Loan Officer’s gender and lending: Does it matter to the banking sector in Tanzania?

THE banking sector plays an important role in allocating scarce financial resources to efficient use within an economy. Commercial banks collect deposits from the general public, a surplus fund that depositors have. Then they channel these funds as loans to borrowers who have deficits at a particular time.

Generally, the bank plays an intermediation role in the economy. They collect small deposits and convert them
into large loans (denomination intermediation). Also, they transform short-term deposits into long-term loans
(maturity intermediation).
Without this role of commercial banks, financial resources could be inefficiently utilised within an economy.
Furthermore, lending remains one of the bank’s important functions. It involves issuing different credit facilities, ranging from salary advances, personal loans, trade finances and lease financing.

As lending makes the bank’s most significant asset, which generates massive revenue for the bank (interest income), it is associated with high risk to the banking industry.

The likelihood of the borrower not paying as per the loan contract exposes the bank to the risk of losing the
money they have acquired from depositors, referred to as credit risk. To avoid this risk, each commercial bank
prepares a credit policy that must be followed when lending to borrowers. But the question remains, why do
banks still experience nonperforming loans?

Banks can not mitigate credit risk totally, but they can use several mechanisms to lower the risk to the minimum. Studies have revealed that several factors can influence loan repayment by the borrower. Individual factors
such as age, gender, education, income level, and business nature can impact loan repayment.

On the other side, loan characteristics such as loan size, interest rate, loan tenure, and loan conditions can also
influence the repayment of borrowed money. Economic factors such as inflation rate, interest rate, economic
growth and the business cycle may also affect repayment. Importantly, it has been revealed that the individual
relationship between a loan officer and a borrower does matter in loan repayment.

The gender combination of the loan officer and the client is among the observed characteristics influencing loan
repayment, although not considered in the banking sector currently.

While we know that female exhibits high repayment rate than males, the combination of the loan officer and
client gender also significantly affects the repayment. Research indicates that four possible combinations can be
formed: female loan officer and female client, female loan officer and male client, male loan officer and male client and lastly male loan officer and a female client.

The relationship between a loan officer and a client creates trust and an obligation to repay the loan on top of the signed loan contract.

Those combinations with female loan officers tend to perform much better than male loan officers in terms of repayment. Banks need to learn from this observation which works better in micro-financing, and develop a strategy to lower their non-performing loans.

Furthermore, for clients who were previously served by a female loan officer and are currently being served
by a female loan officer, their repayment performance is much better than those with different gender loan officers.

The informal relationship between the client and the loan officer is essential for business continuity and successful loan repayments in the banking industry. Based on these, banks need to consider, among other factors in place, the gender combination between a client and loan officer to ensure a higher repayment rate.

This will lower their non-performing loans, increasing the quality of the portfolio, which will later maximize the value of the bank.
Furthermore, ensuring clients’ records of previous facilities and allocating the right loan officer will also enhance repayment rates. Not to forget, employee retention and motivation play a crucial role in ensuring the quality
portfolio of the bank.

As this is found to be working in Microfinance, it is hopeful that it will also work for commercial banks as informal relationship plays an essential role in loan repayment. Banks must establish a pilot portfolio to observe which gender combinations would work better for their clients.

Female loan officers are believed to perform much better than males, while male clients are highly associated
with defaults.

These important facts can facilitate the allocation of clients to loan officers to reduce the likelihood
of non-repayment. This will help them in improving the quality of the loan portfolio that they are holding.

Author: Godsaviour Christopher is A PhD Candidate at the University of Agder, Norway and a researcher
at the Center for Banking and Financial Services Research (CBFSR) at UDBS. (godsaviourchristopher@gmail.com
and +255753218577)