Micro, Small and Medium Enterprises’ External Financing Challenges: The Role of Formal Financial Institutions and Development Finance Intervention in Tanzania

Abstract

Micro, Small and Medium Enterprises (MSMEs) play a significant role in income generation, job creation, poverty reduction and reducing income inequality. However, MSMEs from developing countries are exposed to several challenges in their business operations. Among others, access to external financing has been cited to be the most pressing challenge for MSMEs in developing economies and Tanzania in particular. Using a desk review methodology, this paper explores in detail the causes of the problem and mechanisms currently put in place to address these. Briefly, the paper delineates how the structural mismatch between mainstream funding requirements and unique characteristics of MSMEs has led to market failure. It further provides insights on innovative financing strategy, which may be a better alternative to circumvent the problem.