Tanzania: High Borrowing Costs Stir Huge Debate in Tanzania

Dar es Salaam — High borrowing rates in the banking industry have ignited a huge debate with some questions whether recent fiscal measures by the central bank had improved liquidity and reduction of cost of loans.

The debate was revived this week when Vunjo MP Charles Kimei remarked in Parliament that the "good monetary policy measures" had not brought about the desired outcomes, that is, to bring down the interest rates.

In July, this year, the Bank of Tanzania in July introduced some policy measures that laid a solid framework to increase liquidity and reduce the cost of lending to the private sector.

The BoT also said would introduce a Sh1 trillion special loan fund for banks and other financial institutions to access money for lending to the private sector.

The central bank also reduced the amount required to be reserved at the BoT, equivalent to the amount of loans extended to agriculture, as a way of increasing agriculture financing at lower interest.

However, Dr Kimei, who is the former CEO of CRDB Bank, said "the banks have just increased their profitability for the benefit of their shareholders instead of relieving the borrowers."

"There are problems with the monetary policy measures introduced by the Bank of Tanzania to improve liquidity and lower interest rates because they have not yet yielded," he said.

"I can tell you, the extra liquidity obtained by banks after the measures went to the government securities," he said.

According to him, the central bank should now lower the returns of the Treasury Bonds and Bills which are usually used as benchmark due to the fact that the government securities are risk-free.

"If the central bank is auctioning the risk-free government securities at, say 16 percent, which bank will charge lower than that. I can swear, interests cannot lower that way. We need to change the system by announcing lower rates in the government securities," he said.

According to the BoT, overall lending rates averaged 16.55 percent in September this year, compared with 16.75 percent in August and 16.57 percent in July.

However, the chairman of the Tanzania Bankers Association, Mr Abdulmajid Nsekela, told The Citizen that there were commercial banks that offered as low as 10 percent borrowing rates.

"All I can say is that the banks' interest rates have continued to drop from 18 percent to 14 percent and there are some banks which have already declared to offer as low as 10 percent," he said.

He added that banks were working on the interest rates after the central bank improvement measures which he described as stimulus package in agriculture. "The efforts to lower interest rates are continuous and sustainable," he said.

Commenting on the debate, Equity Bank executive director Esther Kitoka said "the current initiatives taken have not improved liquidity but rather improved capital position which is good."

However, she said, the liquidity still sits with big banks.

"This has resulted into a squeezed liquidity position in that market that creates stress to small and medium size banks," she said.

She said the government needs to allow for all players to get a share in public funds which will in the end have a multiplier effect on the economy.

"Big banks are not the preferred choice to all customers."

"We need to allow growth of other banks which can also expand their network to reach more people and improve quality of service across. GEPG (Government electronic payment gateway) payments are channeled through the same big banks which limit customer's convenience in making such payments and skew liquidity again to few banks," she said.

"The sector is not healthy due to concentration in few banks as compared to Kenya where banks are spread out in terms of their market share," she said.

The Bank of Tanzania could not immediately comment on the debate.

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