Influence of Transaction Cost Determinants on Credit Customer Category of Commercial Banks in Tanzania

Abstract

The provision of credit services in rural areas is a challenge as agriculture and other rural economic activities have unique characteristics of dependence on natural resources, long production cycles and vulnerability to multiple risks. This paper aims to analyse transaction cost as the determinants of the choice of credit customer category for commercial bank’s credit business scale-up in Tanzania. Primary data for this study were collected from 37 registered and licensed commercial banks in January 2018 through structured questionnaires. The main sources of secondary data were peer-reviewed journal articles on transaction cost economics and rural financing. Data were analysed quantitatively through the logistic regression method. Key findings revealed that commercial banks have failed to scale up their credit operations to rural-based customers due to high transaction costs. This fact emanated from commercial banks’ preference of transacting credits directly with individual borrowers instead of using intermediaries, thus multiplying transaction costs, especially when dealing with rural-based borrowers. Therefore, commercial banks believe to be better off with few urban-based credit customers. This study recommended that commercial banks should use multiple credit governance structures (CGSs)\ (methods for credits delivery) to mitigate transaction costs when giving credits. Direct channels should be opted for when dealing with urban-based borrowers since low transaction costs are involved. Indirect channels with intermediaries should be opted for when scaling-up credit operations to rural-based borrowers since they allow the spreading of credit transaction costs throughout the credit supply channel.