Effect on productivity on MFI profitability in Tanzania

Micro Finance Institutions (MFIs) have been established worldwide to cover a gap of financial services to MSMEs (Micro, Small and Medium Enterprises). MFIs operate by mobilizing a large number of clients with small loans being disbursed gradually against accumulated savings referred to as loan insurance. Although MFIs are basically not for profit making organizations; striving for sustainability has made it impossible consider profit making as a secondary objective. Productivity and in particular staff productivity is positively related to profitability of an MFI. PRIDE Tanzania (Promotion of Rural Initiatives and Development Enterprises) and PTF (Presidential Trust Fund) were selected as the representative of the Microfinance Institutions in Tanzania. Information was collected from the staff of selected MFIs, through administration of questionnaires and analysis of financial statements and portfolio reports. This study has revealed that both PRIDE Tanzania and PIF are profitable and have reached financial self sufficiency. Financial self-sufficiency is defined when an institution’s inflation-adjusted operating revenues, less monetary and in-kind subsidies, exceed its inflation-adjusted operating costs plus its actual and imputed funding costs. MFI may either increase a high quality loan portfolio (equivalent to sales for an enterprises) or reduce costs since profits are a result of Total Revenue minus Total Costs. One of the most important recommendations derived from this study is to establish incentive schemes for their staff in order to boost staff productivity and ultimately profits for their organizations. Others include training of staff, building capacity of institutions through seeking funds/loans from financial institutions, promoting new products other than solidarity loans especially individual lending and use of modern technology in all services.