Increased commercial banks' liquidity yes, but...
BORROWERS from the commercial banks and other financial institutions in Tanzania are already finding it more expensive to indulge in that 'habit,' following a rapidly rising inflation rate, as well as increased interest rates – mainly on financial instruments.According to Bank of Tanzania (BoT) reports, the weighted average
interest rates on money market instruments trended upwards – consistent with the liquidity squeeze experienced in August this year – compared with the position in August 2010.
The overall Treasury bills yield increased to 7.30 per cent in August this year, up from 6.45 per cent in July 2011. By comparison, the yield was 3.86 per cent in August 2010...
...In consequence whereof most of the banks have started to cast their nets among these financial instruments, which are generally considered to be safer and more secure that lending to the private sector.
During the period under review, the BoT report says, the commercial banks’ lending and deposit rates exhibited mixed trends, with the latter edging downwards, while lending rates rose – in consistence with the rising inflation.
The overall lending rate rose to 15.79 per cent in August 2011, up from 15.71 per cent in July 2011, and 14.35 per cent in August 2010, says the Bank of Tanzania's Monthly Economic Review for September 2011.
This means that domestic borrowers have to pay interest rates ranging from 16 to 35 per cent. This is a major barrier to growth, mainly in the productive sectors of the economy.
On the other hand, this will maximize interest income for the banks – and enable them to record super profits... Good news for shareholders and higher interests account holders!
A similar pattern was observed in the one-year lending rate which rose from 14.83 per cent in July 2011 – and 14.37 per cent in August 2010 – to 15.98 per cent in August this year.
Conversely, the overall time deposits rate fell to 6.30 per cent in August 2011, down from 6.42 per cent in the preceding month. For its part, the 12-month deposit rate fell to 7.96 per cent in August 2011, from 8.03 per cent in July 2011.
This will automatically reduce the banks' obligations on interest expenses – mainly on deposits – and this will automatically cut the banks' general operating expenses.
Bankers who spoke to Business Times said increased interest rates in the money markets, coupled with a rising inflation rate, are already having implications upon lending rates and long-term economic prospects.
“The outlook is that, lending rates will go up; and this will create more difficult moments for borrowers,” said Zahir Mustafa, the Barclay's Bank's consumer banking director for East & West Africa.
As a result of this, Mustafa said, most businesses will fail to grow; few new jobs will be created – both of which will have a bearing on the country’s future economic growth.
“I believe that, if interest rates will continue to soar, loan sizes of some borrowers will go down as well,” he said in an interview with this writer.
Bankers who spoke to this paper said the banks' performance during the third quarter of this year was higher than their performance in the second quarter that ended on June 30 this year.
This includes increased liquidity; higher assets growth; increased deposits and loans.
The three major banks in Tanzania – National Micro-Finance Bank (NMB), NBC limited and CRDB Bank – which together claim 49.4 per cent of the banking market share, were the major contributors of higher profits and deposits in the banking sub-sector.
However, the issue of Non-Performing Loans (NPLs) has remained a big challenge to banking in the country. Currently, the overall industrial rate has remained at nine per cent, though some banks have recorded ten per cent of gross NPL!
“We believe that this is an industry-wide problem, and we as banks should make sure we take the requisite approach to mitigate the situation,” said Exim Bank’s senior manager (Finance), Farzana Karimjee.
According to selected financial results, most of the banks – both large and small – recorded profit-after-tax increases compared with the same quarter last year.
The major drivers of the relatively good performance were loans and advances, followed by foreign exchange dealings and transactions, as well as investments in government securities.
Sabasaba Moshingi, chief executive officer of the Tanzania Postal Bank (TPB), said the major traditional drivers of banking profits have always been loans and advances.
Speaking to this paper recently, Moshingi noted that, under the new Bank of Tanzania regulations, some banks will find themselves reducing their loan portfolios in proportion to their deposits.
“Generally, performance of the banks during the third quarter (of 2011) was brilliant, mainly in the areas of loans and investments in government securities,” he stressed.
Rian Vanjaarveld, the NBC head of Finance, told Business Times that there was overall growth mainly in deposits, loans and total assets in the banking sub-sector during the third quarter of the year.
Noting that the increased interest rate (lending) by the Bank of Tanzania from 9.58 to 12 per cent per annum will cause credit to be more costly, Vanjaarveld that, in NBC's case, non-performing loans increased in 2010 because of retail lending.
However, in 201, the figure is decreasing/improving due to the actions that have been taken to improve retail portfolio/exposures.