Influence of efficiency measures and bank categories on non-performing loans threshold among community banks in Tanzania

Abstract

Over the past twelve years Non-Performing Loans (NPLs) ratio in Community Banks (CBs) has been above the threshold of the overall bank industry. Operating above the NPLs industry ratio threshold connotes potential danger while the contrary is core for maintaining a safe loan portfolio. This study examined the influence of CBs’ efficiency measures and bank categories on the NPLs ratio threshold using unbalanced panel data from 9 CBs in a span of 17 years. Probit regression modelled the relationship between variables. The study establishes that Technical efficiency under Constant Returns to Scale (TeCRS) increased the probability of CBs to operate within NPLs threshold, while Scale efficiency (SE) and Technical efficiency under Variable Return to Scale (TeVRs) decreased the chances. Furthermore, Co-operative Community Banks (CCBs) had lower chances to NPLs threshold compared to Non-Co-operative Community Banks (NCCBs). The results are consistent with moral hazard hypothesis. The policy implications are that, bank regulators (BOT) should control CBs’ undue expansion to limit overstretching their capacity. Furthermore, CBs should fortify group lending methodologies in dealing with small borrowers. Moreover, bank regulators should reinforce capital adequacy regulations to curb excessive risk taking in CCBs in order increase probability to operate within NPLs threshold.