INDIVIDUALS and corporate borrowers in Tanzania will soon start to feel the pinch as banks are steadily but surely increasing their lending rates beyond current range of 14-24 per cent.This is bound to play havoc with an already struggling economy, as it will push the number of borrowers further down, thereby slowing growth of the productive sectors of the national economy – as well as 'individual' economies.
Economic experts who spoke to this paper this week said the banks are likely to increase their lending rates, so as to compensate for the high inflation rate that is currently obtaining – 13 per cent – and which shows no signs of relenting!
Bankers will also want to counter the losses incurred in their bond portfolios.
Borrowers from the commercial banks are currently paying interest rates ranging from 15 to 45 per cent, depending on the interest policy of the bank concerned; the nature of the loan; the kind of business or economic activities involved – and the the risks associated with all that.
In the event, this has ruined the ability of borrowers to expand their capital, as well as increase savings that would enable them to re-invest their incomes.
Naturally enough, the immediate victims of these developments would be low income earners and individual borrowers. If nothing else, this would also have the effect of locking millions of Tanzanians out of the financial services world.
Interest income is one of the major areas upon which banks depend to generate income as a matter of course. But, according to the financial reports of the banks, foreign currency dealing and related transactions are slowly taking over as the lead income-generating activity in the banking sub-sector.
Analysts say this situation is caused partly by the move last week of the central Bank of Tanzania (BoT) to auction a seven-year bond worth Tsh20 billion, with a 10.08 per cent coupon rate.
In the event, the auction ended up with the Government rejecting all the bids which were on offer despite a 31 per cent over-subscription by prospective investors!
This has made the investors and the banks to remain with high liquidity, having failed to dispose of same through investing in Government paper which is unquestionably more reliable – and with assured high returns!
During the Treasury bonds auction under review, investors' bid prices ranged from (70.0000/100) to (85.6194/100) – thereby reflecting demand for high yields.
The demand for high yields could be attributed to the extant high inflation rate (13 per cent); tight liquidity; and speculation arising from the high yields gained in the 5-year bond auctioned two weeks ago – as well as bonds auctioned in other countries in the east African region.
According to Dr Joseph Massawe, the director of Policy & Research at the central bank (BoT), the bids were probably rejected because the bidding rates were unrealistic.
“I have not gone through the reports that you are talking about, as I am outside the country,” Massawe said. “But, the bank could have rejected the bids because the bidding rates were unrealistic – and, hence, the bank looks forward to lower them!”
In his explanation, Massawe said the rejection must have a direct impact on the investors because, by failing to invest in the Government paper for that weak, it means the banks now have excess liquidity – which is expensive to maintain!
According to Joel Joseph Nkya, an analyst with Tanzania Securities Limited. “since the banks and investors are looking for high returns, with the BoT's rejection, banks are obviously going to increase their lending rates so as to compensate for their bonds portfolios.”
However, Nkya said there are many reasons for the supposed move by the banks to increase their lending rates.
Nkya gives some of the reasons as cushioning against losses due to borrowers' failure to repay their debts/loans; compensating for losses due to the depreciating national currency, and the inordinately high inflation levels.
“The fact that BoT rejected all the bids which were on offer will drive the banks into seeking alternative sources of high returns... And, it is their customers who will bear the brunt,” said Nkya.
Generally speaking, the fact that the central bank has moved to raise the interest on Treasury bills to around seven per cent as an average is an indication that individuals and firms seeking bank loans are likely to get them at a higher rate of interest.
Treasury bills were offering as low as four per cent in the past few months. More often than not, this forced investors to turn to long-term Treasury bonds which routinely offer higher returns.
According to the 'Weekly Market Commentary,' adjusting the lending rates is going to slow down loans book growth – and, thus, interest income. This is because the number of firms and individuals going for loans is likely to go down as a result of the higher interest rates they will be required to pay
However, Massawe was of a different view, arguing that, since liquidity is expensive to maintain, the banks are likely to reduce their lending rates – if only because they would have nowhere else to take their money to!
According to the analyst, raising lending rates directly implies uncertainty in Tanzania's economic prospects.
In addition, businesses will be deterred from borrowing because of the high lending rates... And this could have the effect of slowing down the economy.
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