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President Samia’s call to cut  interest will bolster economy

President Samia’s call to cut interest will bolster economy

AT a recent 20th conference of financial sector (COFI) held in Dodoma that brought together banks, the issue of high interest rates charged by banks once again came up, echoed by her excellence president Samia, who for second time reminded banks to rethink about the lending rates charged by banks.

This matter resurfaced because despite effort taken, the current average lending rates amongst most banks are around 16% and 18% and this makes it harder for businesses to not only make profit resulting in high non-performing loans (NPLs) but make it harder to push the economy forward.

It is not my aim to force banks to reduce interest lending rates, but rather as rest of Tanzanians to contribute to the debate I foresee in the future, if extra efforts are not made to ensure, in the financial sector appropriate strategies are put in place that will reduce the President’s thinking on how to run this nation that it is beginning to grow rapidly and in line with international competition standard.

Could high interest rates charges to private businesses hurt the execution President Samia’s economic agenda? President Samia’s act of repeating to banks at 20th COFI to lower interest rates be interpreted as roasting banks to ensure that the yawning gap between the central bank’s monetary policy rate and the lending rate of commercial banks is bridged?

This is a gap we must tie together if Tanzania under Samia leadership is to realise the vision of a Tanzania whose economy is globally competitive. The Banks Tanzania despite various calls from politicians and investors continue to lend at an average of 16% and 18% interest to private businesses.

There is pressure on the banks from the government to reduce their interest rates to enable more businesses to access credit, expand operations and create employment. But with the banks insisting the high interest rate is a result of the government’s difficult policies, the central bank must jump in to resolve the situation.

Private businesses in Tanzania continue to struggle to access credit from banks to expand their businesses. Since assuming office, following the demise of Dr JPM, on separate occasions, president Samia and other high-level politicians have complained about the high lending rate by banks that the believes comes down to profiteering by the banks.

I might not be in president Samia’s mind hundred percent, but I am of the view that she would like to loudly say, if banks are ready to give a momentum to the private sector to lead the socio-economic transformation of Tanzania, loaning rates must come down, and they must come down instantly.

Insinuation is that when banks do not become mere profit-making enterprises but see themselves as active partners with Government to build a healthy and stronger economy, then we would be making considerable progress in Tanzania.

The lending rates by commercials banks have made it challenging for small businesses to secure loans to expand their enterprises and have thus led to the collapse of some.

Talking to a small business operator at Goba-Centre area in Dar es salaam, said “getting loans from a bank especially for small business minded people like us is not easy. Sometimes it is not because the banks do not consider your application, but you realise from their terms that you will struggle to pay back.” This lady went on to state that, “I have had a terrible experience clearing a bank loan in the past when running my legal business in Same town Kilimanjaro region and since moved to Dar es Salaam, not much has changed when trying to access loans.

The interest rate is quite high 16% and many businesses like mine cannot afford or risk it. About 18% interest? It is extremely high if you ask me” I do not know what the problem is but experience from other countries could open our eyes and help us look at better ways to help entrepreneurs invest more and provide more jobs and income to the government through taxation.

In Kenya, the central bank’s benchmark lending rate is 7% while commercial banks lend at an average rate of 12%. In Nigeria, believed to have booming economy competing with South Africa, the benchmark lending rate is pegged at 11.5% but commercial banks lend at between 18-30%. Although TBA chairperson Mr.

Abdulmajid Nsekelea, and his capacity as Managing director of one of major bank in Tanzania CRDB, told COFI last week that the banking sector as part of society wants the market to have affordable interest rates to push the economy forward, makes one to wonder, will they wait for the president to make third appeal for them to act on reducing rates?

Whether banks are making up their lending rates high to make irrational profits to shareholders need more research, but the economic fundamentals including inflation, budget deficit and recurrent borrowing by the central government determines the lending rate.

Daily news 30th November 2021, (pg. 11-12) at its business standard section presented an analysis on central bank to re-open bonds that attracted high bids. Devoid of going into the detail, amongst experts who viewed their concern was Zan Security CEO, Mr. Masumbuko who said, “it is hard to ignore Treasury bonds when the 20 and 25 Treasury bonds are offering 15.49% and 15.95% percent annual interest respectively”. Based on expert remarks like that and given T-bills and T-bonds are risk-free investment, do we real understand the wide consequence of such benchmark rates to the economy like ours? Unquestionably, investor flight towards fixed income securities comes with threat to the economy, as this crowds out much needed liquidity or funds for the private sector.

The lending rate is a derivative of the treasure bill rate, interbank lending rate, and the policy rate. A bank’s baseline cost of funding in our market is high excluding staff cost, infrastructure cost, risk of defaulting cost before profit margins. By the time banks price all these, they are already high.

While everybody wants the gap between the financial strategy rate and the lending rate to squeeze, I think, notwithstanding TBA’s wish uttered at the COFI conference held in Dodoma commercial lending rates by banks will not soon be reduced to an appreciable level.

Without turn around on T-bills and T-bonds lucrative yield and right measure to manage and cope with factors that lead to the probability of borrows defaulting, bank’s loaning rates will remain high.

At the bigger picture, as soothing as intention to have affordable interest rates to push the economy forward may sound, the actual situation, in my outlook seems to be a legendary slogan of chicken and egg question.

While the banks may think government must contribute significantly to reduce the lending rate by lessening the tariff burden on them and checking fiscal deficit among others, the government may believe lowering the greedy appetite for abnormal profit will do the magic.

The good news, however, if I listened to a great degree BoT Governor Prof. Florens Luoga’s speech at the 20th COFI conference, the concern on both the government and the banks has now been set in motion.

While the government is doing its part by endeavouring to reduce the budget deficit, the banks are being urged to work more effectively in a way that saves them adequate resources to free borrowers of the high interest rate on credit.

How long it will take however, we must wait and see before the President tell again on perils of high lending interest rate matter.

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Author: DR HILDEBRAND SHAYO

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