Interview: Charles Kimei, CEO and Managing Director, CRDB Bank
In what ways has the sector been impacted by volatility in commodity markets?
CHARLES KIMEI: One of the central risks of commodity financing is the unpredictability of world market prices, combined with the absence of mechanisms for managing this risk in unsophisticated financing markets, where hedging instruments – including price insurance and forward sales markets – are absent.
Notwithstanding this risk, a bank the size of CRDB Bank cannot completely avoid lending to the main sector in the economy, since agriculture accounts for more than 25% of the GDP in Tanzania. In the case of CRDB Bank – which has a loan portfolio of around $1.7bn, the largest in Tanzania – commodity financing constituted approximately 20% of the portfolio as of June 2017. Other banks finance commodities to a much lesser extent. The reason that most banks are shying away from commodity financing is the inability of traders to provide sufficient collateral. This is a widespread challenge in Tanzania, as commodity financing at a reasonable scale requires very high-value collaterals.
During harvest seasons, buyers of commodities need to accumulate huge stocks, especially for export. In addition, the size of loans needed to facilitate this short-term activity must be very large for the buyers to provide fixed or landed mortgages. As a result, banks with appetite for this business are forced to accept the stocks as collateral, which is placed under expert managers to ensure that stocks are released for export only after payment has been received in the bank’s account. This results in the commodity stock becoming its own guarantee and allows for small initial disbursements supported by minimum collateral. This may be referred to as “warehouse financing of commodities”. However, the global financial crisis of 2009-10 has made this model hard to sustain. During the crisis the prices of a number of commodities dropped dramatically, by more than 50% in some cases. This caused problems for banks as the stocks lost value well beyond expectations. The government was forced to step in to provide some relief to the commodity buyers, and also gave support to banks to restructure the issuance of short-term loans.
How have high interest rates impacted the ability of banks to lend for the medium and long term?
KIMEI: High interest rates of around 16-20%, when inflation is only at 5%, tend to increase default risk given the average returns on investment. Taking a 10-year loan for the construction of a hotel with an average grace period of three years and an interest rate of 20% as an example, the loan would be extremely difficult to repay, because it would double in the fourth year when repayment is due to start, due to capitalisation of interest.
Generally, term loans become problematic in a high interest environment. This is probably manifested in recent increases in non-performing loans in the banking sector across the East African region. Medium-sized to large banks can accommodate a limited amount of term loans; however, for small banks this task can be incredibly difficult.
To what extent can the Bank of Tanzania (BoT) facilitate borrowing within the sector?
KIMEI: As a last-resort lender and a fundamental player in major fiscal policy decisions, the BoT may indeed be able to contribute to the lowering of lending rates. This could be done in part by influencing rates on treasury securities, while also reducing the interest rates it charges when lending to banks. With lower BoT discount rates, the interbank money market interest would also be low, with consequent reductions in overall lending rates across the economy. As interest rates fall, appetite for medium- to long-term lending by banks would certainly improve.
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