Effects of macroeconomic variables on banks’ lending in Tanzania

Abstract

The purpose of this paper is to analyse the effects of macroeconomic variables on banks’ lending in Tanzania. The study applies the Autoregressive Distributed Lag Model (ARDL). Time series data were analysed yearly covering the period of 1970 to 2021. The contribution of this particular study is provision of empirical evidence of whether macroeconomic variables affect banks’ lending behaviour in Tanzania and provide evidence-based policy implication for the country with regard to the financial sector and banks’ lending in Tanzania. The empirical results show that there is a significant short-run negative impact of M3 Money Supply in overall commercial banks’ lending rate in Tanzania which ultimately impact positively commercial banks’ credit lending behaviour. An increase in money supply would lead to a decrease in interest rate. This would ultimately lead to an increase in banks’ lending, which is expected to increase because banks would become more liquid resulting into stimulation of banks’ lending behaviour. By implication, a contractionary Monetary Policy in a country would inhibit banks’ lending as banks run out of liquidity and therefore lending rate would be high. However, excessive bank lending to unproductive
and speculative sectors due to a lower rate of interest would lead to unnecessary increase in money supply and hence inflation. This would necessitate the government and the monetary authority of the country to put in place measures to control the rate of inflation to a desirable level. The changes in money supply have direct impact on prices and economic activities and that the relationship between money supply and inflation is much predictable in the long-run than in the short-run. The study suggests that more economic activities act as stimulators
of banks’ lending. When more economic activities are in place in an economy then the likelihood of banks to lend to such economic activities is increased. The study thus advises policy makers to put in place conducive environment which could attract more business opportunities to which banks could extend credit.