Informal Credit in Tanzania: Evidence from a Case Study in Northern Tanzania

Abstract

This article reports results of a survey on informal credit sources and uses in Tanzania’s northern region of Arusha.  The survey covered a random sample of 260 rural households.  Out of which 160 reported informal credit use.  These were by order of importance: friends, relatives, family members and neighbours. Out of the reported sources, friends were the major source of credit in all the three districts that were sampled for the study.  The set of borrowers includes both rich and poor households, but unexpectedly, the former dominated in the use of informal loans.  The informal loans accessed were in cash, physical assets and labour.  These were proffered to formal loans because they involved low transaction costs and little or no explicitly interest rate charges.  Consumption was the major reported use of informal loans.  Nevertheless, some informal loans were also used to finance farm activities, children’s education and even payment of taxes.  Overall, the mean and median size of the informal loans were very small, but the loans accessed served to smooth income over the crop production cycle in the sampled rural households.  Thus the informal credit sources “complemented” the inaccessible formal credit sources by offering consumption loans and working capital.  The manner of information loan transactions underscores the importance of trust and reciprocity in rural debt contracts.  Moreover, the size and uses of information loans in the sampled areas serve to show the importance of small loans for direct consumption, children’s education and working capital in strategies that target to develop the rural financial markets (RFMs).  The types of information leaders established by the study bears no potential for acting as “middle-rung” agents for expanding the outreach of formal financial services in the rural areas in and beyond the sampled areas in Tanzania.