Bank of Tanzania and Interest Rates on Loans

By Geoffrey Kabakaki

This week the Governor of BOT revealed that his bank cannot influence the rates of interest that are charged by commercial banks on loans they give to their clients. Further his revealed that 36 commercial banks operating in Tanzania are well capitalized, and that they credit worth, in terms of capitalisation they are 16.2 percent above the international standard of 10 percent. He also revealed that these banks are able to meet customers demands for 45.5 percent as compared to 20 percent which is an international standard. He revealed this information when he was addressing the Parliamentary Committee on Finance and Economic Affairs.

But what really a country like Tanzania can do to make commercial banks reduce interest rates? and what are the costs to the economy by the persistent high interest rates of commercial banks in Tanzania?

For sure BOT must do something on interest rates charged by commercial banks in order to stimulate borrowings and rise consumption for the benefits of economic growth, although it is also true that many Tanzanians are not credi worth but this should not be entertained!. The interest rates spread to commercial banks is very high, this could be related to lack of competition in the banking sector which in a way has resulted into the formation of a cartel at the expense of consumers and the economy. BOT should do a research on this matter and also BOT should review probably its lending and borrowing interactions with banks, what rates of interest is BOT charging to commercial banks?

If BOT interest to commercial banks is also high, it should be upon BOT to reduce that interest in order to allow banks also reduce the interest they charge to their customers. This means that, it is not necessarily true that BOT can do nothing on interest rates charged by commercial banks on their customers, BOT can intervein by reducing the interest rates is charging while lending and borrowing to commercial banks! and commercial banks can replicate this to the credits they are providing to customers.

High interest rates on loans mean that fewer people will borrow money for investment activities and those who will borrow will get little profits or fail to make any profits. The implication of this is little economic activities in terms of investements, little income to the people, hence little consumption of goods and service. The end results will be a vicious cycle with persistent economic activity stagnation, poverty and small scale of industrial and agricultural growth in the country. Every country economic policy cannot succeed unless the banking sector is functioning properly, by functioning properly means providnig credits to people for investment purposes, that is why USA and Britain when the banking sector crushed Governments immediately provide money to the banks. This is not that government like banks owners, no, Governments want banks to continue giving money in term of credits to people in order to make investments!

Based on the above analysis the issue of high interest rates and credit worthness that deter Tanzanians from borrowing money for investment purpose is a very serious matter that should be addressed!

The data that Govonor has provided to the Parliamentary Committee show that commercial banks are keeping a lot of money at their disposal, this is hardly a good information because they keep money at the cost of the Tanzania economy. This money is supposed by in investments creating jobs and income to people.

What is your views on this matter, should commercial banks continue charging high interest rates on loans? is it wise that BOT can not do something?