A Dissertation Submitted in Partial Fulfillment of the Requirements for Award of the Degree of Master of Science in Accounting and Finance of Mzumbe University
The study was mainly aimed at assessing the causes of high cost in the issuance of bank guarantee by commercial banks in Tanzania; CRDB Morogoro Branches were selected as being an appropriate representative. The study used a cross sectional study design which specifically deployed a diagnostic study in directing towards discovering what is happening, why is it happening and on what can be done on high costs pertaining to Bank Guarantees with Tanzanian Banks.
The sample size of the study comprised of 53 respondents. Objectives of the study were to determine the extent to which Bank Guarantees are preferred by customers, identify factors which are considered in establishing the issuance cost, establish components involved in coming up with issuance cost and lastly seek justification for including those components in coming up with issuance cost or cost of a bank guarantee.
The study found that majority of customers prefers bank guarantee since it assures their clients regarding completion of the contract. It was further found that banks consider factors such as value of the contract, asset pledged as collaterals, reputation of the customer (credit worthiness) and nature of his/ her business. More ever, it was found that banks when computing issuance cost they include components such as application fee, mortgage fee, legal fee and valuation fees.
The study concludes that bank guarantees are generally preferred by customers. It has further concluded that issuance costs are based on necessary procedures that banks must follow before issuing the guarantee. It is therefore concluded that, there is justification for the issuance cost to be high since they are based on necessary procedures that must be followed by the banks before providing guarantees to their customers.
The study recommends that costs which are not very necessary in providing guarantees be removed. These include the cost of mortgage and valuation fee.