Transaction Costs and Choice of Best Credit Governance Structure of Commercial Banks in Tanzania

Abstract

The paper analysed transaction costs as determinants of the best credit governance structure (CGS) for scaling up of commercial banks credit operations in Tanzania. Primary data were collected from 37 registered and licensed commercial banks in January 2018. The main sources of secondary data were peer reviewed journal articles on transaction cost economics, governance structures (especially those of pioneers of New  Institution Economics, Oliver Williamson and Ronald Coase) and Bank of Tanzania annual reports. Structured questionnaires for the survey on  transaction costs (Information Search Costs, Credit Contracts Negotiation costs and Credit Contracts Enforcement Costs) associated with commercial  banks credit transactions were administered to 204 respondents. Data were captured and analysed quantitatively through binary and  multinomial regression models due to dichotomous nature of the dependent variables (Credit distribution channels). Transaction costs as predictors  were used to establish a choice of preference between direct and indirect channels for credit distribution. Key findings identified direct  channel for credit supply as the best for commercial banks credit supply to urban based customers since transaction costs can be well mitigated.  Also commercial banks credit scaling up must involve distribution channels with intermediaries, given non-conducive credit business environment  in rural areas. The current study recommends to the government of Tanzania to make tangible socio-economic  development in rural areas; such  developments will greatly reduce the need for commercial banks to invest in infrastructures in rural areas. This will cut down transaction costs,  allowing the scaling-up of commercial banks credit operations and facilitate accessibility of credit facility to the majority who are in need.