Why Tanzanian banks now banking on personal loans for profit

Dar es Salaam. The share of personal loans to commercial banks’ total credit to various economic activities is on the rise as lenders shift to salaried workers to increase their profits amid declining yields on government securities.

The Bank of Tanzania (BoT) said in its April 2018 Monthly Economic Review that personal loans accounted for 27.2 per cent of commercial banks’ total loans to various economic activities during the year ending March 2018, far above any other activity.

During the year to March 2017, the share of personal loans stood at 17.5 per cent, behind trade activities which accounted for 20.2 per cent. At a time when the BoT was lowering yields on government securities, commercial banks are left with no option but to start lending, analysts say.

With high levels of Non Performing Loans (NPLs) in the market – currently averaging 12 per cent of total gross loans – lenders are forced to become more and more innovative in their lending decisions and salaried employees are viewed as the best option.

Yields on Treasury Bills have fallen from 10.32 per cent in May 2017 to a measly 4.64 per cent in May 2018.

Similarly, in March 2017, the BoT cut its discount rate to 12 per cent from 16 per cent to help spur lending and boost economic growth. It was the first time since 2013 that the BoT was lowering its rate.

Again in August of the same year, the BoT lowered the discount rate to an all-time low of 9 per cent.

The discount rate is applicable to banks borrowing from the central bank as a lender of last resort and in the Treasury securities (government papers).

Such decisions have created room for commercial banks to aggressively ‘fight’ for an increased pie of the business that comes with personal loans issuance, forcing them to roll out loan packages with lower interest rates and more lenient pay back requirements.

Some of the commercial banks, which have announced reductions in loan interest rates in recent months, include: BancABC, Ecobank, PBZ and NBC.

While some lenders decided to keep their interest rates to themselves for reasons only known to them and their clients, CRDB Bank Plc came out openly on May 11, 2018, announcing that it was cutting its rates down from 22 to 17 per cent That was followed with a similar announcement from NMB Bank Plc which reduced its loan interest rates from 19 per cent to 17 per cent for salaried workers.

“For a long time, customers have been asking for the reduction of interest rates, we have now approved a huge reduction of interest rates that comes with best offers including a free processing fee for 6 weeks from today” the NMB Bank Plc chief executive officer, Ms Ineke Bussemaker said last week.

But CRDB Bank Plc ‘hit back’ announcing yesterday that it was further cutting its interest rates on personal loans to 16 per cent

Under the new arrangement, announced by the CRDB managing director, Dr Charles Kimei in Dar es Salaam yesterday, one can borrow up to Sh100 million, up from Sh50 million.

The loan, according to Dr Kimei, will be obtained within one day through the bank’s branches.

“We are also introducing a loan buyout system. We will buy the loans that some clients have with some lenders so that they can also get a chance to borrow from CRDB,” he said.