Interest Rates: Let’s Stop the Stupidity…

Some American folks are regarding their federal government’s part ownership of General Motors as an outright act of embarking on socialist policies. For someone like me who experienced socialism, I could understand the phobia. Tanzania abandoned socialist policies for a reason – and that governments are bad at running businesses. I worked for a state government, so I know how crippling bureaucracy could be.

As a matter of fact, the mayor of New Orleans, Ray Nagin, once admitted on a TV interview that governments are not built for speed. You were right brother.

Lack of efficiency and effectiveness, I believe, is a universal phenomenon that plaques most governments across the universe. Despite all that, it is amazing how some folks in Tanzania are still looking for government’s intervention in every aspect of life. One that I thought was crazy, is the call for the government to curb high interest rates charged by banks.

See for yourself right here.

Shoot me if you like, but I think the majority of Tanzanians are not aware of how things work. I think it is ridiculous to cry for lending ceilings, interest caps, etc, without knowing what drives the interest rate in the first place. So let me help. I might be wrong, so anyone with additional information chip in.

My understanding is that the risk profile of a borrower would drive the interest rate charged. Since banks are not there to dance mdundiko, they have to get a return based on the risk they are assuming. The problem is this – for ages, there was no mechanism in Tanzania to track each individual’s risk profile. Hopefully, this company would change that.

Given lack of a solid historical credit profile (including scoring) in Tanzania, the majority of Tanzanians poses a high risk to lenders. Your good intensions regarding the return of borrowed money must be backed by a clean history of doing so. It is that simple. So if Bongolanders want banks to go under (which will eventually affect their ability to lend even more), then keep on asking for lower interest rates that don’t match risk profiles of borrowers.

I must be dreaming or something, but I think it is stupid to suggest that the Tanzanian government force banks to set aside a portion of their capital for lending. Hello? How do you think banks typically make money? Let’s see what the National Microfinance Bank’s financial statements say. In 2008, the bank’s assets in loans, advances and overdrafts stood at TShs 570.6 million compared to TShs. 436.7 million in government securities. Check that out for yourself here .

The truth of the matter is that other than treasuries and stocks listed at the infant Dar-es-Salaam Stock Exchange; the list of possible investment options in Tanzania is very short. That in itself is a motivating factor, without government’s pressure, for banks to make money through lending. One must be very crazy to even propose a lending ceiling to National Microfinance Bank, given that they are doing more lending already.

Another factor that drives high interests in Tanzania is the volatility in the value of the shilling. If a shilling today does not have the same value tomorrow, prudent banks must set interest rates that preserves the value of their investment, including factoring the anticipated inflation levels in the interest rate. I think I don’t have to say more on that, because we can all see that most banks offer higher interest rates on saving accounts pegged in shillings compared to US dollars. The same is true when it comes to borrowing.

See an example of the Exim’s Bank right here .

I love my Tanzania. Nonetheless, I just hate some stupid things my fellow Tanzanians say.

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Photo credit: www.banknotesinfo.com