Don warns against growing gap between interest rates charged on loans

09Aug 2018
Francis Kajubi
The Guardian
Don warns against growing gap between interest rates charged on loans

COMMERCIAL banks have been urged to ensure that interest rates paid on deposits are not far off to those charged on loans so as to encourage people save their money with them.

NBC Managing Director, Theobald Sabi whose bank announced rate cuts on some deposit accounts earlier this week. File photo.

“Majority of the banks are charging interest rates on loans that go above 16 percent while interest rates paid on deposits are not more than four per cent. Lenders are striving to maximize their profits while reducing costs in terms of money paid to depositors which may discourage people from saving,” said Senior Lecturer in Economics at Mwalimu Nyerere Memorial Academy, Dr Lenny Kasoga.

Dr Kasoga said currently there is a growing gap between the two interest rates being paid by banks hence likely to discourage depositors because there is no incentive in keeping money at the bank.

He warned that as most big banks are struggling to maintain huge profit margins in a challenging business environment, their main area of cost cutting is lowering interest rates on savings.

“If this tendency continues, there is a possibility that depositors will choose other ways using their money to earn good profits such as through share purchases or invest in quick results businesses,” Dr Kasoga warned.

The Senior Lecturer argued that it is surprising that although banks are benefiting from Bank of Tanzania’s recent lending rate reduction, they are still targeting borrowers and depositors to maximize profits.

“This state of affairs is not good for the banking sector’s growth because it is retrogressive,” he noted.

Eelier this week the National Bank of Commerce announced changes on interest rates paid to depositors of selected accounts with effective from 25th August this year.

“NBC management would like to inform our esteemed customers that there will be some changes on interest rates for Chanua Account, Student, Pure Save and Kikundi,” stated the bank’s notice published earlier this week.

The notice further stated that new interest rates will be 2 percent for Chanua and  Student Accounts while for Pure Save Account worth between 10m/-  and 100m/- , interest paid will be a single percent and 2 percent for amounts exceeding 100m/-.

“The new interest rates for Kikundi shall be 1 percent for amounts of between 10m/- and 100m/- and 2 percent for deposits above 100m/-,” the announcement added.

The bank’s Corporate Manager, William Kallaghe said the rates have been reduced from between 4 and 5 percent. “There are measures that we take to comply with either the law or cope with the real situation on the ground,” Kallage said when responding to a question as to why has NBC management taken such a decision.

On his part, Gaudence Shawa who is NBC’s Head of Customer Life Cycle Management and Branch Optimization, said the changes won’t bring any negative impact because NBC remains attractive to customers in many ways.

“We believe in transparency and fair competition but we have nothing to worry about because the new rates are competitive and attractive in the market compared to many of our competitors,” argued Shawa.

Commenting on the changes, Bank of Tanzania’s Deputy Director of Banking Supervision, Thomas Mongella said as far as regulations are concerned banks are legally allowed to announced such changes according to prevailing market forces.

“As for deposit interest rates, banks are allowed to make changes provided they notify their customers about such changes in a period of not less than 14 days,” Mongella noted.