Equipped and productive: better financing for community businesses in Tanzania

Principal researcher Ben Garside provides a taster of the growing opportunities for community businesses in Tanzania to use new energy supplies productively to expand and develop their businesses, while discussing the associated financing challenges.

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Insight by 
Ben Garside
Ben Garside is principal researcher in IIED's Shaping Sustainable Markets research group
26 November 2020
Woman weighing a bag with a scale.

As electricity grid extension reaches further into rural areas, there is an increased opportunity to use that energy productively for electrical equipment to improve productivity and profits of community businesses. But business owners, particularly women, face many challenges getting the finance they need (Photo: Nkumi Mtimgwa/CIFOR via FlickrCC BY-NC-ND 2.0)

Community businesses – including smallholder farmers and other micro and very small businesses – are vital contributors to economies and jobs across the world. This is particularly true for rural areas of sub-Saharan Africa.

But while the finance to support them appears to be available, these businesses aren’t all the same and may want different things. A carpenter may need a larger loan and a longer payback term than a small juice stall, for example.  And although gender norms in many rural areas mean it’s a woman who is more likely to be running the juice stall than the carpenter’s shop, would this finance, if she wanted it, be available to her?

Women’s opportunities to borrow business finance are not the same as those for men, particularly when it is larger amounts from commercial banks. And perceptions of risk and appetite to borrow are also different.

So why is it important to understand this variety of needs and perceptions now? As electricity grid extension and decentralised systems such as mini-grids are reaching further into many rural areas, the chance to use that energy productively for electrical equipment to improve productivity and profits of rural community businesses is becoming real.

Targeting finance better into businesses is part of the answer to levelling up opportunities for the women and men running them.

Finding out more about finance 

Working with local partners TANGSEN and Solar Sister, as well as a range of renewable energy service providers, we conducted surveys with 373 community businesses across Tanzania, including farmers using powered irrigation, to find out more about their perceptions of financing challenges and opportunities. They were businesses that already used energy as an essential part of the business model. We also interviewed people working in finance.

What did we find? Perhaps unsurprisingly most community businesses use savings as their go-to for finance. In our sample, women were more likely to borrow than men but were especially concerned about their ability to repay any loans.

Group savings schemes are the most popular form of borrowing. The smallest of these, Village Community Banks (VICOBAs) are a vital source of financing for rural women but have limited capital (based on membership and deposits) and are not ‘on-demand’, so loans are not available at all times.

Usually lending slightly larger amounts, Savings and Credit Co-Operative Society (SACCOs) are favoured by men. Although they face similar capital constraints, there is growing interest in capitalising well-functioning SACCOs to get more financing to communities, benefiting men more than women.

High commercial lending rates surprised us but on further analysis, borrowers were mostly wealthy farmers with enough assets to access commercial loans – again, mainly men.

      Finance source used to borrow, disaggregated by gender

      Almost twice as many community businesses borrowed to expand their business than to start one up, which is consistent with general findings for businesses this size. Overall, borrowing was mainly to buy non-energy inputs.

      And we asked what appliances community businesses planned to buy in the next year – lighting and refrigeration featured highly – and how they planned to buy them. This infographic tells the full story.

      Ways forward

      What have we learnt from this? First, that there is a clear need to work with community businesses to raise awareness of how equipment can help build profitability and the ways it can be financed. This must be done to appeal to different business types – the Saba Saba trade show is popular with farmers, for example – and in the different forums that women and men attend. Importantly, care should be taken that this awareness raising does not turn into a debt push.

      Second, finance supply needs better targeting and tailoring. There is a gap in the market for small business wanting to borrow small amounts from group lenders such as VICOBAs and SACCOs to buy electrical equipment and use new energy supplies, compared with the types of businesses needing larger more expensive equipment and those looking to expand.

      Lease financing – where periodic payments grant a right to use machinery or equipment for a specified period – could be an answer to that. Having little collateral requirements compared to traditional commercial loans, an intermediary called EFTA has pioneered a leasing model in Tanzania. But it reaches small businesses needing equipment finance in the range of US$10,000-60,000 – out of reach of most of those we surveyed.

      A ‘micro-leasing’ model offered by Sero Lease and Finance (SELFINA), whereby women repay the loan while generating income from the asset, could be viable for community businesses in rural areas.

      Overall our research highlights the need for a range of solutions for different types and sizes of businesses and farmers, especially for smaller, rural set-ups.

      Solutions are also not only about nominal access to finance products. Gender norms – women expected to perform most household duties and stay close to home, for instance – limit women from expanding their businesses and accessing other lending, such as from SACCOs. And negative perceptions towards financing – such as women not being taken seriously by loan officers – prevent some women from aspiring to achieve more for their business.

      There’s lots more in the report, I encourage you to dive in!