Who remembers what the then Managing Director of the CRDB, Charles Kimei, had said on 27 September 2018? At the heart of his speech was an acknowledgement that the banking sector has been slow to adopt the latest technologies that have simplified a small operator’s access to banking services until phone services opened their eyes that Small business owners should never be underestimated.
What has happened ever since? Although efforts have been taken to bring Small and Medium Enterprises into the banking services, the costs have neither been cheaper nor affordable, with stiff lending interests another gadfly to terminate.
According to the then managing Director of the CRDB, Charles Kimei, the SimBanking services were a late acknowledgement of the success of sim card innovations that had revolutionized the accessibility to money transfer, payment of bills and microfinance to small operators whom the traditional banking services had contemptuously treated as of nuisance.
However, the financial power of small businesses has been appreciated because of the pulling up of resources and ample opportunities to lend a guy. There is a decent business. Even traditional banks can strike with small businesses. Lots of it when bankers evaluate the individuality of the operators, but their overall effect is astoundingly breathtaking.
Out of this dose of realism, a small business owner became another additional client, albeit peculiar, enjoined in the list of the VIPs. In the beginning, it was difficult to control as the sim card business was in disarray, and it proffered unscrupulous players smoke room to dump their sim cards to evade meeting their financial obligations such as loans, among others.
Over time, small operators learned that credit ratings qualify them to ask for larger loans and acquire a reputation to live up to; every lender takes them seriously when they see they have better-borrowing credibility. And when the small borrower fails to meet his obligation, the lender threatens to share his low credit rating with other lending players, which will block future loans.
Step by step, the microfinance industry is being reorganised in a manner that may serve the long-term interest of all players. Still, another roadblock has been erected against the nobler aims to reach the weak members of society and offer them unthinkable banking services before introducing the sim card as a venue for small-scale financial transactions. As sim cards play a significant role in small-scale financial transactions, we are now exposed to unregulated transactional fees and exorbitant borrowing rates, which keep rising and rising with no slowdown in sight, annulling the very purposes behind the idea.
Read related: How Digital Payments are Fueling Tanzania’s Economic Renaissance.
Transactional fees hover around 10-15% of the value of the transaction, which is unfathomable. The owners of these lending firms are squeezing almost 10% of the principal sum, which is harsh, unconscionable, and quite disheartening. Neither the Bank of Tanzania (BoT) nor the TCRA does anything to protect small businesses. The initial intentions were to ease a small business’s access to financial transactions, but now transactional fees are proving to be a stumbling block. Users of sim card microfinance ought to ask themselves whether it pays off to part with 10% of their hard-earned cash to access the services. It looks like it doesn’t make ends meet.
If this is not a deterrent enough, small loans are pricey too. Interest payments are charged around 20% or more, with repayment usually 30 days or less. Hefty fines are slapped if you defer payment even by a single day. When initial interest payment and penalties are taken into account, we end up with a colossal over 30% of the principal sum borrowed with a one-month duration.
When the one-month duration is factored in per annum, the interest income to the sim card banking cakewalk owners is a whopping 240% per annum of the principal loan borrowed. This is not business anymore but daylight robbery, to put it mildly.
The sim card bankers entice their customers to invest in their savings accounts, where interest payment is pegged at 2% per annum, not per month! We would like both the BoT and the TCRA to respond to the question of why there is a double standard here. Why are the small businesses charged monthly or for a smaller duration while the interest income in their savings accounts is computed annually? Why is there no uniformity?
As we have analyzed before, shorter duration leads to higher costs for a small operator, while more extended periods to generate interest income leave a local business in dire straits. He has earned virtually nothing, while the costs of access to Simbanking services are a major cost of entry that discourages many from joining the party.
For the sake of argument, let us give sim card operators the benefit of the doubt that their interest rates in those savings accounts pegged at 2% are monthly, not annually, but charging loans at 10% plus over the same period still leaves an unnecessarily huge gap to close. Of more significance, the risk absorbed by these companies has become less and less of a factor because sim card owners cannot easily dump their cards to avoid meeting their financial obligations.
With risks lowered, why overcharge unless weak banking regulation is a catalyst to fleece the poor of their petty investments without attracting the ire of the regulators who seldom protect small businesses?
Fixed Deposit Accounts Interest Payments Slashed for What?
Interest rate computation is based on risk, inflation, and the lost or next best opportunity among many arrays of factors. The CRDB interest rates for certain fixed deposits that used to pay 13% per annum while offering monthly income have been reduced to 5% for the same services. The question is why the bank only covers the inflation rate but refuses to compensate their clients holding those same fixed deposits.
Indeed, the banks are unwilling to share the profits from lending those easy pickings from the fixed deposits. They are now disincentivizing the savings account holders because they are losing money to inflation, devaluation, lost next best opportunity and unrewarded risk absorbed. It is incomprehensible to consider banking regulators are condoning all these without facing the wrath of parliamentary watchdog censure!
Lending Interest Rates Stubbornly Above Two Digits!
As Charles Kimei, on November 21st, 2021, contributing to parliamentary budgetary estimates, vigorously urged the government to reduce lending interest rates to below two digits so that our banking institutions could mutually serve the local businesses profitably. The irony is the lending rates have remained stubbornly above two digits while the savings interest payments have been significantly reduced by more than half.
Also, read Financial Predators: A Tale of Financial Struggles in Tanzania.
The question remains: who benefits, and why is the BoT looking the other way as if it is empowered with the banking regulatory authority to arraign foul play by bankers? The BoT is sleeping on the job to the detriment of small businesses, potentially engines of economic growth where more than three-quarters of meaningful employment exists.
Our Considered Recommendations
Fixed deposit interest payments should cover both inflation, risk taken, and the next best use of the money locked into the deposit account. For sure, even if the purpose is to lower the cost of borrowing, that cannot be achieved by a fixed deposit saver while leaving both commercial banks and lenders profiteering at the expense of the saver.
A middle ground ought to be established to ensure a win-win situation prevails for all sides at all times. Transactional fees, penalties, and low rates of interest payments in Simbanking ought some form of regulation to restrict a small business from being left to pick the rotten end of the stick.
Periods of borrowing and lending ought to have some uniformity and rates which are very reasonable. When the rate variance is between 8% and over 200% between lending and savings rates, it is because regulation is nonexistent or it is not being stringently enforced with hefty penalties against banking malpractices.
