Small and Medium Enterprises (SMEs) are the backbone of Tanzania’s economy, contributing approximately 35% of the national GDP and employing more than 6 million people across diverse sectors such as retail, manufacturing, services, agriculture, and ICT. Despite this vital role, Tanzanian SMEs face significant hurdles due to a complex and burdensome tax system that undermines their potential for growth, innovation, and formalization.

According to a 2025 report by the Tanzania Investment and Consultant Group Ltd. (TICGL), SMEs are subjected to a corporate income tax of 30%, 18% VAT for businesses with an annual turnover above TZS 100 million (approx. USD 40,000), and a 4% Skills and Development Levy (SDL) on payroll. These taxes are compounded by various local government levies and withholding taxes ranging from 2% to 15%, depending on transaction types.

A nationwide survey of 250 SMEs revealed alarming figures:

• 78% identified high tax rates as a primary obstacle to business growth.
• 76% reported that tax filing procedures are excessively complex.
• 72% operate informally to avoid compliance burdens and associated costs.
• On average, SMEs spend 248 hours annually just on tax compliance activities, often relying on external consultants at an average cost of TZS 1.5 to 2 million per year.
• For some businesses, penalties and dispute-related costs have reached up to TZS 11 million (USD 5,200) over a two-year period due to delayed payments or VAT discrepancies.

These burdens are particularly severe in urban centers. For instance, a retail business in Dar es Salaam with TZS 150 million annual revenue pays around TZS 20 million in corporate tax, TZS 5 million in VAT, and TZS 3 million in municipal levies, consuming over 18% of its income before operational expenses.

The pressure of over-taxation has discouraged reinvestment, job creation, and formalization. About 56% of SMEs admitted to reducing staff or delaying business expansion due to tax-related financial strain. Comparatively, Rwanda, with a flat SME tax rate of 3% on turnover, has seen over 60% compliance growth, showing how tax-friendly regimes foster enterprise growth.

To address these challenges, TICGL’s report proposes actionable reforms:

• Reduce the corporate tax rate for SMEs to 15–20%.
• Raise the VAT threshold or exempt SMEs earning under TZS 200 million.
• Introduce digital tax platforms and mobile tax solutions to ease compliance, especially for rural enterprises.
• Offer tax holidays (e.g., 2–3 years) for startups and businesses in agriculture, manufacturing, and technology.
• Strengthen tax education, particularly for informal businesses considering formalization.

In conclusion, without targeted reforms, Tanzania risks stalling the growth of its most dynamic economic segment. A simplified, inclusive, and supportive tax regime is not only essential for SME development but also critical for expanding the national tax base and achieving the country’s Vision 2025 goals. The time for tax reform is now — and the data makes the case clear.

Microfinance Institutions (MFIs) are pivotal in driving financial inclusion and economic growth in Tanzania, particularly for Micro and Small Enterprises (MSEs). A recent study by the Tanzania Investment and Consultant Group Ltd. (TICGL) titled "The Contribution of Microfinance Services to the Development of Small and Medium Enterprises in Tanzania" provides comprehensive insights into how MFIs support SMEs, the challenges they face, and opportunities for growth. This article explores key findings from the 2025 TICGL report, highlighting the transformative role of microfinance in Tanzania’s SME ecosystem.

The Importance of MFIs for Tanzanian SMEs

MFIs bridge a critical gap in Tanzania’s financial landscape, offering accessible credit, savings products, and financial literacy training to MSEs that traditional banks often overlook due to perceived risks. According to the Tanzania National Bureau of Statistics (NBS, 2022), MSEs contribute over 35% to Tanzania’s GDP and employ more than 5 million people. By providing tailored financial services, MFIs empower these enterprises to expand, create jobs, and reduce poverty.

Key Services Provided by MFIs

• Micro-loans: Small-scale loans (often below TZS 5 million) for working capital and business expansion.
• Group Loans: Peer-guaranteed loans, particularly effective for women-led and rural businesses.
• Financial Literacy Training: Programs to enhance budgeting, loan management, and business planning skills.
• Digital Financial Services: Mobile banking and payment platforms for improved accessibility.

Key Findings from the TICGL Study

The TICGL study, conducted between November 2024 and January 2025, surveyed 420 MFIs across Tanzania, providing a detailed analysis of their operations, challenges, and opportunities. Below are some key insights:

Loan Portfolio Allocation

MFIs allocate their loans strategically to support various sectors critical to Tanzania’s economy. Figure 1 illustrates the distribution of MFI loan portfolios:

Figure 1: Loan Portfolio Allocation by Business Sector (2025)

Source: TICGL, 2025

Trade and retail dominate with 30% of loan allocations, reflecting the prevalence of small trading businesses. Agriculture (22%) and manufacturing (18%) also receive significant funding, aligning with national priorities for food security and industrialization.

Loan Size Trends

The study found that 62% of MFI loans are below TZS 5 million, catering primarily to micro-enterprises with quick-turnaround needs. Figure 2 shows the distribution of loan sizes:

Figure 2: Loan Size Distribution Among MSEs (2025)

Source: TICGL, 2025

This trend highlights MFIs’ focus on small, low-risk loans, which are easier to approve and manage.

Default Rates and Risk Management

Loan default rates remain a significant concern for MFIs. The study found that 49% of MFIs report default rates between 5–10%, while 27% face higher risks with rates exceeding 10%. Figure 3 outlines the default rate distribution:

Figure 3: Default Rates for MSE Loans (2025)

Source: TICGL, 2025

To mitigate risks, MFIs employ strategies such as:

• Credit Risk Assessment and Scoring (26%)
• Group Lending and Social Collateral (23%)
• Loan Portfolio Diversification (17%)
• Strict Loan Monitoring (19%)
• Credit Guarantee Schemes (15%)

Challenges Facing MFIs

MFIs face several barriers that limit their ability to serve MSEs effectively. Figure 4 summarizes the key challenges:

Figure 4: Main Challenges in Providing Loans to MSEs (2025)

Source: TICGL, 2025

High borrowing costs (44%) and stringent collateral requirements (29%) further complicate MFIs’ ability to secure capital, while regulatory constraints, such as interest rate caps, limit operational flexibility.

Opportunities for Growth

Despite these challenges, the TICGL report identifies significant opportunities to enhance MFI support for MSEs:

• Government-Backed Funding (28%): Access to credit guarantee programs and concessional loans can expand lending capacity.
• Digital Financial Services (25%): Mobile banking and fintech partnerships can reduce costs and improve accessibility.
• MFI Collaboration (27%): Knowledge sharing and joint initiatives can enhance service delivery.
• Fintech Partnerships (20%): Advanced technologies like AI-driven credit scoring can improve risk management.

Recommendations for a Stronger Microfinance Ecosystem

To maximize the impact of MFIs on SME development, the TICGL study proposes several actionable recommendations:

For MFIs

1. Adopt Digital Lending Platforms: Invest in mobile-based loan systems to streamline operations and reach underserved areas.
2. Enhance Financial Literacy Programs: Offer structured training on budgeting, loan management, and digital tools to reduce default rates.
3. Diversify Funding Sources: Engage with impact investors and development finance institutions to secure sustainable capital.

For Regulators

1. Introduce Tiered Compliance: Reduce compliance costs for smaller MFIs to encourage growth.
2. Flexible Lending Guidelines: Allow alternative credit assessments to include informal businesses.
3. Streamline Reporting: Implement digital reporting systems to reduce administrative burdens.

For Stakeholders

1. Strengthen Public-Private Partnerships: Facilitate collaboration between MFIs, banks, and government agencies.
2. Promote Fintech Innovation: Support regulatory sandboxes to test new financial products.
3. Focus on Gender Inclusion: Develop targeted financial products for women-led enterprises.

Conclusion

Microfinance Institutions are indispensable to Tanzania’s economic growth, empowering MSEs through accessible credit and capacity-building programs. The TICGL 2025 study underscores the need for innovative lending models, digital transformation, and regulatory reforms to overcome challenges like high default rates and limited capital access. By leveraging government support, fintech partnerships, and financial literacy initiatives, MFIs can strengthen their role in fostering sustainable SME growth and driving financial inclusion across Tanzania.