The impacts of financial linkage on sustainability of less-formal financial institutions: Experience of savings and credit co-operative societies in Tanzania

• Financial linkage growth analysis in Tanzania’s SACCOS industry was conducted.
• Sustainability model was developed based on Panel data regression analysis.
• Financial linkage in Tanzania’s SACCOS was evaluated using the Sustainability model.

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.