Syndicate content

The power of commercial lending: Myth or reality?

Jacques Morisset's picture

Let's think together: Every Sunday the World Bank in Tanzania in collaboration with The Citizen wants to stimulate your thinking by sharing data from recent official surveys in Tanzania and ask you a few questions.
Banks play a critical role in economic development, as success stories are difficult to find without a big increase in commercial lending over time. Countries like Korea, Malaysia and China saw their credit to GDP ratio surge by 40 percentage points during the 1990s. On the African continent, similar stories are emerging in Cape Verde, Senegal and Nigeria, though arguably at a lower rate than in Asia.

Tanzania’s financial sector has been growing rapidly over the past few years, almost doubling size between 2006 and 2012. As a result of the good performance of the national economy and the gradual liberalization of the financial sector, there are today 45 commercial banks, local- and foreign-owned, competing for costumers. This growth has translated into higher lending activities as reflected in the following statistics:

- Total banking credit surged from 11.3 per cent of GDP in 2006 to over 24 per cent in 2011. This last ratio is still below the regional average of approximately 45 per cent of GDP and far from the level achieved by Kenya (52 per cent).
- The recent increase in lending activities is partly the result of higher borrowing by the Government, which grew by 5.5 percent of GDP between 2006 and 2011, and now accounts for almost 20 percent of total credit in the economy.
- Private credit expanded from 12.9 per cent of GDP in 2006 to 20.3 per cent in 2011.

Domestic banks almost doubled their lending to public non-financial institutions between 2008 and 2012. By contrast, the credit allocated by the domestic financial system to the central and local governments has remained modest at only 1.2 percent of total credits at the end of 2012.

At the sector level, the allocation of total credit reveals that:
- Trade, personal services, and manufacturing counted for almost two-thirds of total domestic lending by commercial banks at the end of 2012.
- The share of agriculture and construction of total lending was only 15.5 per cent in December 2012, significantly lower than their contribution to national GDP (almost 30 per cent).
- Commercial loans to the electricity as well as education and health sectors increased by 103 and 80 per cent between 2011 and 2012 (but represented only 6.5 per cent of total lending at end-December 2012).

The following questions may help inform the policy debate about the role of commercial banks in Tanzania's quest for economic emergence:
- To what extent can commercial banks contribute to economic development in Tanzania?
- Will the growing competition between commercial lenders benefit customers?
- Can the rapid expansion of commercial lending endanger the stability of the domestic financial system?
- Is there a risk that a rapid increase in public borrowing could crowd out private lending?

Source: Bank of Tanzania and World Bank’s World Development indicators.

Comments

Submitted by Michael mammone on

Its no good telling the people your money is safe in the bank if the bank is gona go broke !! will the country be strong enough to recover !!no point investing if the investment isn't secure .

Add new comment