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Credit market ’regulator’ long over due
2006-06-14 09:38:09
By Mireny John
The 16 years or so of financial sector’s liberalization in Tanzania are painted with both good and bad stories.
Snappily, the good news is about having over 30 commercial banks and a lot other financial institutions dealing with micro-finance lending.
The bad news relate to lack of effective competition in the credit industry, unmistakably indexed by exorbitant lending rates to individual borrowers or private investors.
Of late, consumers have also been exposed to reckless and unfair lending practices.
The trend might not be immediately discernible in the minds of consumers with bank loans, pawn transactions, furniture finance or motor vehicle finance.
The thing about Tanzania’s credit consumers is their unsuspecting behaviour. I mean when they read electronic flashes on Automated Teller Machines’ (ATMs) suggesting that rates are about to change, they would not imagine enforcement would go retrospectively.
However, such cases are rampant in the credit industry, where contravention on existing loan and credit agreements is unilaterally carried out, and fleecing consumers to the brim.
If this practice is allowed to take its sway without restraint, the pleasure of increased access to credit would lead to over indebtedness.
The banking supervisory role as entrusted on the Bank of Tanzania (BoT) basically ensures that bankers operate according to financial laws of the land.
Yet, the same Act is silent on how to protect consumers and secure redress for ’unacceptable’ practices and enforce compliance with regulatory requirements.
There are ample cases where consumers are charged administration costs on processing their loans, leave alone periodic service fees.
Industry watchpersons fear that given the current multiplicity of service fees, a day is not far when customers would be required to pay just for opening a door leading to the banking hall!
Most of those fees are deducted from personal accounts without prior notification to customers.
All these and many other weaknesses in the credit sub-sector calls for a supplementary legislation for protecting consumers.
Without usurping the powers of BoT, we need something like a National Credit Act that would provide for the establishment of an independent regulator responsible for promoting a credit market that is fair, transparent, accessible and responsible. It would as well prop up a market that is competitive and sustainable.
Even economies with mature financial sector like South Africa, such an Act exists, and it specifically prohibits practices such as reckless lending and automatic increases in credit limits while regulating interest and fees.
In this regard, harsh penalties on credit providers that approve loan applications knowing that clients cannot afford would be enforced.
The noble role of the regulator is to bring transparency and honesty to the credit market, without distorting the basic rules of the market mechanism.
However, it requires honest disclosure from credit providers and consumers.
Loan agreements are frequently complex and difficult to understand, with many of the fees and obligations hidden in the fine print.
The vulnerability of people who have become so used to being rejected by credit provider is frequently exploited.
Hence, the regulator will further receive and investigate complaints, and educate consumers of their rights under the envisaged law. At the moment, different types of credit have been treated very irregularly.
Definitely, some critics would question the implied limits on interest rates and the additional administrative burden placed on financial institutions.
By far, the biggest effect on the industry would be the additional disclosure, which would require all lenders to disclose actual interest rates and illustrate clearly how much a credit agreement would cost the customer.
Apparently, low-cost credit providers would benefit from this.
Under the current arrangements, customers do not get the competitive benefit of their price advantage because disclosure is manipulated. The cost benefit will be much clearer to the consumer now.
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