INTEREST rates on lending have slightly declined to 15.65 per cent, in mid this year, but are still high to facilitate smooth business and spur economic growth, according to the central bank.
The Bank of Tanzania (BoT) also notes that interest rates at around 15 per cent, are normally charged to well-established businesses, while small and medium enterprises (SMEs) are charged between 20 and 30 per cent on top of strict commercial conditions, especially the demand of collateral.
This has pushed the Minister for Industry and Trade, Dr Abdallah Kigoda, to plead with financial institutions to find ways of lowering lending rates and stringent rules for SMEs.
"The move will not only boost SMEs' output but also volume of loans contracted, thus ballooning banks' profitability levels," Dr Kigoda told the 'Daily News.'
By July this year, the overall interest rate stood at 15.65 per cent. However, the value for this indicator has fluctuated at between 42.83 per cent in 1995 and 6.54 per cent in 1978. According to the minister, the high interest rates and a number of rules including collateral discourage and choke the growth of SMEs which have crucial importance to economic growth.
Dr Kigoda, an economist, said the sector is contributing almost 65 per cent and 25 per cent of the total industrial output and trading. "There are a number of issues concerning lending interest rates, but the banks can at least start the discussion on how to lower them to SMEs," Dr Kigoda said.
The minister said the bottleneck should be how to empower this sector, which is the engine of the economic growth to access affordable capital plus managing their finances. Dr Kigoda said he was aware of the other variables that are pushing up interest rates such as inflation and Treasury Bills rates, but said the government was working to control them.
"We should increase farms' productivity to sustain ourselves (Tanzania) and have enough for export, as this will help lowering the inflationary pressure," Dr Kigoda said. Nevertheless, to address the issue of high borrowing costs, the economy needs a good infrastructure in place, national ID system and credit reference bureau.
The Barclays Bank Tanzania CEO, Mr Kihara Maina, told the 'Daily News' that despite credit being necessary to drive an economy, banks which are offering credit to the public, feel uncomfortable when putting client money at risk when lending. "To be able to do that we want to make sure that lending practices are as safe as possible. We need therefore infrastructure around safeguarding credit to be in place," Mr Maina said in a recent interview.
The bottom line of credit reference bureau will compel borrowers to behave better with respect to credit as banks are going to share defaulters' information freely. "Lower default rates will lead to banks charging lower risk premiums and therefore lower credit interest rates," Barclays' boss said.
"Although it would not happen overnight, ultimately the rates will go down". Some banks have started to offer soft terms on loans, like the Stanbic Bank's SMEs Quick Account. This account has no collateral obligation and needs only 24 hours to secure a loan.
"So far over 30bn/- have been issued in a span of about one year since the introduction of SMEs account, benefiting over 1,920 clients," Mr Abdallah Singano, Stanbic's Head of Marketing and Corporate Affairs, said.
Although the country does not have London Interbank Offered Rates (LIBOR) like benchmark it is heading toward that direction where formal yardstick rates driven by banks are going to be created.
These benchmark rates, according to money stakeholders, starts by revolutionary things of having interbank which at the end of the day require a lot of controls from the government, capital market, central bank and the like. One never knows in the coming years, Dar Interbank Offered Rate (DIBOR) may take shape to benchmark loans and deposits interest rates.