Does a Loan Have an Impact on Attitude to Risk Among Micro-Entrepreneurs in Tanzania?

Abstract

Intervention with small loans for micro-entrepreneurs is crucial for the establishment and growth of their businesses. Intervention of this sort, however, induces changes in behaviour and attitude to risk depending on the repayment mechanisms in place.  From the entrepreneurial point of view, after obtaining the loan, the borrowing agents are likely to make decisions that are associated with higher risk than would have been otherwise.  But the argument is that, if the repayment mechanisms are so draconian, the opposite can occur, making micro-entrepreneurs more risk averse. Such entrepreneurs are likely to maintain the status quo and strive to be able to service the loan in terms of meeting the repayment requirements.  Using the case of Morogoro and Mvomero districts in Morogoro region, the study found that the repayment motive outweighs the entrepreneurial acumen induced by the loan, making operators who have borrowed more risk averse than potential borrowers.  Those in rural areas are even more risk averse. We found that this hinders initiatives to go for larger loans in the subsequent rounds and retards the expansion and growth of micro-enterprises. This finding points to the need for new repayment mechanisms that reduce the trade-off between the maximization of repayment rates and further development of the entrepreneurial spirit.