Dar es Salaam — Borrowers should not expect reduced bank loan interest rates soon, despite the dramatic fall in interbank rates and increased liquidity level in the market.
"The liquidity is currently stable, but I am very optimistic that things will remain the same in a while and the lending rates won't ease soon, said Mr Michael Paul from the Treasury department at Ecobank Tanzania.
Speaking with The Citizen in an interview yesterday he said the impact would be seen by next year, but currently there were signs of increased lending to the market, but not fully-fledged.
The interbank rates, which are the cost of borrowing between banks, have dropped to 3.94 per cent, as of Tuesday this week, the lowest in three weeks from 7.19 per cent in April this year.
The liquidity improvement in the banking sector is a result of stable deposits, as banks have continued increasing time deposit rates to mobilise more funds from the market. The current overall interest rate on deposits has increased to the maximum of 12 per cent from 10.32 per cent recorded in April this year, reflecting bank efforts to attract deposits.
Generally, a fall in interbank rates and increased liquidity levels can give hope for cheaper and more loans, but this depends on the confidence of banks to the market. Bankers say the sector continues to be cautious to lend because of the volatility of the market, especially the recent rise in non-performing loans (NPLs).
The Bank of Tanzania (BoT) has, however, directed banks with high NPLs' ratio to formulate and implement strategies to reduce it to at most 5 per cent and encourage them to increase the use of the existing credit reference system to reduce risks.
The rising non-performing rates have caused banks to increase their borrowing rates as the BoT's monetary policy statement for June indicates that they have rose to 17.72 per cent by April this year from 16.03 per cent in June last year.
The BoT's statement maintains that the banking sector has remained sound, stable and profitable with levels of capital and liquidity generally above regulatory requirements.
Since last year, banks reduced their lending portfolios to various sectors of the economy, with exceptions of personal loans, which have continued remaining stable despite the sector volatility.
With an ongoing tight fiscal policy, Mr Paul believes the interbank rates will continue remaining stable at a single digit.
The Treasury head at one of the largest banks, who spoke on condition of anonymity said the fall in interbank rates was a result of previous interventions by the BoT.
He said the decision by the central bank to reduce discount and statutory money reserve (SMR) rates had boosted liquidity in banking sector.
In March 2017, the discount rate was reduced to 12.0 per cent from 16.0 per cent to ease access to liquidity and in April 2017 the statutory minimum reserve (SMR) requirement on private sector deposits was reduced to 8.0 per cent from 10.0 per cent to broaden the lending base of commercial banks.
During the period, the central bank also injected liquidity into the economy through reverse repo operations, purchase of foreign exchange from the domestic market, inward foreign exchange swaps and provision of short-term loans to banks.
"Last year, banking liquidity was so low, which caused an increase in interbank rates, but now banks have cash and we expect this to push down lending rates," he said.
Another reason that has caused the interbank rates to go down is reduced government borrowing from the banking sector as well as the cut down of rates for government securities.
When asked whether this would enable normal borrowers to access cheaper loans, the official said it would take a maximum of two years for the banks to revisit their book of accounts and expenses.
Other bankers, who spoke to The Citizen yesterday, said a change of regime in 2015, also caused the changing of economic policies that created a different state of monetary and fiscal policies.
"During the fourth phase, the government was borrowing so much from the banking sector compared to the current regime," said an official from an international bank, who did not want to be named.
He said during the fourth phase government, the borrowing rate through securities were as higher even up to 20 per cent, as the government had high demand for cash.
However, since the fifth government started, things have changed, as expenditure has been cut, while government borrowing through Treasury bills and bonds has also been reduced.
"The fiscal and monetary measures that the current regime is taking have reduced expenditure, which in turn has affected government borrowing from the banking sector," the bank official said.