Microeconomic and Macroeconomic Drivers of X-Inefficiencies of Community Banks in Tanzania

Abstract

Over a span of years efficiency in Tanzanian Community Banks (CBs) has been low. The specific and macroeconomic drivers of inefficiency, however, have not been uncovered. Using tobit regression and triangulation methods the study analysed the drivers of inefficiency and found that gross loans to total deposit (Gltd), bank size (logassts), return on average assets (RoaA) and capital adequacy ratio (Car1) were statistically significant and negatively related to most bank inefficiency measures; while net interest margin (Nim) was statistically significant and positively related to inefficiency. The effect of macroeconomic factors on inefficiencies was not uniform; with GDP having an unexpected statistically significant and positive relationship with inefficiencies. The positive relationship is seemingly explained by the decreasing contribution of agriculture to the Tanzanian GDP. Policy-wise, these findings imply that bank regulators need to encourage community banks to increase their asset base in order to control inefficiencies. Moreover, community banks’ management need to reconcile between gross loan to deposit (Gltd) ratio and liquidity, as higher Gltd ratio may compromise optimal liquidity in banks. On the effect of Net interest margin (Nim), management should revisit their pricing policies in order not only to reduce inefficiencies but also to attract deposits from savers. With regard to the effect of GDP on inefficiency, community banks need to diversify in other sectors of the economy so as to mitigate excessive dependency on agricultural lending.