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.