Although BOT takes various measures such as Reductions in legal reserve funds (SRM), reductions in repos, bank lending and reductions in debt yields have not translated into lower lending rates as expected.
Lending rates remain higher at 16 percent for most banks, with the exception of CRDB Bank, which recently announced cuts in interest rates on farmer personal loans.
Currently, the average bank lending rate is between 16% and 21%, making it harder for borrowers to turn a profit.
This has also discouraged potential borrowers from applying for loans as others have chosen to borrow from individual private lenders or family members.
Working paper entitled “Determinants of Banks Lending Interest Rates in Tanzania, an Investigation using Banks Balance Sheets’ Data” by Wilfred Mbowe, Aristides Mrema and Sia Shao, three factors within banks will continue to keep interest rates on the roof.
There are currently other banks lending up to 21%, four times the BOT base rate, while the maximum mortgage rate is reportedly 19%.
Digital lenders that lend via mobile phones, including telecoms, lend at an interest rate between 11% and 15%, which is repaid within half a month or a month.
Interest rates for individual unregistered lenders are higher than mobile lenders or banks as funding costs range from 30% to 50% per month.
Bank-negotiated lending rates charged to Prime customers remained unchanged at around 14 percent through November last year, according to BOT.
According to the working paper, the main drivers of high lending rates are exorbitant operating costs, non-performing loans and financing costs.
Interest income is the main source of income for all banks.
The paper states that three factors accounted for 70.4 percent of small banks’ average lending rates in 2014-17, while for medium-sized and large banks; They accounted for about 69.5 percent and 67.4 percent of lending rates, respectively, they said.
Exorbitant operating costs
Bank operating costs are largely related to employee salaries and benefits, which on average account for 43.7 percent of banking industry operating costs and drive overtime.
People familiar with the banking industry claimed that the maximum monthly salary of the CEO of a major bank is 60 million/- which is equivalent to the profit of a bank branch.
Monthly salaries for CEOs of other medium and small banks have also ranged from 15M/- to 30M/-, which in part corresponds to a quarterly or annual profit for a small bank.
The banker says banks also recruit hundreds of middle-level managers for marketing, sales, risk and other departments, some of whom end up idle in offices with little work.
The cost of employee salaries and benefits is much higher at small banks, at 44.4 percent of operating costs, than at mid-size and large banks, at 42.5 percent and 43.9 percent, respectively, the working paper found.
The implications of this, the findings suggest, are that efforts should be directed towards improving operational efficiencies in order to reduce banks’ operating costs.
The key areas of attention are in relation to employee salaries, the paper suggests.
Other notable cost components are building and equipment rental costs, building and equipment depreciation, and incidental expenses, which together accounted for another 16.2 percent of the banking industry’s operating expenses.
In this context, the paper says, banks could consider using ICT advances in the country in the provision of services to reduce the cost of “death costs” and wages.
“Priority could be placed on leveraging the growing agent banking framework and digital banking technology,” it said.
The results find that factors affecting non-performing loans include global financial crises; credit check weaknesses; a decline in the supply of credit, due in part to factors such as liquidity constraints; and a decline in effective demand for credit and capital raising activities.
While banks are gearing up to meet the regulatory benchmark of at least 5 percent non-performing loans, other banks have gone beyond that.
NPLs are caused in part by economic uncertainty, job market instability and unethical practices by loan officers.
However, some banks use the debt recovery mechanism to recover non-performing loans.
Measures must be taken to reduce non-performing loans, including enhanced borrower screening mechanisms supported by bank-level credit management frameworks to reduce credit risk.
High financing costs
Funding costs are another factor that keeps banks’ lending rates high, as some funds are offloaded at higher costs rather than lending them at a lower or equivalent rate.
According to the BOT, the total interbank cash rate that banks use to lend each other ranged from 4.48% to 4.54% up to a seven-day period, while the overnight rate was 3.72%.
However, some banks say they typically move expensive funds overseas when there are local liquidity crunches.
In recent years, the BoT has introduced various policy measures to relax lending rules, including lowering statutory reserve requirements, lowering discount rates, and providing regulatory flexibility for loan restructuring.
For example, the central bank lowered its benchmark interest rate from 7 percent to 5 percent last year to protect banks from the impact of COVID-19.
The policy change aimed to give banks additional leeway to borrow at lower costs, signaling lower interest rates for banks.
To boost liquidity, the regulator also decided to lower the statutory reserve requirement (SMR) from 7 percent to 6 percent effective June 8 last year.
BoT governor Prof. Florens Luoga has claimed that the regulator has developed a series of policies aimed at lowering lending rates, increasing liquidity in banks and increasing credit in the agricultural sector.
Speaking to the Guardian last week, Gbenga Makinde, chief executive of UBA Tanzania, said they have introduced cluster marketing which offers a friendly price to consumers.
“In cluster marketing, we have collaborators from government agencies, semi-governmental bodies and companies coming to the UBA platform for financing and financing as a consumer loan at a very good interest rate,”
“Cluster marketing charges borrowers rates that are pretty good, friendly, and cheaper than what they get from other banks,” he said.
High-ranking government officials have also, from time to time, urged the banks to lower lending rates, but that doesn’t seem feasible in the real sense.
During the 20th Financial Sector Conference held in Dodoma last December, President Samia Suluhu Hassan reminded banks to reconsider lowering lending rates.
She said high interest rate spreads signal the inefficiency of the banking sector and when this happens, it hampers not only financial development but also economic growth.
In June last year, the President was also quoted as saying that financial institutions must cut real interest rates in line with measures being implemented by the central bank, and proposed cutting interest rates on short-term loans to below 10 percent.
She issued the directives following the dedication of the new zonal BOT office building in Mwanza.