By March of this year, Tanzania will place a cap on interest rates on borrowing, the BoT announced late last year by decree of President Magufuli.
What is the effect to the economy when you put a ceiling rate on borrowing interest? In other words, what would happen if you stop banks from adding interest rates on borrowing after a certain level?
Well, first the banks would frown, because basically, the lollipop has been ripped out of their mouths, they simply won’t make as much as they used too. Or won’t they?
Once the cap is in place, the borrowers will rush to get more loans because interests are now controlled if not downright lowered.
With the increased frequency in borrowing, from both old and new borrowers attracted by the cap, banks should actually see a decent pick in their profits.
The logic is simple, many shy away from bank loans due to high interest rates, so lower the interest rates and more will apply for loans.
Instead of charging high interest rates to a few able bodies, charge lower rates to a larger group and enjoy even high returns.
It’s a win-win situation, yet another visionary economic move by President Magufuli.