The impacts of financial linkage on sustainability of less-formal financial institutions: Experience of savings and credit co-operative societies in Tanzania Benson Otieno Ndiege a,b, *, Xuezhi Qin a , Isaac Kazungu b , John Moshi b a School of Business Management, Dalian University of Technology, Dalian 116024, China b Moshi Co-operative University, P.O Box 474, Moshi, Tanzania 1 1. Introduction Both formal and less-formal 2 financial institutions are vital and required in the economic development of the Low Income Countries (LICs) (Aryeetey, 2008). In Tanzania, the National Financial Inclusion Framework (2014–2016) which was released in 2014 reveals that, both formal and less-formal institutions have played an important role in the National Financial Landscape. Also it shows that the impacts of formal and less-formal institutions in financial inclusion have been growing. For instance, the formal financial institutions services reached 16% and less-formal institutions services reached 27% of the population in 2009. Consequently, they have a mutual role in financial system development and economic growth (Kaleshu & Temu, 2012; Qin & Ndiege, 2013). In this situation therefore, the growth and survival of formal as well as less-formal financial institutions in Tanzania is important and thus is the focus of this study. Despite the recent fair improvements made in financial sector of Tanzania, which are mentioned in literature to be the outcome of financial reforms that started by the enactment of the Banking and Financial Institutions Act of 1991 (Kaleshu & Temu, 2012; Satta, 1999; Simpasa, 2011), both formal and less-formal financial institutions have challenges that seems to limit their individual ability to expand financial services (Kaleshu & Temu, 2012; Randhawa & Gallardo, 2003) as should have been. For example, while the immediate effects of financial reforms were the development of the formal sector (Satta, 1999; Simpasa, 2011) it has not reached reasonable population (Bee, 2009; Kaleshu & Temu, 2012). In general, poor majority who are residing in rural settings are the most excluded in formal financial system (Kessy & Urio, 2006). Perhaps there are various reasons for these and here we just describe the main two. Firstly, most of the formal financial Journal of Co-operative Organization and Management xxx (2014) xxx–xxx A R T I C L E I N F O Article history: Received 10 May 2014 Received in revised form 29 September 2014 Accepted 1 October 2014 Available online xxx Keywords: Financial linkage SACCOS Sustainability Tanzania A B S T R A C T The developing economies are experiencing a growing trend of financial Linkage between formal and less-formal financial institutions. Normally, less-formal financial institutions receive loanable funds from formal financial institutions as an approach to meet their financing deficit, while formal financial institutions engage in linkage as a mean to expand business. The main concern of stakeholders regarding this practice is how such linkage can affect the performance of the less-formal financial institutions. In Tanzania, the Savings and Credit Co-operative Societies (SACCOS) are the most used less-formal financial institutions which are also highly involved in financial linkage. In this study therefore, we used Tanzania SACCOS’ financial statement data, for the period of 2004–2011, and panel data regression model to examine the relationship between financial linkage (measured as financial dependency ratio) and sustainability (measured as Operational Self Sufficiency) of less-formal financial institutions. The findings suggest that the higher the level of financial linkage the more the SACCOS become unsustainable. Implying that, to be sustainable institutions, the SACCOS should try keep away from the use of external funds in their loan portfolio. ß 2014 Elsevier Ltd. All rights reserved. * Corresponding author at: School of Business Management, Dalian University of Technology, Dalian 116024, China; Moshi Co-operative University, P.O Box 474, Moshi, Tanzania. Tel.: +255714097134; +86 15566410607. E-mail addresses: benson.ndiege@yahoo.com, benson.ndiege@muccobs.ac.tz (B.O. Ndiege). 1 The Moshi University College of Co-operative and Business Studies has recently changed the name and now it is known as Moshi Co-operatives University. 2 The less-formal financial institutions are all semiformal and informal financial institutions most of which are rural financial institutions and serve the poor. So in some explanation the word is synonymy to microfinance. Moreover, contrary to the formal financial institutions like commercial banks, less-formal financial institu- tions are not regulated by the Bank of Tanzania. G Model JCOM-27; No. of Pages 7 Please cite this article in press as: Ndiege, B. O., et al. The impacts of financial linkage on sustainability of less-formal financial institutions: Experience of savings and credit co-operative societies in Tanzania. Journal of Co-operative Organization and Management (2014), http://dx.doi.org/10.1016/j.jcom.2014.10.003 Contents lists available at ScienceDirect Journal of Co-operative Organization and Management jou r nal h o mep ag e: w ww .els evier .co m/lo c ate/jc om http://dx.doi.org/10.1016/j.jcom.2014.10.003 2213-297X/ß 2014 Elsevier Ltd. All rights reserved.