By Allan Olingo

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Tanzania will in the next three months introduce a monetary policy to determine interest rates on loans in a bid to lower lending costs.

Coming just a year after Kenya introduced a rate cap, which banks now being blame for the dip in credit growth, Tanzania’s move is forecast to improve private sector lending and reduce bad loans.

The latest International Monetary Fund review of the country has recommended a change in policy to address the sharp fall in private sector lending and the rise in non-performing loans.

A week ago, while opening CRDB Bank’s main branch in Dodoma, President John Magufuli asked the central bank to speed up the introduction of an interest rate regime that will reduce the cost of lending.

“We want the Bank of Tanzania to hasten the introduction of this cap so that all banks can have uniform lending that is affordable to the public. I understand the risks involved in lowering this, but we also have to face reality that the current rates are too high,” the President said.

Capping interest rates

But BoT deputy governor in charge of financial stability and deepening Dr Bernard Kibesse said that the Bank intends to bring about “a fair level” of lending rates, which borrowers consider high.

“The policy will be out in March,” Dr Kibesse said. “We have benchmarked this law on the lessons learnt from Kenya and South Africa. We are prepared to mitigate any risks and challenges that they have faced.”

“We expect that capping interest rates will not negate the growth of our banking sector,” he added.

The banking regulator has, however, said that this will not be a direct rate cap like the one Kenya introduced in September 2016.

“We will be shifting from using the aggregate monetary targeting to determine interest rate — the price policy — to set the monetary policy,” the central bank said in a statement.

BoT currently uses a range of tools to set the policy, including liquidity control and interventions in the foreign exchange market. It has also been using the discount rate and the minimum capital requirements to set the policy.

This is not the first time Tanzania is trying to control the cost of loans. In 2011, MPs unsuccessfully sought to introduce a clause on the banking law to introduce a cap on the interest commercial banks can charge on loans. The government side shot down the motion, saying it wanted a free market.

The then BoT governor Prof Benno Ndulu acknowledged the concerns over the “high interest rates charged by commercial banks on loans and the low rates they offer for deposits,” but warned that an interest rate cap would hurt the very people it intended to help.

Effect

Experts say that the recent move will affect banks that are struggling with capital ratios, an issue the IMF says needs to be looked at.

“A lack of public spending, coupled with private sector concerns over policy uncertainty, is curtailing growth in Tanzania’s economy,” the IMF says in its latest review.

“While its first-half growth in 2017 was still strong, a sharp fall in lending to the private sector — prompted by high non-performing loans — pointed to a slowdown in growth.”

President Magufuli is also asking for the tightening of the forex controls by the regulator to tackle financial crimes and protect the local currency.

“We have 58 banks in Tanzania. We want the banking regulator to take action against the failing institutions. We would rather have a few viable banks than many failing ones,” the president said, adding that the government is already putting in place monetary policy measures to ease the pressure on the shilling.

In Uganda, the central bank has said it is not considering interest rate caps, even after an MP in July vowed to table a Bill to force the regulator to act.

But Central Bank Governor Emmanuel Mutebile warned that this would escalate distortions in the credit market, trigger black-market activity and deny many borrowers access to credit.