Applied Economics and Finance Vol. 7, No. 3; May 2020 ISSN 2332-7294 E-ISSN 2332-7308 Published by Redfame Publishing URL: http://aef.redfame.com 126 Role of Financial Innovation in Enhancing MSMES Access to Credit: An Empirical Investigation on Tanzania Wilfred E. Mbowe 1 , Fredrick R. Shirima 1 & Deogratius Kimolo 1 1 Bank of Tanzania, United Republic of Tanzania Correspondence: Dr. Wilfred E. Mbowe, Bank of Tanzania, United Republic of Tanzania. E-mail: wembowe@bot.go.tz, wembowe14@gmail.com. Disclaimer: The views expressed in this article are solely those of the authors and do not necessarily represent the opinion of Bank of Tanzania or any other institution. Received: March 20, 2020 Accepted: April 30, 2020 Available online: May 19, 2020 doi:10.11114/aef.v7i3.4777 URL: https://doi.org/10.11114/aef.v7i3.4777 Abstract This study assesses the extent to which financial innovations contribute to improving micro small and medium enterprises (MSMEs) access to credit in Tanzania. Information was collected through interviews using a structured questionnaire administered on a sample of 318 respondents. Probit estimates were used for robustness check of the factors that influence MSMEs borrowing behavior. The findings indicate that factors, which influence MSMEs to borrow money through innovative channels, comprise the need for meeting business start-up, operational and expansion costs. Other factors are in respect of ease of access; convenience; short loan process; and a relatively high degree of control of the loan process by the borrower. In contrast to progress made in improving access to financial services by MSMEs, loan access by individuals or businesses through innovative platforms is still low. Only 28.8 percent acknowledged having received loans through innovative platforms, and coefficient on innovation variable was found to be statistically insignificant. Explaining this anomaly include unfavorable terms of loans; high lending rates, inadequate knowledge; small-size loans; and short repayment period. Meanwhile, loan process time, loan size, loan access (distance) have a higher probability of increasing loan access by MSMEs. Therefore, there is a need to intensify measures towards enhancing MSMEs access to credit, taking advantage of available innovative platform channels. Increasing efforts towards reducing credit risk will help to lower the lending rates, while moral suasion measures by financial regulators together with borrowers‟ traceable business-record can as well entice loan providers to offer loans of larger size and longer maturity. Meanwhile, capacity building is imperative in enabling MSMEs to acquire requisite business management skills and inculcate record-keeping culture. Equally crucial is enhancing measures towards maintaining the country‟s macro-economic stability with a view to boosting demand for credit and improving MSMEs‟ loan repayment capabilities. Keywords: Tanzania, financial development, financial innovation, credit access, SMEs, empirical analysis 1. Introduction It is now widely acknowledged that the access to reliable and affordable financial services to the majority of the Tanzanians matters in fostering economic development through realization of the industrialization agenda and Vision 2025. This is through a noble role that financial institutions play in transferring funds from surplus spending units (savers) to deficit spending unit (investors), thus promoting efficiency and economic growth, see for example Shaw (1973) and McKinnon (1973). Financial institutions also facilitate a friendlier business environment for both domestic and international transactions. In recognizing this significant role of financial services, the Government undertook a number of initiatives aiming at putting in place a vibrant financial sector. These initiatives started with the first-generation financial sector reforms that begun in 1991 aiming at allowing the market forces to allocate funds in a more efficient way, enhancing the effectiveness of monetary policy instruments, and to promote competition among financial institutions in order to improve their efficiency. Following the recommendations of the Financial Sector Assessment Program (FSAP), the country embarked