The Dual Role of Microcredit: Extent, Drivers, and Livelihood Implications of Loan Diversion Among Smallholder Farmers in Morogoro Region, Tanzania

Abstract

Microcredit serves as a vital financial instrument for promoting smallholder agricultural development across sub-Saharan Africa. However, the frequent diversion of loans from their intended agricultural purposes to non-farm uses, commonly referred to as microcredit diversion, raises critical questions about its effectiveness. This study investigates the extent, patterns, and behavioural drivers of microcredit diversion among smallholder farmers in the Morogoro Region of Tanzania. Using a cross-sectional, mixed-methods design, primary data were collected from 240 randomly selected smallholder farmers. Descriptive statistics, microcredit diversion metrics, and thematic analysis of qualitative responses were employed to examine utilisation patterns and the motivations underlying loan diversion. The results indicate that while microcredit remains a crucial source of financing for farm investment, covering 49.72% of average farm expenditures, an average of 35.36% of borrowed funds was diverted to non-agricultural purposes, including household consumption, education, and healthcare. This dual role of microcredit highlights its function as both a productive investment and a consumption-smoothing mechanism within resource-constrained households. Through the Rational Choice Theory, our study interprets microcredit diversion as a rational strategy by smallholder farmers to optimise overall household welfare under scarcity and competing priorities. Thus, policy implications include the need to align microcredit disbursement with agricultural cycles, integrate financial literacy and extension services, and strengthen monitoring mechanisms to minimise diversion and maximise agricultural productivity. These findings contribute to the literature on rural finance and provide actionable insights for designing microcredit programmes that better support agricultural development in Tanzania.