NEW HOPE FOR CREDIT SUPPLY AS CENTRAL BANK EASES POLICY

In Summary

The central bank said it reviewed downward the discount rate – the interest rate at which it charges for lending to other banks – from 16 per cent to 12 per cent starting today and experts said the move could lead to reduced lending rates to customers by commercial banks as well as an improvement in money supply to the economy.

Dar es Salaam. There is hope for possible improvement in credit to the private sector after the Bank of Tanzania (BoT) slashed the discount rate by four percentage points effective from today.

The central bank said it reviewed downward the discount rate – the interest rate at which it charges for lending to other banks – from 16 per cent to 12 per cent starting today and experts said the move could lead to reduced lending rates to customers by commercial banks as well as an improvement in money supply to the economy.

It is a major policy stance taken by the central bank since President John Magufuli came to power in November 2015 and initiated measures that led to a credit squeeze by banks to the private sector.

Early last year, for example, the government ordered ministries, public corporations and local government authorities to immediately transfer cash that had been deposited in commercial banks, to the BoT, a move that saw about Sh500 billion mopped off commercial banks.

All that affected the flow of deposits as well as lending capabilities among commercial lenders due to tight liquidity.

Commercial banks primarily extend loans and fund their activities through customer deposits.

“The central bank is a last-resort lender and now it’s calling the commercial banks for less expensive credit,” says Prof Delphin Rwegasira from the University of Dar es Salaam’s economics department.

“It’s a signal of easing monetary policy and we hope this will help boosting money supply, credit expansion and encourage the commercial banks to lend at lower rates,” he says.

“This is a good step towards easing the tight policy which the private sector has been crying of affecting credit,” he adds.

An executive from a commercial bank also agreed that the policy move would improve liquidity and reduce cost of funding in commercial banks.

“But we should not expect any immediate impact to consumers because not many commercial banks use this instrument,” the executive said.

In 2016, the total domestic credit outstanding was Sh20.89 trillion with credit to private sector accounting for a larger share of around 79.5 per cent, according to the BoT’s monthly economic review for January.

That followed an annual increment of Sh516.6 billion or 2.5 per cent. The increase, however, was much less compared with an annual growth rate of 26.8 per cent in the year ending December 2015.

The slow pace of domestic credit was on account of a reduction in government borrowing from the banking system and slow growth of credit to the private sector by banks. Government borrowing decreased by 12.3 per cent in 2016 compared with an expansion of 33.7 per cent in 2015.