Impact of Microfinance Regulations on Microfinance Institutions’ Performance in Tanzania

Abstract

In this paper, we examined the impact of newly established regulations on sustainability and outreach performance of Microfinance Institutions’ (MFIs). We argue that any newly established regulations for MFIs are expected to enhance their sustainability and outreach performance, otherwise, the reverse may be true. The study focused on problems, practices, problem solution and contribution to future practices of new regulations based on the theory of development. Thus, the study employed inductive approach to collect qualitative data using in-depth interviews and focus group discussion. The study findings revealed that that new regulations in Tanzania have been inadequately designed with inadequate participatory environment during policy formulation. This led to limiting the number of licensed MFIs and new entrants in the financial sector, which, in turn, affected the sustainability and outreach performance of the MFIs. The provisions also seem to discourage MFIs members and investors through significant political interference from the government by imposing the impractical interest caps which have led to MFIs operating under stiff and frustrating conditions. The study concludes that, MFIs operations in Tanzania are mired with inadequate design of regulations causing inadequate outreach performance of most of MFIs. This situation has far reaching practical implications for stakeholders in the MFIs sector and the regulators who play essential roles in policy formulation where MFIs expect some necessary amendments. As such, there is a need to adequately involve stakeholders in policy formulation, to review interest cap rates, and a balanced political involvement in policy making which will again attract new entrants and encourage more funding for MFIs.