TRANSACTION COSTS AND COMMERCIAL BANKS CREDIT BUSINESS IN TANZANIA

Abstract

The purpose of this study is to investigate the transaction costs that commercial banks in Tanzania experience in extending credit to borrowers outside of the established urban markets. Using Transaction Cost Economics as a theoretical framework, a positivist paradigm and cross-sectional survey design was undertaken, utilizing questionnaires that were distributed to 204 credit officers from banks throughout Tanzania. Statistical analyses of these questionnaires included descriptive statistics, correlation analyses, and regression analyses to determine which of the transaction costs associated with lending to these bank customers were the most significant. Results indicated that time-related costs were the most significant contributor to the transaction costs of commercial banks in Tanzania (β = .876, p < .001), followed by lawyer fees (β = .216, p < .001). These two costs accounted for 79.5% of the total transaction costs of commercial banks in Tanzania. Furthermore, these costs indicate the challenges that banks in Tanzania experience in identifying and lending to borrowers in rural areas. To reduce the transaction costs that commercial banks in Tanzania experience in lending to these borrowers, it is recommended that the banks improve their information systems, mobile and agent lending channels, and regulate regional lending costs.