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The main objective of this study was to determine the impacts of interest rate
reduction on commercial borrowing in Tanzania. Specifically, the study assessed the
relationship between interest rate and commercial borrowing, found out the internal
and external determinants of interest rate spreads in National Microfinance Bank,
(NMB) and determined the effects of rates reduction on commercial borrowing at
NMB. This study benefited by the use of both primary and secondary methods of data
collection. The methods employed include Questionnaires and interview.
Major findings of the study revealed that there was strong relationship between NMB
Policy rate and Lending Rate of commercial borrowing in Tanzania. For example,
when the NMB Policy rate increased the interest rate reduction on commercial
borrowing rate also increases and as the NMB Policy Rate decreased, commercial
Lending Rate also decreased and vice versa is true. This further meant that as NMB
Lending Rate increased, Overhead Cost decreased and vice versa. However, the
relationship between interest rate and commercial borrowing was observed when
there was an increase of loan amount taken by the customers, there was relief in doing
repayments to the borrowers. Finally, the relationship was observed when there was
fast growth of business entities as when there is lower interest rate it encourages the
investment and this necessitates the fast growth of business entities. Furthermore, the
study found various internal and external determinants of interest rate spread in
National Microfinance Bank (NMB). These include non-interest income
administrative/Operating Costs, inflation Rate and Deposit Rate.
Finally, it was revealed by the study that there are various effects of rates reduction
on commercial borrowing at NMB. The observed effects include the increase of
borrowing amount, constitutes economic growth, Increase lending rate and Lower
defaults.The study recommended that NMB should ensure that the interest charges for
borrowing are lowered so as to enable more customers to come and borrow. The
Bank of Tanzania (BOT) which is the Regulatory Authority of all banks in Tanzania
should apply stringent regulations on interest rates charged by banks so as to regulate
their interest rate spread and also, they should come up with rigorous policies on loan
advances. Due to the competitive nature of the banking industry in Tanzania, NMB
must employ sales persons to look for customers to borrow while exploring other
profit-making ventures. |
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