Transaction Costs of Group Microfinancing Models and their Effects on Family-Owned Business Performance in Tanzania

Abstract

This paper explores the effect of transaction costs in group-based microfinancing on family-owned businesses in Kagera region in Tanzania. The paper employs cross-sectional survey data collected from a systematically selected sample of 279 owners of family businesses in four rural Districts in Kagera region. The selected sample is based on the consolidated list of microcredit borrowers in each district from four microfinance institutions operating in the districts. The questionnaire contains three determinants of transaction costs with a total of eighteen items and three determinants of family-owned business performance with a total of twelve items.  Multivariate linear regression is employed to estimate the relationship between transaction costs and business performance. Results show that majority of transaction cost variables related to searching for information on potential borrowers and also those related to bargaining and decision making exert a negative influence on business performance. The transaction cost related to policing and enforcement of the group loans seem to have positive influence on the performance of the family-owned businesses. Implicitly, in rural settings where group lending models dominate, the transaction cost related to policing and enforcement are inevitable in ensuring that family-owned businesses have a significant impact on socioeconomic benefits to the entire family.