Interest charges a symptom of the bad loans problem, not the cause

20Nov 2021
The Guardian
Interest charges a symptom of the bad loans problem, not the cause

SCARCELY  two months pass before one or other public economic forum takes up the issue of the level of interest charges offered by commercial banks to borrowers, whether it is small and medium companies or it is individual entrepreneurs in informal sector situations,-

Not much is said about large borrowers for they have leverage with banks, either through the government as ministerial agencies (like TANESCO among other big borrowers) or having a track record of solid business with banks, as partners rather than mere lenders. It is those without these two identifying characteristics who continuously hanker after rates.

For once, it is usually believed that interest rates are the key issue that the government needs to solve, by regulatory action on commercial banks, which it must be admitted the government has always taken care not to push too hard. This is likely to be taking place at the moment as financial sector stakeholders have been examining the state of credit in the country for the ‘national financial services week’ at Mnazi Mmoja grounds in the commercial capital. The Treasury and the central bank were apparently lamenting the level of interest rates charged by commercial banks, whereas they should be the first to grasp why.

One point raised on these concerns was the inability of so many borrowers to pay, one reason definitely being the level of interest to be paid, where some borrowers said the rates are at times up to 25 per cent of the value of the amount lent to them. That level of interest charge is quite high, but there are situations where ‘loan sharks’ charge almost 100 per cent of the amount, in other words one borrows 1m/- and will return 2m/- by the time the payments are finished. At times there is periodicity payment making the amount to be returned even higher than the percentage quoted, especially if the borrower is late to pay.

The popular outlook has usually been the moral argument of asking commercial banks to lessen the charges so as to ease the burden for borrowers, which fails to see the core of the problem. It is clear perception that a whole category of loans demanded by people of a certain profile or series (echelon) of profiles stand a good chance of not being paid, so rates become high so that banks recoup all their costs even if a number of the loans will fail. It isn’t that they charge high and earn hefty income from all loans.

The reason banks risk chalking up many non-performing loans is that nearly all sectors where operators need loans are doing bad business, even when they look profitable for instance in tourism, as many are doing poorly. The offer is high and demand is low, so shops have few customers, hotels, guest houses, function halls, taxis; all repaying loans. Money circulation is low in relation to the population seeking to trade.