Experts weigh effects of rising household debt
What you need to know:
- Policy improvements are crucial to address predatory practices, promote financial literacy and ensure borrowers from increased access to credit
Dar es Salaam. Data from the Bank of Tanzania (BoT) reveals a rise in Tanzania’s household debt-to-income ratio in 2023 compared to 2022. This increase can be attributed to growth in salaries and a corresponding rise in outstanding debt.
In its recent Financial Stability Report, the central bank indicated that the household debt-to-income ratio increased slightly to 52.8 percent in 2023 from 51 percent in 2022.
The Corporate Finance Institute defines the debt-to-income (DTI) ratio as a comparison of an individual’s monthly debt payments to his or her monthly gross income.
This means that when the ratio increases, a significant portion of household income goes towards paying off debts.
Speaking to The Citizen, local economists shared that an increase in the debt-to-income ratio can have both positive and negative implications.
Associate Professor of Development Economics at the University of Dar es Salaam, Prof Abel Kinyondo, said on the positive side, an increase in debt signifies improved access to financing.
“It shows that people can obtain extra finances beyond their income for developmental purposes,” he said.
This can be true, as the BoT reported that credit to the private sector grew by 17.1 percent in 2023, with personal loans having the largest share.
The cost of borrowing also declined with the lending rates, which were an average of 15.3 percent in December 2023, compared with 16.1 percent in December 2022.
This, they say, was contributed partly by prudential, fiscal and monetary policy interventions.
Prof Kinyondo said, however, that on the negative side, this can be detrimental if the funds accessed through debt are used for non-productive or non-developmental activities.
“Some people take out loans due to the rising cost of living and use the debt to cover where their income falls short. In this second scenario, it implies that life has become tougher and the cost of living has increased,” he said.
According to the central bank, household borrowings in the country are mainly used for house construction, plot purchases, small businesses, education, medical services, automobile purchases, emergencies, rental payments, personal expenses, the purchase of household items, and funeral expenses.
Mzumbe University’s expert in financial management and taxation, Prof Haruni Mapesa, said when a person borrows beyond their income, they add a burden to their future income.
“The income generated in the future will have to be used to repay past debts; if people fail to invest the borrowed money into productive ventures, they might find themselves in a debt trap,” he said.
Prof Mapesa also agrees that a higher debt ratio will also be positive if the debt is used for productive purposes.
“For example, if a farmer uses the loan for advanced inputs that will increase productivity, they will be able to repay the debt and improve their economic situation,” he said.
The expert urges that the investment environment and policies in the country should be enabling so that those who take loans can benefit from their loans for productive activities.
The central bank noted that household borrowing and repayment improved on account of the increase in income, and the bank’s survey disclosed that disbursed and outstanding personal loans increased in 2023 following an increased appetite for banks’ lending to households. “The share of personal loans in total outstanding loans remained dominant as the growth of credit to the private sector increased.
The increase in the share of personal loans is due to a decrease in the risk weight of these loans, a rise in household income, and banks’ preference to lend to households relative to other sectors of the economy,” the BoT report read in part.
With simplified access to credit during the period under review, credit services in the financial sector improved, as depicted by broad distribution channels, access points, and borrowing.
For instance, access to credit services through mobile phones increased to Sh27.7 billion in December 2023 from Sh12.7 billion recorded in December 2022.
The central bank said: “The increase in digital lending was mainly on account of increased ownership of digital devices and a wide range of digital credit products coupled with relaxed Know Your Customer (KYC) requirements as well as enhanced market conduct supervision and complaint handling and redress mechanisms.”
However, despite the recorded growth, the credit market is marred by increased predatory lending practices and unlicensed lenders.
In addition, the credit market is facing challenges that include the absence of a Secured Transactions Law to allow movable collateral, high interest rates, inadequate availability and interoperability of business, property, and residential address information, increased cybersecurity risks and low financial literacy levels.
