Undeniably high lending interest rates by commercial banks and currently charged by microfinance institutions negatively influence business and the economy.
Soaring interest rates slow down business growth and have a rippling effect on the economy that depends on microfinance institutions for easy access to credits.
While it is known that interest charged on loans is the main source of income for these institutions and taking risks must be high enough to cover operational costs, charging up to 30% per month equivalent to 360% per year in an economic setting in which most businesses operate in Tanzania is going to negatively influence business and economy instead of being a contributor to the growth of the economy.
In the parliament of the United Republic of Tanzania in December 2018 endorsed a Microfinance Act which when going through one note that it clarifies the basis under which microfinance institutions are governed, regulated, and operate.
The Act in addition stipulates for licensing, regulation, and supervision of the microfinance sector in Tanzania Mainland and Zanzibar.
In my interpretation, the document concretises an obligation made by the Ministry of Finance and Planning and the Bank of Tanzania to renovate the microfinance sector through better integration and regulation and this was to be realised through the National Microfinance Policy 2000 article, but the execution of the policy was ineffective, that led to its review in 2017.
The 2018 Microfinance Act was enacted to operationalise the national microfinance act 2017 whose main objective was to generate a supportive setting for the microfinance sub-sector to contribute to poverty reduction, nonetheless, a question arises on what is the effect of high lending interest rates on the economic environment?
The intensification in the cry of small borrowers, especially micro small businesses entrepreneurs for being charged high interest if not reprimanded by those responsible as per the Act, the business situation in Tanzania will continue to hurt many voters, something that can make them hate their government for no reason caused by a failure of someone somewhere to have failed to do their job.
Front pages published on 27th November 2022 regarding high lending rates changes incited me to resolve to say something subsequent analysis done by a newspaper published in Kiswahili published on 27/11/2022 with a headline that showed the existence of sucking blood loans which together with other costs make such loans awful.
In my view, the unlawful conduct of certain individuals and businesses licensed in Tanzania to operate as microfinance towards lending at high rates without serious control is a threat that if not managed could result in the toughening of the conditions for loans and other crediting agencies.
Although the government of Tanzania has done a lot over the years to improve the rule of law, more need to be done on managing those taking advantage to exploit a poor segment of the Tanzania population through the so-called easy access loans.
Ordinarily, the amount of interest that is charged is as if those who have the authority to oversee these rates are either on vacation or short of manpower and intelligence to crack down easy access loan providers whose current interest is up to 30% per month equivalent to 360% per year, in addition to default charges per day etc.
The intelligence to reduce the interest rates offered by majority lenders and financial institutions that have been given a license to do the financial business is not new to those who have been following public appeals from our leaders.
My memories remind me that the president of the Republic of Tanzania has several times on different occasions asked financial institutions to review the interest rate charged on loans extended to borrowers.
And Vice President Dr Philip Mpango likewise has also been giving an opinion on a similar subject on the reduction of interest rates which have been blocking opportunities for those who would like to access loans to develop themselves commercially and similar views have also been extended by Kassim Majaliwa (Hon) the Prime Minister of the United Republic of Tanzania.
The leader’s call to review the rate of interest on loans reminds me of the words said by the former governor of the central bank the late Prof. Ndulu, in one of his conferences when he advised the banks to think carefully about the interest charge admits profits financial institutions they were making if they are compatible with the situation of borrowers in contributing to the growth of the country’s economy.
Prof. Ndulu went further and advised that interest rates of 16% or other charges lenders put to access loans will stifle the economy instead of promoting economic activities and this may be reflected in the continued existence of bad loans.
It’s not my objective to point fingers at the establishments, but I wonder how a licensed institution can earn 30% per month in addition to other expenses and no one is seeing this as a problem, or someone must be reminded of their responsibility so that those who are busy looking for small loans from financial institutions have someone to speak for them?
The analysis of the loans named ‘kausha damu’ (see published Swahili papers on 27th November 2022) for a right mindful will realize that there is a problem that if not given an extra eye, all efforts to get rid of the Tanzanian out of poverty will hit the rock and this situation will affect more women who are a great supporter at the family level and for the nation as a whole. What kind of business can provide returns to pay interest of up to 30% per month?
Analysis of the price graph for Tanzania shows the prices of 30 products, offered by sampled 14 microfinance institutions is fascinating. More than half of the institutions analysed are privately-owned for-profit institutions, followed by NGO microfinance institutions.
Products examined, terms and conditions and the average market rate in Tanzania reveal that the smaller the loan size, the higher the cost incurred by the debtor.
When analysed using a standardized APR formula which involves the impact of the interest rate, fees and insurance, the lending rate reduces the expendable income of the individual and enterprises whose profit margins are due to the interest repayment which in most times seems higher.
Cracking and reflecting on rates of interest charged in our business environment the relevance of microfinance institutions in the growth of the economy cannot be undervalued particularly in developing and transition countries like Tanzania.
The basic drive of microfinance institutions is to realize the demand of the poor section of Tanzanian society by giving them credit facilities at reasonable interest rates. Regardless cost of the fund, business enterprises and even big firms as well as individuals needs loan or credit from commercial banks, policy banks and microfinance institutions to start or grow their businesses while individuals need credit facilities for household consumption on food, education, housing, purchase of personal effects etc.
Still, the major challenge of especially small and medium enterprises are the soaring interest rates attached to these loans, high inflation levels and overall slow growth of the economy.
Access to financial facilities is critical in developing an energetic small and medium enterprises sector in any economy. At any measure, when inflation increases the cost of servicing debts or loans becomes costly and borrowers will be compelled to pay at the real interest rate.
When this happens, there will be a negative impact on the country’s economy in the long term. Under such circumstances, the government must do more to improve the bar on abiding by the rule of law.
There are many policy suggestions, but critical ones are policy on the fixing of interest rates should be reviewed by the Central Bank to make the interest rates on loans more flexible and competitive.
The microfinance institutions in fixing their lending interest rates should consider the economic growth in terms of Gross Domestic Product, inflation levels as well as interest rate instability.
To help microfinance institutions retrieve loans given to customers or small and medium enterprises, the charges or interest rates levied on loans should be reduced so that businesses will be comfortable while paying such loans.
The Central Banks of most economies have a fiduciary obligation to regulate the operations of financial institutions. A Central bank ensures that its financial obligations of running the economy are sustained to ensure economic growth and the livelihood of the people and businesses.
Hence, as part of its obligations, it should ensure that interest rates on loans are accommodating and payable to foster and promote business and discourage bad debts, which in turn has negative consequences on microfinance institutions.
In our setting, microfinance institutions need to be stimulated to moderate their interest rates on credit they give to promote business above all SMEs that are in the majority in the informal sector of the economy.
