factors Affecting Lending Environments in Commercial Banks in Tanzania

Introduction

The primary role of the banking industry is through their financial intermediation and mobilizing the funds. In this practice, there is an available investment for the individuals and companies. This is the common function of a banking institution. The main sources of funds in a bank are the customers deposits. Through the use of lending, the people can acquire their needs according to their agreement with the commercial banks. And by the implementation of the regulations that tends to protect the interests of the banks, there is an assurance that there is a reduction in the failures of the banks even in developing countries.

Background and Problem Statement

Because of the global changes in financial markets and financial market players could lead to changes in the delivery of credit to agriculture and rural developments. The changing competitive landscape could result in expanded niche players, new entrants, and firms exiting the rural and agricultural lending market. Understanding the changing structure of banking institutions should provide useful policy information to assure a safe, sound, competitive and efficient rural and agricultural lending market. The ability of banks to deliver agricultural and rural loans efficiently in the future will play an important role in rural economy. In the early research in terms of factors affecting the commercial bank lending to agriculture (in America, particularly in Texas), through the tobit model the researchers found that the ratio of agricultural loans to bank assets

declined as commercial bank deposits become more sensitive to market rates (Nam, Ellinger, & Katchova, 2007). However, in Tanzania which is a developing country, the scenario might be different. Then, what would be the factors that contribute in the lending environment of the commercial banks in Tanzania?

Research Aim and Objectives

The main aim of the study is to investigate the factors that might affect the lending ability of the commercial banks in Tanzania. And in order to properly gain the information needed, the study has four objectives that needs to be considered. First is to examine the structural and other characteristics of banks which might affect the lending capacity of the banks in different sectors like industries and agriculture, etc. Second is to determine the ability of the business sectors in terms of the agreement between the banks. Third is to identify the capacity of the commercial banks in terms of the liquidation and bankruptcy. And fourth is to measure the effectiveness of the regulations imposed in the financial environment.

Literature Review

The banks offer different services and products. For such, there are car loans, mortgage loans, credit for business financing and many others that require the depositors funds. However, because of the recession and financial crunches, the credits and loans became stricter. Added to that, are the continuous rises of bad debts, which affect the ability of the banks to provide the financial needs. The mismatch of the liabilities being payable on demand became a great problem that constraints the banks

in awarding the credit and loans. This entirely loses the shareholders. In terms of allowing the agricultural and industrial sector in lending, the negotiation and regulations are the only answer of the governmental and public banks. On the other hand, the commercial banks might be reluctant to create any lending transactions because as part of the credit risk management, the loan portfolio became their basis to award the loan or not. This is to avoid the long-standing debts even if there is a government subsidy and assurance. It is evident the last years effects are reflected in the practice of the banking institutions (Tanzanian Bankers, 2006).

Methodology

The applied method in the study is the use of survey and interview among the commercial banks in Tanzania. In the first phase of the study, the survey will be conducted among the financial officers who are handling the credit or loans transactions and activities. Through the use of the survey, the study can gain the idea regarding the implemented standards or protocol before awarding the credit and in collecting the debts they offered. On the other hand, the second phase of the study is through the use of the interview which will be conducted among the administrators or banks managers of the commercial banks. In this way, the researchers can determine the effectiveness of the imposed regulation in lending activities. In addition, the effects of bad debts in the operations of the banks can be also determined.

References:

Nam, S., Ellinger, P.N., & Katchova, A.L., (2007) The Changing Structure of Commercial Banks Lending to Agriculture [Online] Available [Accessed at: 08

http://ageconsearch.umn.edu/bitstream/9913/1/sp07na03.pdf September 2010].

Tanzanian Bankers, (2006) The Land Reform in Tanzania: Opportunities for Agriculture and Mortgage Finance [Online] Available at:

http://www.tanzaniabankers.org/land%20reform.pdf [Accessed 08 September 2010].

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