Assessing the effectiveness of credit guarantee schemes on access to finance by small and medium enterprises in Tanzania

Small and Medium Enterprises (SMEs) plays an important role in job creation and income generation in Tanzania. However banks and other financial institutions are often reluctant to lend the SMEs. Studies revealed that major reasons that hamper the ability of small enterprises to raise finance to include lack of collateral, information asymmetries, market uncertainty and higher transaction costs related to serving distant customers. To address SMEs finance constraints, governments and donor initiatives introduced Credit Guarantee Schemes in both industrial and developing countries as a risk diversification mechanism. This study aims to assess effectiveness of Credit Guarantee Scheme on small and medium enterprises access to finance in Tanzania. To attain the above objective, a survey of 22 Small and Medium Enterprises (SMEs), which have accessed credit guarantee scheme was conducted. Copies of well-structured questionnaires were distributed and administered to sampled SMEs. The collected data were analyzed by using SPSS for descriptive statistics generation. The validity and reliability of the instrument were tested using Cronbach’s alpha with a result of 0.70, while predictive form of validity was 0.94. The findings showed that credit guarantee schemes enabled SMEs acquiring additional capital and reduced the level of security required by SMEs when applying for loan. The guarantee schemes have increased awareness to the Small and Medium Enterprises lacking adequate collaterals in their endeavor to flourish their businesses. It is therefore recommended to increase efforts towards improvement of this type of financing for small businesses to enable them graduate to fully-fledged institutions such that they contribute positively to Tanzania’s economy.