Tanzania: President Samia’s call to cut interest will boost economy
At a recent 20th financial sector conference (COFI) held in Dodoma and which brought together banks, the issue of high interest rates charged by banks was raised again, taken up by its excellence President Samia, who for the second time reminded banks to rethink the lending rates charged by banks.
This issue has resurfaced because despite best efforts, the current average lending rates of most banks are around 16% and 18%, making it more difficult for companies not only to make a profit, resulting in high nonperforming loans (NPLs), but makes it more difficult to move the economy forward.
My aim is not to force the banks to cut loan interest rates, but rather, like the rest of Tanzanians, to contribute to the debate I foresee in the future, if further efforts are not made to ensuring that in the financial sector appropriate strategies are put in place that will reduce the president’s thinking on how to lead this nation which is beginning to develop rapidly and in accordance with the standards of international competition.
Could the high interest rates imposed on private companies undermine the execution of President Samia’s economic program? Should President Samia’s act of telling banks at the 20th COFI to cut interest rates be interpreted as a bank roasting to ensure that the gaping gap between the central bank’s monetary policy rate and the commercial bank loan rates to be met?
This is a gap that we must close if Tanzania under Samia’s leadership is to realize the vision of a Tanzania with a globally competitive economy. Tanzania banks despite various appeals from politicians and investors continue to lend an average of 16% and 18% interest to private companies.
The government is pressuring banks to cut interest rates to allow more businesses to access credit, expand operations and create jobs. But with the banks insisting that the high interest rate is the result of tough government policies, the central bank must step in to resolve the situation.
Private companies in Tanzania continue to struggle to access bank credit to expand their businesses. Since taking office, following the death of Dr JPM, on several occasions President Samia and other high-level politicians have complained about the high lending rate of banks which they say boils down to profits. from the banks.
I may not be one hundred percent on President Samia’s mind, but I think she would like to say loud and clear that if the banks are ready to give a boost to the private sector to lead the socio-transformation. Tanzania’s economy, borrowing rates must come down, and they must come down instantly.
The innuendo is that when banks don’t become just for-profit businesses but see themselves as active partners with government to build a healthy and stronger economy, then we would make tremendous progress in Tanzania.
Commercial bank lending rates have made it difficult for small businesses to obtain loans to expand their businesses and thus led to the collapse of some.
Speaking to a small business operator in the Goba-Center region of Dar es Salaam, he said: âGetting loans from a bank, especially for small businesses like us, is not easy. Sometimes, just because the banks don’t take your request into account, but you realize from their terms that you will have a hard time repaying. This lady went on to say, “I had a terrible experience clearing a bank loan in the past while running my legal business in the Kilimanjaro region of the same city and ever since I moved. in Dar es Salaam, not much changed when I tried to access loans.
The interest rate is quite high at 16% and many companies like mine cannot afford it or risk it. About 18% interest? This is extremely high if you ask me “I don’t know what the problem is, but the experience of other countries could open our eyes and help us find better ways to help entrepreneurs invest more and provide more jobs and income to government through taxation.
In Kenya, the central bank benchmark lending rate is 7% while commercial banks lend at an average rate of 12%. In Nigeria, whose economy is booming in competition with South Africa, the benchmark lending rate is set at 11.5%, but commercial banks lend between 18 and 30%. Although the president of the TBA, Mr.
Abdulmajid Nsekelea, and his role as managing director of one of Tanzania’s main banks CRDB, told COFI last week that the banking industry, as part of society, wants the market to have interest rates affordable to move the economy forward. are they waiting for the president to issue a third appeal to act on the rate cut?
Whether banks raise lending rates to make irrational shareholder profits requires more research, but economic fundamentals, including inflation, budget deficit, and recurring central government borrowing, determine the lending rate.
The Daily News of November 30, 2021 (p. 11-12) in its section on trade standards featured analysis on the reopening of central bank bonds which drew high bids. Without going into details, among the experts who expressed concern was Zan Security CEO Mr. Masumbuko, who said: âIt’s hard to ignore T-bills when 20 and 25 T-bills offer respectively. 15.49% and 15.95% annual interest. “Based on expert remarks like this and given that treasury bills and treasury bonds are risk-free investments, do we really understand the far-reaching consequences of such benchmarks on an economy like the United States? Undoubtedly, the flight of investors to fixed-income securities comes with a threat to the economy, as it crowds out much-needed liquidity or funds in the private sector.
The lending rate is a derivative of the treasury bill rate, the interbank loan rate and the key rate. The basic cost of financing a bank in our market is high, excluding staff costs, infrastructure costs, risk of default before profit margins. By the time the banks assess all of this, they are already high.
While everyone wants the spread between the financial strategy rate and the lending rate to narrow, I think that, despite TBA’s wish expressed at the COFI conference held in Dodoma, commercial lending rates by banks are not will not soon be reduced to an appreciable level.
Without a turnaround in the lucrative yields of treasury bills and treasury bonds and without appropriate measures to manage and cope with the factors that lead to the likelihood of loan default, bank lending rates will remain high.
All in all, as calming as the intention to have affordable interest rates move the economy forward may sound, the real situation, in my perspective, seems like a legendary slogan of the chicken issue and the hen issue. the egg.
While banks may think that the government must make a significant contribution to reducing the lending rate by easing the tariff burden on them and controlling the budget deficit, among other things, the government may think that reducing the greedy appetite of abnormal profits will do the magic.
The good news, however, if I listened to much of the speech by BoT Governor Professor Florens Luoga at the 20th COFI Conference, government and bank concern has now been triggered.
As the government does its part in striving to reduce the budget deficit, banks are urged to work more efficiently so as to spare them sufficient resources to free borrowers from the high interest rate on credit.
How long will it take though, we have to wait and see before the President speaks again about the dangers of a high loan interest rate.