19 February 2013

Tanzania: Higher Bank Lending Rates Frustrate Local Investors

THE debate on higher interest rates on lending has intensified after the Minister for Finance and Economic Affairs, Dr William Mgimwa, called upon financial institutions to look on how they can address the matter and step up economic growth.

Although officials want lending rates to go down, monetary titans have it that the government should build up the necessary financial infrastructures to support descending interest rates. Dr Mgimwa urged that the banks should find ways of lowering interest rates on lending to enable borrowers to acquire new loans and service the existing loans.

"This will help people expand economically, settle their debts in time while building trust," Dr Mgimwa, an economist by training, said last week when opening the Bank of Africa branch in Kahama, Shinyanga Region. President Jakaya Kikwete, at a different forum, was quoted as saying that lending rates were on the higher side and likely to backpedal economic growth.

He said higher lending costs will push up production costs. The Minister for Industry and Trade, Dr Abdallah Kigoda, also urged the banks to lower lending rates to spur development growth hinting that the current rates were prohibitive. "Banks should start thinking and talking about lowering lending rates to open the doors for many borrowers," Dr Kigoda said.

He, however, acknowledged that the government has the role to play to bring down the rates especially for small and medium enterprises (SMEs) to accelerate economic growth. Dr Kigoda, an economist, said he was aware of various variables pushing up interest rates including inflation, treasury bills and bonds rates, but promised that the government is working round the clock to control the same.

The lending rates are as high as over 20 per cent in some banks while deposit interest rates are between five and 12 per cent. This makes the spread (difference between lending and deposit rates) range at between 10 and 15 per cent. One wonders why the lending rates are that high in this seemingly competitive industry with about 50 banks and a multitude of none banking financial institutions.

Mzumbe University's Dar es Salaam Business School Senior Lecturer, Dr Honest Ngowi, said possible causes for the higher lending rates include covering banking costs, profit margins, inflation, demand and customers' ignorance. "Financial institutions have to charge 'adequate' price (interest rate) to be able to cover their costs.

These costs typically include salaries, banking infrastructure costs, insurance; various taxes and fees including rental fees for business premises," Dr Ngowi said. He said banking business revolves around taking deposits from the public and lending the same in order to make profit.

The concept of time value of money is critical in banking. Inflation therefore is among the core and most fundamental drivers of high interest rates. "This is mainly so in an inflationridden economy like Tanzania," the economist said adding "in order to protect the value of the money they lend, the lending institutions have to charge inflation-adjusted interest rates."

Therefore the higher the inflation (actual or potential) the higher the interest rates ceteris paribus (other factors remaining constant). One wishes that this was the same for depositing interest rates, Dr Ngowi said. Barclays Bank Tanzania (BBT) Managing Director Mr Kihara Maina said lack of suitable financial infrastructure has to be put in place to facilitate and safeguard credit to be in place.

The other financial infrastructure includes putting up a credit reference bureau which will itself depend on the national ID to identify individuals correctly. The National ID was launched last week while credit bureau is on pipeline. BBT MD also said changing of the central bank policy from reserve money to interest rates targeting would in one way or another help to reduce interest rates on lending as banks will use the rate as benchmark unlike the current trend of Treasury Bills.

The Bank of Tanzania (BoT) Director of Economic Research and Policy, Dr Joseph Masawe, said although money targeting works well, it is still not perfect than interest rates policy. "The economy now works in the different era, (thus) spearheading migration to targeting interest rates from money, which has positive challenges," Dr Masawe said recently.

The challenges including developing further the money markets such as the Dar es Stock Exchange and Foreign Exchange Market, that normally fluctuate in either direction on central bank interest rates.

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