The causes of non-performing loans in the banking industry- Part Two

2 min




Last week, I argued that non-performing loans (NPLs) are one of the major causes of economic stagnation (i.e., banks with high NPL tend to lend less to the private sector). The NPLs decrease the ability of the banks to extend additional loans to the private sector hence affecting the ability of the banks to play their role in the development of the economy. Therefore, we need to find sustainable solutions to lower the levels of NPLs and ensure the stability of our banking industry. Last week, I shared one of the main causes of NPLs in the banking industry which is the lack of supervision and monitoring of loans which is called post-disbursement monitoring. Today, I will share three more possible causes of NPLs in our banking industry:

Lack of effective credit risk management

Lack of effective credit risk management practice is another cause of NPLs in our banking industry. Although credit risk management practices differ from bank to bank based on the type and complexity of the credit activities taken by the banks, the fundamentals of credit risk practices are the same but still, the majority of the banks have less effective credit risk practices due to lack of proper skills among the credit risk personnel, and poor credit appraisal. One of the most important aspects of lending is determining the customer’s capability and desire to repay the loan and the banks can’t do that effectively if the credit risk staff are not competent and do not abide by policy and procedures. Banks need to have efficient risk management systems and procedures and train their credit staff comprehensively on collecting reliable and adequate information about the customers to minimize exposure.

Unhealthy competition among banks is another cause of NPLs in our banking industry. Currently, we have about thirty-four (34) commercial banks (Source: Bank of Tanzania) but only 19 percent (this figure is debatable) of the population is banked which results in unhealthy competition among the banks. Due to unhealthy competition, pressure to deliver services faster than competitors, and to deliver positive returns, banks are forced to increase the number of facilities to marginal borrowers and lower their lending standards. Although this strategy delivers short-term success, it’s deteriorating the assets quality of banks hence increasing the number of NPLs. Thus, to lower the number of loan losses in our banks, we need to lower the number of banks; By having fewer but strong banks; will improve the financial health of the banking industry, improves the customer experience, and increase efficiency & diversify the risks.

Government indebtedness to sensitive sectors of our economy is one of the reasons we have a high number of NPLs in the banking industry. Government failure to repay the contractors, suppliers, and vendors has left them with no working capital to run their businesses hence affecting their ability to pay their loans.

As the largest employer in the country, the Government takes a large chunk of the blame for the NPLs in the banking industry because the majority of the borrowers are those who have done work for the government but have not been paid at all or not paid in time which makes them unable to repay their loans. As a major stakeholder, it’s in Government’s best interest to pay its debtors on time to ensure no disruption of their economic activities.

To conclude, the NPLs are one of the major causes of economic stagnation since the NPLs decrease the ability of the banks to extend additional loans to the private sector hence affecting the growth of our economy as NPLs affect the ability of the banks to play their role in the development of the economy. I shared the importance of finding sustainable solutions to lower the levels of NPLs and ensure the stability of our banking industry.

Lastly, for the past two weeks, I shared four possible causes of high NPLs in our banking industry; non-supervision and monitoring of the loans, lack of effective Credit Risk Management, unhealthy competition, and Government Indebtedness to local debtors.



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