INADEQUATE entrepreneurial skills and prudence in spending of loans are among major factors for higher rates of default and bad debts in financial institutions.
Most lending institutions have been directing their efforts in looking for borrowers because it is one of the core business of banks and necessary for generating income and profit.
To avoid falling into huge losses, other banks have instead turned their focus to invest in risk free government securities instead of lending, thus crowding out the private sector in allocation of financial resources.
Having a long experience in dealing with small scale borrowers from the rural areas, the National Microfinance Bank (NMB) says lending should always be preceded by seminars and training on the best use of loans on productive activities.
The NMB Bank Head of Agribusiness, Mr Robert Pascal, says the practice has helped the bank minimise defaulting rate while increasing the volume of credit to farmers in rural areas who have often been neglected by mainstream bankers.
For example, training farmers on better farming methods before issuing loans for investment in agriculture has been an important prerequisite by the bank.
The practice has shown positive results including cutting down defaulting rate. "NMB agricultural financing has been a success due to continuous investment in knowledge, new product innovation and partnerships with key stakeholders which ultimately brings tailor made pool of products, that are relevant to market needs and agribusiness value chains," he said.
Similarly, lack of credit information results in high lending and default rates for loans, as lenders cannot establish which borrowers are creditworthy.
This puts small and start-up businesses at an immediate disadvantage as large business may find their creditworthiness easier to prove. For example, some banks provide loans only to businesses that have been established for a number of years.
High lending rates also mean credit is out of reach for much of Tanzania's population. To reduce the rate of defaulting and increase access to credit, the Bank of Tanzania (BoT) has established a Credit Reference Bureau (CRB) having a database that would contain borrowers' information.
BoT has picked Creditinfo International GmbH of Germany and US business information firm Dun and Bradstreet to formalise the country's banking and credit system. A CRB will also reduce the risk of bad debts. BoT believes that commercial banks' lending interest rates would range between 10 to 15 per cent when the CRB comes into effect.
The Tanzania Postal Bank (TPB) says loan defaulting remains to be the major challenge to most lending institutions, although it has managed to contain it at four per cent which is below the industry rate of seven per cent.
"Putting into practices the best lending strategies has been a major reason for success in holding down defaulting rate, thus pulling down the level of the NPL," observed Mr Sabasaba Moshingi, the TPB Chief Executive Officer last week while briefing journalists on the bank's financial performance for the year ended December 2013.
TPB intends to make full utilisation of the Tanzania Postal Corporation (TPC) network and private agents, re-branding, risk management and control and leveraging on technology. Looking into 2014 and beyond, he said TPB will continue to be nimble, quick to identify opportunities and ensure maximum return on such ventures.
For example, the bank is expected to refine its legal status take advantage of the capital markets, particularly raising low cost capital. The process of going public may somehow delay but by 2016 TPB will already be among the listed companies on the Dar es Salaam Stock Exchange (DSE).
On TPB Popote, he said phase II was underway and steady as the bank is planning to connect 300 agencies from 160 as at the end of December 2013.
TPB has posted robust growth of about 18 per cent in the year ended 2013, with its net profit jumping to 4.73bn/-, up from 4.07bn/- registered in the previous period.
The bank has recorded high profit for the year despite making heavy investments in improving its branches, TPB POPOTE, establishment of new branches as well as the Corporate Social Responsibility (CSR).