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The Link Between Cost Efficiency and Non-Performing Loans of Community Banks in Tanzania

Tanzania Economic Review

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Title The Link Between Cost Efficiency and Non-Performing Loans of Community Banks in Tanzania
 
Creator Mataba, Lucas; University of Dar es Salaam
Aikaeli, Jehovaness; University of Dar es Salaam
Kirama, Stephen; University of Dar es Salaam
 
Description The link between bank efficiency and non-performing loans (NPLs) has generally beenused to predict the effect of either variable on bank failure. The results have, by andlarge, remained inconclusive in the bank efficiency literature, falling mainly undereither ‘bad management’ or ‘bad luck’ hypothesis camps. This study applied the Tobitsimultaneous regression to explore the effects of ‘bad management’ and ‘bad luck’ onthe incidence of low cost efficiency and NPLs of community banks (CBs) in Tanzania.Secondary data from 9 CBs in a span of 13 years were sourced from the Bank ofTanzania (BoT); and from audited accounts of CBs. The paper establishes that although both bad management and bad luck contribute to NPLs increase, bad luckwas the dominant source of high NPLs and cost inefficiency in CBs. The policyimplications of the results are that the banks regulator (BOT) should limit riskexposures of CBs by controlling excessive risk-taking and loan concentration; and byinsisting on diversification. Further, the BoT should provide managerial training andknowledge-sharing aimed at increasing management efficiency. The government andother stakeholders can also provide financial and technical support to CBs to enablethem to effectively serve risky sectors, including agriculture, as a way of enhancingfinancial inclusion of the avoided rural sector. Key words: community banks, cost efficiency, NPLs ratio, bad management, bad luck.
 
Publisher Dar es Salaam University Press
 
Contributor
 
Date 2016-02-13
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
application/pdf
 
Identifier https://journals.udsm.ac.tz/index.php/ter/article/view/2471
 
Source Tanzania Economic Review; Vol 7, No 1&2 (2017): TER
2507-7740
0856-3373
 
Language eng
 
Relation https://journals.udsm.ac.tz/index.php/ter/article/view/2471/2541
https://journals.udsm.ac.tz/index.php/ter/article/view/2471/2542
 
Rights Copyright (c) 2016 Tanzania Economic Review