Abstract:
Over a span of years efficiency in Tanzanian Community Banks (CBs) has been found to be
low. However, the specific and macroeconomic drivers of inefficiency have not been
uncovered. The study applied explanatory sequential research design by examining relationship
between variables through analyzing quantitative panel data. panel data was used and utilized
nine (9) community banks except three banks which emerged recently. Using tobit regression
and triangulation approach the study analyzed 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 positively related to
inefficiency. The effect of macroeconomic factors on inefficiencies was not uniform; with GDP
having an unexpected positive effect on inefficiency. The corresponding relationship is
seemingly explained by the decreasing contribution of agriculture to GDP in Tanzania. Policywise, these findings imply that bank regulators should encourage community banks to increase
their asset base in order to reduce inefficiencies. Moreover, community banks’ management
need to reconcile between Gltd ratio and liquidity as higher Gltd ratio may compromise optimal
liquidity in banks. On the effect of Nim, management should revisit their pricing policies in
order not only to reduce inefficiencies but also to attract deposits from clients. On the effect of GDP on inefficiency, community banks need to diversify in other sectors of the economy so as
reduce dependency on agricultural lending.
