Tanzania’s money markets have tumbled and show no sign of recovering soon, leaving us to wonder what is happening to us. Interest rates have taken a major hit for reasons which defy understanding.
This article traces interest rates from the 1980s to the present, excavating the possible reasons behind the steady interest declines and how borrowers and banks have fared during this period.
I also collaborate with my ideas to arrest the sorry state of affairs. In 1988, I strolled through one of the local banks (name conveniently withheld) and implored a teller to give me fixed deposit interest rates for one year and above.
She told me interest rates stood at 39% per annum. I quickly transferred my little cash into a fixed-deposit account for three years.
After three years, I went to the bank branch and found the money had more than doubled. It was almost three times that I had deposited money into that fixed deposit account.
The sudden growth of my investment encouraged me to repeat the exercise, and I continued to reap money until 1996, when, to my utter shock, I found that interest rates had plummeted. This forced me to move the money into real estate, where I was confronted with mixed fortunes.
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My real estate journey is a story for another day. Today, let’s focus on money markets in Tanzania.
According to the Bank of Tanzania, the benchmark interest rate in Tanzania was last recorded at 6%. It averaged 11.32% from 1972 until 2024, peaking at 67.50% in 1994 and reaching a record low of 3.70% in October 2009.
The current low interest rates are partly the result of political pressure to encourage borrowers to take loans at the expense of money market investors. Still, the political duress came at a time when inflation rates had been soaring.
Can we deem low interest rates due to political pressures alone, or are other factors involved?
The inflation rate in Tanzania in 1988 was 31.19%, with an annual change of 1.24%. Bank rates were almost at par with this rate during this period and beyond.
Care must be taken to appreciate that different goods and services fared differently when dealing with an annual inflation rate. The annual inflation rate is an average figure that does not capture the inflation of every product or service.
So, in 1988, when I made my first fixed deposit, the interest rate was 39% per annum, and the annual inflation rate was 31.19%. The bank was paying me real interest income because the interest rate was above the annual inflation rate of 31.19%.
The difference between the interest and inflation rates was 8.19%, sufficient to cover my risk, losses on the next best option, and adverse foreign exchange fluctuations. Equally important is to point out that lenders were being charged 45% per annum, which was 6% above what money market investors were being paid.
Today, money market investors are paid 5% per annum, while lenders are charged 12-18% per annum, leaving the banks with around 7-13% per annum.
Banks should have been offering investors an annual interest rate of 8-9% compared to the rates they charge lenders. This would have left banks saddled with around 5% income and encouraged their clients to have enough financial incentives to participate. At the moment, it is not so!
Today, interest rates are around 6-5% annually, closely accommodating the annual inflation rate. In 1990, annual inflation was 35.83%, which began to drop steadily, hitting 7.89% in 1999. An era of low inflation continued until 2007 when it reached 7.03% per annum.
Between 2008 and 2012, annual inflation rates dodged, and the country experienced a kink of 16% per annum in 2012. From 2013 to date, inflation rates have been very low, ranging between 4% and 6% per annum.
My concern has always been how bank rates mirror annual inflation rates without catering to risk and forsake the subsequent best option investors incurred without compensation.
Our banks only offset annual inflation rates to investors in the money markets but do not adjust for risk taken and loss of the next best option.
The lack of compensating risk investors incur means their appetite to enter the money markets cools off because the monetary incentive is eroded.
Money market investors find their investment portfolios losing money because they take the risk, with banks having nothing to do with it.
Banks do fail, leaving investors unprotected. Where refunds are available, they are limited to a few thousand, insufficient to compensate for the lost money comprehensively.
Tanzanian banks never adjust to losing the next best investment to attract more investors to venture into money markets. As a result, few Tanzanians see the logic of placing their cash in this market.
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The lost next option’s lack of comprehensive attractiveness has prodded local investors to venture into real estate, where another pathetic rate of return has diminished their financial portfolio.
Again, adverse foreign exchange fluctuations cause a loss of value. Friends of mine in the diaspora would like to plunge their life savings into Tanzanian money markets, but it is not worth the effort when they do the math.
Tanzanian shilling is nosediving daily despite claims of mega investment deals being locked regularly. Our investment strategy does not add value to our natural resources, which explains why our local currency weakens overall compared to major international currencies.
I will spare you the rigours of appraising the loss in foreign exchange, which is rarely debated in Tanzania, but I will cite just one example to drive a point home.
I have a friend in the US who wants to invest one million dollars in local fixed deposit banks. He asked me for advice on the most attractive rates in Tanzania.
His US bankers gave a party 2.7% per annum for a five-year fixed deposit. He thought and still does believe he was being robbed.
At that time, one local bank offered 13% per annum with monthly payments. I thought that was a great deal because the rate accounted for inflation, taxes, foreign exchange losses, and the opportunity cost of the next best investment.
My friend was thrilled by the proposal, so he waited for his money to mature before opening an online bank account with that local bank.
By the time the fixed deposit had matured, interest rates had fallen by more than 100% while interest rates were gawking at 5% per annum, with monthly payments preserved.
It was a huge loss. I had to alert my friend that Tanzanian financial markets were a Ponzi scheme with a frightening twist. I advised him that it was better to begin surveying stock options at the New York Stock Exchange rather than throwing money in a money market designed to impoverish him.
He heeded my advice, and Tanzanian banks would have lost a diaspora investor with impressive means if our local banking players had acted with the agility needed.
During that period, the Tanzanian shilling lost 39% of its value, making a 5% interest rate—before even factoring in the 18% VAT—a significant loss.
The VAT on interest income, which stands at 18% per annum, is a more significant concern in Tanzanian money markets. This is another daylight robbery.
What is happening is a money investor has made a loss from his fixed deposit income because he was compensated for annual inflation but nothing else.
So, the Taxman illegally comes to bite an interest income solely that has covered inflation! The interest income has not covered the risks taken, loss of adverse foreign exchange fluctuations, and foregone the next investment option.
Once you have the government taxing loss, you should not doubt why few Tanzanians are willing to risk it all in money markets, where their wealth precipitation knows no bounds. It is a sure way of becoming very poor over a long time.
What shocks my conscience is why the Bank of Tanzania (BoT) allows banks to offer interest rates that only cover annual inflation but not risk assumed, losses over foregone next-best investment, and adverse fluctuations of foreign exchange, with VAT pig-butchering even that conspicuous loss.
It is illegal for our own Treasury to tax compensation on inflation at any rate. Therefore, BoT should lay down guidelines and regulations on what can be taxed and at what percentage. VAT at 18 % is unlawful on inflation offset.
Unless bank interest rates offset inflation, the next best option is risk and negative fluctuations on exchange rates plus a profit. Then, after adjustment of non-profit income, VAT at 18% can be charged on profit alone.
Most Tanzanian money market investors lack an understanding of financial variables and may be cheated without knowing it since they get paid something.
Banks charge borrowers more than double what they pay money investors, meaning the local banks pilfer their clients both ways. Borrowers pay more for bank loans, while depositors get less for their investments, leaving banks and the Taxman the biggest winners!
Our politicians have been ferociously campaigning for reduced borrowing rates without striking a chord that will ensure banks do not short-change both sides of their clients. The BoT is a conspirator in chief in these financial crimes.
The BoT can direct bank interest rates on fixed deposits to shield depositors from inflation, risk, losses in foregone next-best investments, and negative exchange rate fluctuations.
The BoT also can set what kind of taxes can be charged on interest income while charging VAT is another major contributor in money investors shunning having their hand there.
A sad combination of over-taxation, under-compensation and letting the government and local banks earn where they have not sown narrate what is wrong with the Tanzanian banking sector.
It is not a lack of ideas, but the BoT is too politicised and lately has become a political tool contrary to the constitutional imperatives. As a result, we are where we are.
Fixing our rot in the banking sector may attract many local and overseas resources, tapering the unquenchable thirst to dip our grubby fingers in international lenders’ deep pockets, who charge through the nose, encroaching on our fragile national sovereignty.
Is anybody there paying attention to this, or do the Bretton Woods financial institutions smite us to flex our muscles and free ourselves from a self-imposed national debt that keeps skyrocketing until even the international lenders dump us for being too risky?
