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New financial regulations for micro-lenders a positive move
2005-08-17 08:09:24
By Editor
All the major reforms undertaken in Tanzania’s financial sector since early 1990s have targeted liberalizing the provision of financial services in order to promote efficiency.
The efficiency barometer would have marks on quality and number of financial services available on the market, accessibility, ownership spread, the degree of inculcation of the culture of saving and borrowing, but most importantly, the average level of interest rates being charged by the commercial banks.
We have seen several banks establishing themselves in the marketplace, both retail and merchant, competing for a very thin cake in an, as yet, hostile financial market.
In the interim, several micro-lending organizations have sprung up to fill some of the obvious gaps in the area of financial intermediation.
For reasons which are technically correct, both banks and micro-lenders have maintained exorbitant interest rates on their various lending products.
Micro-lenders use the principle of collective collateral, but charge in excess of 40 percent in interest. Commercial banks charge on average between 18-20 per cent, or even higher, depending on the degree of risk perceived.
However, micro-lenders, unlike commercial banks, were outlawed from mobilizing deposits from customers, a provision which directly undermined their ability to lend as well as to reduce their lending rates.
Lack of deposit inflows to microfinance institutions restricts both actual and available cash for lending and other purposes. The new financial law therefore provides for greater leeway for micro-lenders to play their crucial role of fostering development.
A greater plus though, will be increased competition in hunting deposits and consolidating the culture of formal mobilization of savings .
The nature of financial business is for customers to deposit, or most likely be advised, or compelled to open an account in a bank(s) that have declared some sort of intention in providing, say, certain types of loans or overdraft facilities.
This means that even provision of micro-lending services will be competitive in the near future.
Those micro-lending institutions that will come up with better yields on deposits as well as reasonable terms on lending based on macro-economic fundamentals (inflation and exchange rates and so on) and realities, are expected to garner a stronger clientele base whose range of services on offer they will be able to widen.
Commercial banks will also be in the same league, hunting for scarce deposits plugged into a reciprocity relationship of better yields on deposits.
In the interim, micro-financing in Tanzania, largely busy in financing petty to medium sized projects of the trading nature, may now wish to widen the parameters of their lending choices, including large-scale farming based on the ratio of available deposit inflows to total cash.
This recent development raises an additional challenge for the need to expedite the establishment of a credit reference bureau to facilitate lending-borrowing decisions.
Massive defaulting has been one of the chief reasons for hiked lending rates in Tanzania, much ahead of the single digit inflation rate.
The tendency is for potential borrowers to blame the financial institutions for maintaining expensive lending rates, deliberately forgetting the fact that the default rate in Tanzania is one of the highest in Africa.
A stable financial system demands trust from both parties involved in any form of transaction.
However, it is true that trust has to be institutionalized, hence the call for a credit reference bureau. Both commercial banks and micro-lending organs badly need it. Now, not tomorrow.
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