Impact of Debt Capital on Outreach and Efficiency Of Microfinance Institutions in Tanzania: A Survey of Some Selected MFIs in Tanzania

Abstract

Financial and development economics researchers, practitioners, and donors are debating on the rightful effects of debt capital on the performance of MFIs in terms of outreach. Some argue that microfinance involvement in commercially procured funds is likely to cause the sector raise interest rates or increase loan sizes to maintain a certain level of operational return or profitability, and be able to pay interest expenses on borrowed capital. Changes in either dimension could result into exclusion of some types of potential poor borrowers. Still others argue that debt capital enhances efficiency through economies of large scale when massive debt funds are used to expand operations. Thus, MFIs can reach more poor clients at low costs. Empirical evidences from this paper show that debt capital reduces MFIs’ outreach to poor clients in Tanzania. The policy implication is that since MFIs are perceived as people’s development tool and poverty alleviation strategy, donation or government grants should be sustained in a long term to enable MFIs reach the poor who cannot afford high interest rates charged by debt financed MFIs.