BoT`s targeted bank credit to private sector consistent

The Bank of Tanzania (BoT)

The Bank of Tanzania (BoT) implemented its monetary policy in a manner consistent with the targeted increase in banks credit to private sector in order to support the anticipated growth rate (GDP) and the inflation target.

The latest BoT Annual Report shows that during 2005/06, the Bank anticipated that commercial bank`s credit to the private sector would expand at a minimum annual rate of 33 per cent, from 26.2 per cent recorded in the previous year.

?Private sector credit grew at an annual rate of about 36 per cent to 1,656.8bn/-, which is in line with the envisaged momentum of economic activities.

As a proportion of GDP, credit to private sector increased to 10.9 per cent, from 9.2 per cent registered in the preceding year.

The major factors behind the strong growth include strong economic expansion, a noticeable increase in the number of creditworthy clients and improvement in business environment,? it says.

The trade sector has been the latest borrower holding an average of 23.3 per cent of total private sector loans, followed by manufacturing, which held 20.3 per cent and the agricultural sector, 12.0 per cent.

During the period, the Bank continued to implement the Government Policy towards guaranteeing bank credits under the Export Credit Guarantee Scheme (ECGS) and Small-Medium Enterprises Credit Guarantee Scheme (SME-CGS).

The two schemes are aimed at enhancing commercial banks? credit to the private sector for financing export business and empower small enterprises in pursuing various pro-poor economic activities.

With the objective of filling the vacuum of medium and long-term financing to production sectors of the economy, including manufacturing, agriculture and tourism, the Government in collaboration with the Bank, has began the process of transforming the Tanzania Investment Bank into a development bank, to enable it provide long-term financing for investment and production to all sector of the economy.

As a first step, the government has already enhanced TIB?s capital by 17.5bn/-. The development of mortgage finance and lease finance will also be given priority in this financial year, according to the report.

Interest rates of commercial banks continued to be market determined.

The momentum towards narrowing the spread between commercial banks? lending and deposit rates, as well as maintaining positive real interest rates, is however not adequate.

The perceived credit risks associated with lending to the private sector is still very high, mainly due to remaining structural impediments in the economy, which have impact on banking services.

Last year, interest rates in the banking system recorded declines. The weighted average interest rate on time deposits improved significantly from 4.41 per cent to 7.27 per cent.

While lending rates declined marginally from 15.51 per cent in June 2005 to 15.40 per cent in June 2006.

On average, the 12 months time deposit rate improved significantly from 5.69 per cent to 8.27 per cent, whereas the one-year lending rate declined slightly from16.06 per cent to 15.59 per cent.

Although the margin between twelve month-time deposit rate and one-year lending rate shrunk from 10.09 per cent to 7.32 per cent.

The ongoing second generation financial sector reforms are expected to improve financial service delivery in the country, increase competition in the banking industry and establish information sharing framework on credit worthiness of borrowing among the banks, says the report.