Financing the in-between sector: Designing and evaluating targeted SME lending in Tanzania

• Employment growth in Tanzania has been driven by small, often informal, manufacturing firms.
• Access to finance is one of the main obstacles these firms face.
• This project aims to help high-potential small firms to overcome this obstacle through targeted lending.
• As a result of the collaboration with the research team, the National Microfinance Bank (NMB) has rolled out a new product for a selection of its small firm clients.

Following on from previous work funded by the IGC and led by Margaret McMillan, this research continues to evaluate how Tanzania can support small and medium-sized firms (SMEs) to grow by assessing the impact of a targeted lending product to high-potential small firms. Previous IGC research suggests that a small, but still significant, share of these firms in Tanzania are highly productive – the so-called ‘in-between’ sector.

This project aims to help these high-potential ‘in-between’ firms to improve their growth prospects through targeted lending. The project team worked with Tanzania’s Small Industries Development Organization (SIDO) and National Microfinance Bank (NMB), Tanzania’s largest commercial bank, to design and pilot a loan product targeted to SIDO’s clients that exhibit high-growth potential. Firms are identified using SIDO’s internal data about credit history and firm performance.

From the baseline data, firms who meet a set of criteria have been invited to apply for the loan from NMB. Final analysis for the project is still underway. If the pilot succeeds, which depends on the number of firms who apply for and receive the loan, and their performance over the following year, NMB will roll out a similar loan product across Tanzania, enabling a full evaluation to be conducted.

Preparing for the survey involved extensive engagement with both SIDO and NMB. Researchers discussed with NMB their SME lending products, their credit scoring process, and their willingness to experiment with new ways of reaching high-potential small firms with their products. Through discussions around the project, NMB has considered other shifts in its lending to SMEs. For example, it decided for the first time to consider coverage for SME client loans nationwide through the African Guarantee Fund. Furthermore, NMB also shared with IGC all their loan data from SME clients in Dar Es Salaam – over 30,000 loans across approximately 7,000 firms over the last five years -- to conduct further collaborative research projects.