Why hospitality, transport have lost out on bank credit

Dar es Salaam. Despite various parameters pointing to the fact that tourism is on the right path to recovery, latest data shows that commercial banks are still reluctant to extend loans to the hospitality industry.

The Bank of Tanzania (BoT) says in its Monthly Economic Review (MER) for July 2022 that while private sector credit growth reached a five-year high at 19.4 percent in June 2022, the transport, communication and hospitality sectors were still in the doldrums as far as credit extension is concerned.

Sectors that had increasingly received bank financing were agriculture, mining, micro, small and medium undertakings, trade and manufacturing.

As of June this year credit extended to hotel and restaurants had fallen to 5.6 percent (minus 2.6 percent) annually, while that of transport and communication had fallen by 0.7 percent (minus 0.7 percent).

In May, the activities also recorded 9.1 percent and 8.9 percent annual decreases for hotels and the transport and communication sector, respectively.

Government emphasis coupled with rise of global food demand continue to favour more investment into the agriculture sector as the activities’ credit from banks has grown by 42.1 percent in the period of one year, according to computation by BoT in their monthly economic review.

Credit extended to the mining and Quarrying activities grew at an annual rate of 36.5 percent, personal credit at 27.5 percent, while credit to trading activities grew at 25 percent and manufacturing at 23.5 percent.

Though it’s in a single digit another activity that records a growth in credit was building and construction at 9.7 percent.

From bankers perceptive, the managing director of KCB Tanzania, Mr Cosmas Kimario, said the banking sector had offered a good support to the hospitality sector during the past two years when the Covid-19 pandemic was at its critical points, especially through the loan restructuring and payment rescheduling as advised by the BoT.

He said being one of the severely hit sectors the BoT in 2020 urged banks and financial institutions to consider the fact that borrowers may be facing financial difficulties which might lead to failure to honour their contractual obligation of repaying debts.

“The sector has also been in survival mode, maintaining their business and less expansion was done in the past few years. Same for the transport sector where there was less traffic and cargo volume,” he said.

For his part, the chief executive officer of the Hotel Association of Tanzania (HAT), Mr Kennedy Edward, said the rate of acquiring new loans for the hoteliers was a result of the tough business that the sector experienced from 2020.

He said as the industry faced booking cancellations, declining revenues, a huge liability burden less and less credit was issued by banks to the sector.

“In our business, loans have a huge significance especially in raising capital for expansion and growth. Rate of accessing new loans declines because some of the businesses have also been dealing with accrued interest expenses from previous debts,” he said.

Analysts say the disparity shows that the two sectors were still constrained by the pandemic and also their risks of sustainability have grown even higher due to the ongoing political tensions in Europe.

Their connection to the tourism sector is also another factor since the businesses in that field were severely hit, impacting economies, livelihoods, public services and opportunities on all continents.

A seasoned banker and financial advisor, Mr Kelvin Mkwawa, said on the Transport and hospitality sectors, the risk was still high.

These sectors, he said, were seen as seasonal sectors meaning are not fully profitable throughout the year so the cash flow is not consistent.

“That risk premium element in these sectors makes banks hesitant to lend aggressively. Also, still banks are struggling to fight off NPL caused by Covid-19 on those sectors,”

“Most banks found out how vulnerable they were on loans to the hospitality sectors and transportation. Realisation of pledged securities is a long process that could take years,” he said.

Mr Mkwawa said the analysis of the businesses in these sectors show inconsistent cash flows which is one of the major reasons why banks are reluctant to lend to these sectors.

Co-founder and Partner at Bankable Tanzania Ivan Tarimo said the pandemic has also resulted in limited expansion of these activities in terms of new outlets, ventures example in businesses of hotels and restaurants.

“The risk appetite of these activities to banks has fallen, and due to the pandemic it has become harder for business personnel who want to let say open a hotel to convince banks to take the risk of lending them,” he said.

Mr Tarimo said in the transport and communication sector there are still headwinds of the pandemic also as logistics business and services associated with it were significantly down in the last two years.

“Banks also suspended some of the financing services such as some of the banks which used to provide Vehicle Assets Finance (VAF) during Covid-19,” he said.

The VAF is the short- to medium-term funding to finance the purchase of moveable assets, such as motor vehicles, for your business.

Bullish outlook

Meanwhile, the tourism sector which is prominently associated with these activities has been reported to thrive in Tanzania with the number of visitors reaching 458,048 during the period of January to May 2022.

According to the National Bureau of Statistics (NBS) this is equivalent to an increase of 44.4 percent compared to 317,270 visited the country during the similar period in 2021.

And, according to Mr Kimario, currently the sectors were viewed differently because of the recovery and growing demand which means the businesses in the transport and hospitality sector were going to require credit addition to meet their new demand.

“The government supportive policies and impact of the Royal Tour project is seen now as the tourism sector is picking up strongly, with international arrivals increasing at an impressive rate,” said Mr Kimario.

In the logging industry Mr Edward says the government has also helped in creating policies for the business to exploit the potential it provides.

“For now hoteliers are focusing on meeting the current demand which is a result of postponement of the booking made in 2020, after this and maybe from next year with the recovery of demand we may see businesses acquire new loans for expansion,” Mr Edward said.