Households’ risks decline on high disposable income

TANZANIA : BANK of Tanzania (BoT) has said financial risks arising from households decreased as a result of increased disposable income.

The Central Bank said in its Financial Stability Report-December 2022 that the rise in household income was mainly attributed to the increase in government employees’ salaries, payment of arrears and new employment opportunities following the recovery of the economic activities from the pandemic.

“The increase contributed to a slowdown in household debt to income, increasing creditworthiness and debt servicing capacity,” stated the report.

According to the report, household debt to income decreased slightly to 49.9 per cent last year compared to 50.8 per cent in the preceding period.

However, household income remains vulnerable to high prices of food and energy items.

The price increase is mainly attributable to supply chain disruptions caused by the war in Ukraine and below-average food harvest due to unfavourable weather conditions in domestic and neighbouring countries.

Also, the strengthening of US dollar due to the tightening of monetary policies to curb high inflation in the US may further deteriorate households’ disposable income and purchasing power through exchange effects, thus reducing debt servicing capacity.

Household borrowing and repayment improved on account of increase in income. A survey revealed that disbursed and outstanding personal loans increased last year following the increase in appetite for banks’ lending to households.

Likewise, loan repayments increased as borrowers’ ability to repay debts improved due to a rise in household income and cash flows.

The respondents’ reasons for increased loan disbursement are the recovery of the economic activities from the pandemic, the increase in salary earner’s income and eased loan terms.

The share of outstanding personal loans to total loans remained dominant as the growth of credit to private sector increased.

The increase in share is on account of a decrease in risk weight, an increase in income and banks’ preference for lending to the household sector.

The increased credit issuance to households may escalate credit risk in the sector as households become indebted, which may affect banks and financial institutions’ balance sheets in the event of default.

The current high cost of living due to increased food and fuel prices may further affect household income and debt servicing capacity.

However, the credit risk may be muted by improved borrowers’ creditworthiness through increase in income and stock of financial assets.

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