Abstract:
Existing literature suggests that determinants of demand for credit have not been well
understood and measured. This study was conducted to assess influence of micro
enterprises owners’ characteristics on credit demand. The study was also designed to
identify lending conditions of semiformal and formal sources of credit in the study area.
The study assessed whether the availability of credit sources has influence on micro
entrepreneurs’ choice for credit. Data were collected from a sample of 183 micro
entrepreneurs in Iringa, Mbeya and Sumbawanga districts. Multistage and simple random
sampling techniques were used to select respondents. Data analysis employed both
descriptive and quantitative methods, where as regression analysis entailed the use of
Probit and Tobit models. The study revealed that micro entrepreneur’s characteristics
substantially influenced the decision to apply for credit and hence the actual amount
demanded. The credit demand was found to be high in all the three districts. The most
important reason for demanding credit was to expand enterprises. Regression results
indicate that marital status and micro entrepreneurs’ business experience had significant
positive influence on the demand for credit at P<0.01. With respect to the actual demand
for credit both marital status and business experience had positive effect at P<0.01 and
P<0.05, respectively. While age of the micro entrepreneur had significantly negative
influence on the demand for credit at P<0.01. In terms of the actual demand for credit, age
had positive sign and significant effect at P<0.01. Furthermore, education of the micro
entrepreneur had positive influence on the decision to apply for credit although not
significant at P<0.05. However, education level had significant and positive effect on the
actual demand for credit. Assets owned by the micro entrepreneurs had significant positive
effect on the actual demand for credit at P<0.01 but no significant effect on the decision to
apply for credit at P<0.05. Since a majority of the micro entrepreneurs have no assets or
are poor clients operating small businesses, there is a need to streamline lending
procedures in various sources of credit to enable the majority of micro entrepreneurs to
acquire credit. This includes lengthening of the repayment periods and substituting the use
of physical collateral with social collateral. Also micro entrepreneurs should be educated
on how to manage their enterprises and on the importance of being credit – worthy. The
study further recommends simplification of the registration and licensing procedures to
make businesses eligible for formal credit.
