, promoting private lending, supporting productive sectors and improving financial inclusion.

A key question is how Tanzania can draw significant private-sector involvement into the institution. Private investors will only invest if they trust governance is credible, operations are commercially sound, risk is manageable, and decisionmaking is professional and predictable.

If the institution is perceived as politically influenced or administratively controlled, private-sector participation may remain weak despite official invitations. To attract stronger private-sector investment, several measures are necessary.

Initially, the institution should establish a truly independent board, possibly with the chairman appointed through an application process. The board should include robust representation from banks, DFIs, pension funds, insurers, SME associations and respected financial experts, rather than members appointed for political reasons. The board should not be dominated by political appointees or publicsector officials.

Second, governance rules should explicitly specify risk appetite, guarantee limits, recovery procedures, provisioning frameworks and operational accountability. Private investors are concerned about institutions where losses might build up because of politically driven lending choices.

Third, the institution should implement robust international credit-risk standards and clear reporting systems. Investors need assurance that guarantees are evaluated professionally, recoveries are pursued effectively and financial stability is maintained.

Fourth, the guarantee structure itself must encourage shared risk rather than the total transfer of risk. From the beginning, it is prudent for BOT to understand that, globally, guarantee schemes work best when lenders retain part of the lending risk. If banks transfer all risk to the guarantee institution, moral hazard increases significantly because lenders may weaken credit discipline.

Tanzania’s proposed institution should therefore use partial guarantees, co-risk sharing, portfolio guarantees, and performance-linked guarantee pricing. This would encourage banks to continue conducting proper credit appraisals.

Another key aspect is capitalisation. Although the proposed authorised capital of 375bn/- is substantial, the main concern is leverage ability and sustainability. A successful guarantee institution needs robust capital adequacy, reinsurance arrangements, backing from development partners and reliable actuarial risk modeling. Otherwise, rapid expansion of guarantees could eventually threaten solvency.

The institution should actively seek partnerships with development finance institutions, multilateral agencies, climate funds, export credit agencies and international guarantee programs. These collaborations could leverage blended finance structures to enhance sustainability and increase guarantee capacity.

Another important issue relates to the sector’s potential to enhance productivity. With proper organisation, the guarantee institution could significantly impact areas such as agriculture, manufacturing, renewable energy, exports, women-led businesses, youth enterprises, affordable housing, logistics and industrial SMEs.

These sectors are often underserved by commercial banks because the criteria used are not innovative or kept up with technological advances, despite their developmental importance. However, the institution must avoid becoming a politically directed lending vehicle. This is where governance risks become serious if the scheme remains under excessive influence from the central bank or the state.

The primary risk is the politicisation of guarantees. When political influence affects guarantee decisions, there is potential pressure to favor borrowers with political ties, projects lacking proper preparation, sectors that are not sustainable, or enterprises that are not performing well. Evidence from past experiences shows that such influence has undermined numerous government-backed financial programs throughout Africa.

Secondly, too much influence from central banks can lead to market distortions. These institutions mainly handle maintaining monetary stability, overseeing banks, controlling inflation and supervising the financial system. When a central bank becomes heavily involved in making credit allocation decisions, it can create conflicts of interest between maintaining fair regulation, supervising finances and promoting development. Over time, this may weaken market confidence.

Third, private investors may fear unequal influence. Even if private shareholders hold 60 per cent of the ownership, investors may still perceive that strategic decisions remain effectively controlled by the state if management appointments, operational guidelines, or guarantee approvals are subject to external influence. Such perceptions can discourage long-term private participation.

Fourth, there is a risk of weak enforcement of recovery. Based on practical experience, government-linked financial schemes often face pressure to relax recovery efforts for politically sensitive borrowers. Once repayment discipline weakens, guaranteed sustainability deteriorates rapidly. Many African guarantee and development schemes have struggled precisely because recoveries became politically difficult to enforce.

Tanzania can draw lessons from international examples where guarantee institutions thrived due to their operational independence, despite being governmentowned. For instance, Germany’s SME guarantee programs work effectively through close collaboration among the government, banks, chambers of commerce and regional bodies, all while maintaining rigorous risk management.

Similarly, China’s and Japan’s credit guarantee corporations provide extensive support to SMEs but operate within disciplined frameworks that emphasise sustainability and recovery management.

The proposed independent credit guarantee institution could significantly reform Tanzania’s financial sector. It would enhance SME access to funding, lower lending risks, draw in private investments and bolster key economic sectors. The BOT’s proposal and request for interest are welltimed and strategically appropriate.

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However, success will depend heavily on whether the institution becomes commercially credible, professionally governed, operationally independent and trusted by private investors.

I assure scheme executors that regardless of investor interest or investment levels, excessive influence from central banks or political entities can create risks such as politicised guarantees, low recoveries, market distortions, diminished private sector trust and ultimately, financial instability.

As an economist-cum-financial analyst, I believe the true challenge in lending to unbankable SMEs is not merely establishing the institution but creating one that is truly trusted by markets, banks, investors and entrepreneurs.