UNIVERSITY OF IRINGA

FACULTY OF LAW

COURSE NAME: LAW OF BANKING AND NEGOTIABLE

INSTRUMENTS

COURSE INSTRUCTOR: adv. TERESIA J MAITARI

NATURE OF WORK: INDIVIDUAL ASSIGNMENT

NAME OF STUDENT; ASHIRAFU HAMIDU KATATUMBA

REG. NUMBER: LLB-29347

DUE DATE: 16th JAN 2023

QUESTION

With the aid of decided cases, relevant examples and Acts of Parliament, critically assess the
manner in which lending practises is being done by Commercial Banks and Other Financial
Institutions in Tanzania.
In your discussion you should not forget to include the mechanism used by the said Commercial
Banks and Institutions in securing the Credits that have been advanced to their respective clients.

This is an individual assignment which require to discuss on the manner in which lending
practises is being done by Commercial Banks and Other Financial Institutions in Tanzania also
the mechanism which used by those comercial banks and financial institutions on secure their
credit.

Financial institutions

Section 3 of The Banking and Financial Institutions Act 1defines Financial institution as an
corporation which operates the business of banking, which are limited as to size, area to
operate, or permited activities as directed by the Bank and the conditions of its licence..
are corporations which are responsible for the supply of money to the market through the
transfer of funds from investors to the companies in the form of loans, deposits and
investments. The most common types of financial institutions include commercial banks, trust
companies investment banks, brokerage firms or investment dealers, insurance companies, and
asset management funds. Other types include credit unions and finance firms. Financial
institutions are regulated to control the supply of money in the market and protect
consumers2..

Function of Financial institution

These are the basic functions of financial institutions which come in the respective group of
institutions like banks, co-operative societies, insurance industries etc.
Accepting deposits: most of the financial institutions viz, commercial banks, cooperative
societies etc., accept deposits from the public. They offer different schemes to mobilize public
deposits from the customers. For the accepted deposits, financial institutions give return in the
form of interest on deposit tenure basis.
Providing commercial loans: accepted deposits are used for commercial lending operations in
the form of loans, advances, cash credits, bill discounting etc., these fetch good return to the
financial institutions.

Providing Real estate loans: the financial institutions also provide loans and advances for real
estate industries to purchase sit, build premises, construction of industrial and residential
parks.
1
Section 3 of The Banking and Financial Institutions Act [Cap 342 RE 2006]
2
https://fbs.com/glossary/financial-institution-fi-30, 07th Jan 2023 At 11:48
Providing mortgage loans: the financial institutions also provide loans to the needy group on
mortgage of properties and collateral securities. For example, Gold loan, property loan etc.
where gold and properties are mortgaged to avail the loan.
Issuing share certificates: financial institutions also undertake the job of issuing share
certificates of any established corporate to its share-holders. It also constitutes accepting
shares investment money from the investors and issuing them certificates on behalf of the
companies.
Commercial Banks

refers to a financial institution that accepts deposits, offers checking account services,
makes various loans, and offers basic financial products like certificates of deposit (CDs) and
savings accounts to individuals and small businesses3.

Functions of Comercial banks

The following are the functions of comercial banks

Accepting current, demand, fixed, and savings account deposits from customers.

Providing cash credit, auto loans, mortgage loans, short-term loans, and advances.

Creating credit by expanding deposits.

The manner in which lending practises is being done by comercial bank and other financial
institutions in Tanzania

Meaning of Lending

occurs when someone allows another person to borrow something. Money, property, or
another asset is given by the lender to the borrower, with the expectation that the borrower

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https://www.investopedia.com/terms/c/commercialbank.asp, 07th Jan 2023, 12:04
will either return the asset or repay the lender. In other words, the lender gives a loan, which
creates a debt that the borrower must settle4

The following are the manner in which lending practices is being done by commercial bank
and other financial institutions.

Fair Lending practices

This is the requirement of law that while commercial banks and financial institution provides
loans either for individual or company should adhere fair lending practices where shall state the
interest rate, commision and fees. Either on an annual or a monthly basis5

Bank Loan

This means money lent by the bank. A loan is an amount of money borrowed for a set period
within an agreed repayment schedule. The repayment amount will depend on the size and
duration of the loan and the rate of interest.

Over draft

An overdraft occurs when there isn't enough money in an account to cover a transaction or
withdrawal, but the bank allows the transaction anyway. Essentially, it's an extension of credit
from the financial institution that is granted when an account reaches zero. The overdraft
allows the account holder to continue withdrawing money even when the account has no funds
in it or has insufficient funds to cover the amount of the withdrawal 6. Forexample BUSTISHA
and SONGESHA.

Basically, an overdraft means that the bank allows customers to borrow a set amount of
money. There is interest on the loan, and there is typically a fee per overdraft.

4
https://www.thebalancemoney.com/what-is-lending-what-are-lenders-398319#:~:text=Lending
%20(also%20known%20as%20%22financing,asset%20or%20repay%20the%20lender, 14th Jan 2023, 15:20
5
Regulation 66 of The banking and financial institution (Microfinance activities) Regulation, 2014
6
https://www.investopedia.com/terms/o/overdraft.asp#:~:text=An%20overdraft%20is%20a%20loan,charge%20or
%20insufficient%20account%20balance. 14th Jan 2023, 17:06
Advantages of an overdraft7

An overdraft is flexible - you only borrow what you need at the time which may make it cheaper
than a loan.

It's quick to arrange.

There is not normally a charge for paying off the overdraft earlier than expected.

Disadvantages of an overdraft8

If you have to extend your overdraft, you usually have to pay an arrangement fee.

Your bank could charge you if you exceed your overdraft limit without authorisation.

The bank has the right to ask for repayment of your overdraft amount at any time, although this
is unlikely to happen unless you get into financial difficulties.

Unlike loans you can only get an overdraft from the bank where you maintain your current
account. In order to get an overdraft elsewhere you need to transfer your business bank
account.

Cash credit

Cash Credit is a source of short term finance for businesses and companies. Cash credits are
also called working capital loans as they fund the instant cash requirements of the
organizations, or to purchase current assets. Borrowing limits on the amount of cash available
for credit for the company varies between commercial banks. The interest charged is on the
daily closing balance instead of the upper borrowing limit, so the repayment is only on the
amount spent from the available limit. Because it is taken for a short term, the repayment of
the amount taken on credit is also set at 12 or less months. Cash credit is a loan and banks
demand collateral to approve it. Cash credits are similar to overdraft facilities, though there are

7
https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-overdrafts, 14th Jan 2023,
17:16

8
https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-overdrafts 14th Jan 2023, 17:20
significant differences between them. Cash credit is available for a shorter period of time and at
a significantly less interest rate than overdrafts9.

Advantages of Cash Credit Loans10

A cash credit loan provides an excellent form of finance without the company worrying about
liquidating their assets.

You are given the flexibility to Withdraw as many times from your available cash credit loan up
to its withdrawal limit.

Deposit whenever you have excess funds to lessen the burden of interest.

Interest paid on your credit cash loan is tax-deductible.

You pay interest only on the amount you borrow.

Disadvantages of Cash Credit Loans11

Since it is a short-term (temporary) loan, a company cannot rely on it for an extended period of
time. After the cash credit loan expires, it can be renewed, but the terms and conditions are re-
evaluated.

New companies can have difficulty obtaining this loan as the approval depends on the proven
track record of profit and collateral security offered.

The interest rate applied to cash credit loan is very high.

9
https://cleartax-in.cdn.ampproject.org/v/s/cleartax.in/g/terms/cash-credit/amp?
amp_gsa=1&amp_js_v=a9&usqp=mq331AQKKAFQArABIIACAw%3D%3D#amp_tf=From
%20%251%24s&aoh=16737870195954&referrer=https%3A%2F%2Fwww.google.com&ampshare=https%3A%2F%2Fcleartax.in
%2Fg%2Fterms%2Fcash-credit, 14th Jan 2023, 17:26

10
https://www.moneytap.com/blog/what-is-a-cash-credit-loan-and-how-does-it-work, 13rd Jan 2023,
12:20

11
https://www.moneytap.com/blog/what-is-a-cash-credit-loan-and-how-does-it-work, 13rd Jan 2023,
12:20
Advance

An advance is a type of loan or payment in which money or goods are given before
consideration is received in return; usually with the expectation of repayment or adjustment in
basis by the party receiving the advance. Forexample Boom advanve and Salary Advance.
Advance payments are generally made in two types of situations: 1) as security for the delivery
of goods or services or 2) as an early payment of a bill or debt12.

Discounting of bills

Bill Discounting, also called Invoice Discounting, is a trading activity where a seller sells some
goods or services to a buyer. The buyer has to make the payment as per the agreed credit
period. Now, if the buyer needs money before that, he can approach a bank or some NBFC and
‘sell’ that invoice to them. The financial institution gets the invoice verified by the buyer and
then makes payment to the seller on their behalf. However, they make some deductions, called
‘discount’, as their commission.

The principles of good bank lending

Before commercial banks and other financial instution grant a loan to the customer the
following are the important principle which must be taken into vonsideration.

i/ Safety of the advance

Before commercial banks or other financial institution to grant a person loan it consider
the safety of their loan that it will be repaid. They give loan to a reliable borrower and who can
repay from reasonably sure sources.

ii/ Viability of the project

12
https://www.law.cornell.edu/wex/advance#:~:text=An%20advance%20is%20a%20type,the%20party%20receiving%20the
%20advance. 13rd Jan 2023, 05:24am
 Here banks and other financial institutions grants loans after satistfy that the advance
will be returned due to the project of the borrower that it will enable to repay the spesific
loans. If the project it will not enable the loan to be repaid then banks will denay the
application of loan.

iii/ Profitability

Here banks looks that if the project it will generate profit, if it will generate profit then the
loan will be granted but otherwise the loan not granted.

iv/ Security

For the purpose of safety of banks and financial institutions loans the security must be
provided by the customer so that the money of banks to be safe repaid. security is that
transaction of offering some property for a loan/advance given. Security does not mean
property. However, in everyday life the general meaning of security is associated with
property.

There are different kind of security which banks and other financial institutions prefer so that
to secure the loan. Among of them are:-

a) Land

Land is commonly accepted by lenders as a form of collateral. This is in part due to the
legal protections available to lenders when securing third party interests in land. We discuss
below the various forms of securing third party interests in land.

A mortgage is the creation of an interest in a right of occupancy for securing the

payment of money or the fulfilment of a condition. A mortgage deed must be registered with
the Registrar of Titles to be effective. A mortgage created between a lender and a corporate
body cannot be registered with the Registrar of Titles unless it has first been registered with the
relevant registrar of that corporate body. For example, mortgages created by a company must
first be registered with the Registrar of Companies (i.e. the Business Registrations and Licensing
Agency) before they are registered with the Registrar of Titles13.

b) Debenture

A debenture is a form of security that a Company grants to a lender in exchange for

funding. The funding can be in any form, and most commonly it relates to a long-term funding
facility, such as a loan granted to a company that is repayable over a period of time 14.

The mechanism used by the commercial banks and other financial institution to secure the
credit.

bank and other financial institutions may purchase, hold and sell securities, This means
that the mechanism which the Bank of Tanzania Act gave banks and other institutions to secure
their credits is to purchase, hold and sell those securities whic the borrower gave tha banks
during the process of taking loans15.

Lending practice in Tanzania by commercial banks and other financial institutions is goveverned
by different law. Every financial institutions have its own procedures as it thinks it fit to provide
loan to the individuals or companies but during that procedure of providing loan they must
adhere the principles of good bank lending.

As i said before the law did not stipulate the specific procedures on the issues of grant loan to a
person but they must also athere the fair lending practice16

13
https://www.clydeco.com/en/insights/2021/03/securing-land-as-collateral-in-tanzania, 13rd Jan 2023, 12:20

14
https://www.chamberlain-co.co.uk/what-is-a-debenture, 13rd Jan 2023, 12:34pm

15
Section 43(1) of The Bank of Tanzania Act [2006]

16
Regulation 66 of The banking and financial institution (Microfinance activities) Regulation, 2014
BIBLIOGRAPHY

Statutes

The Bank of Tanzania Act [2006]

The Banking and Financial Institutions Act [Cap 342 RE 2006]

The banking and financial institution (Microfinance activities) Regulation, 2014

Online Materials

https://www.clydeco.com/en/insights/2021/03/securing-land-as-collateral-in-tanzania

https://www.chamberlain-co.co.uk/what-is-a-debenture

https://www.law.cornell.edu/wex/advance#:~:text=An%20advance%20is%20a%20type,the%20party%20receiving%20the
%20advance.
https://cleartax-in.cdn.ampproject.org/v/s/cleartax.in/g/terms/cash-credit/amp?
amp_gsa=1&amp_js_v=a9&usqp=mq331AQKKAFQArABIIACAw%3D%3D#amp_tf=From
%20%251%24s&aoh=16737870195954&referrer=https%3A%2F%2Fwww.google.com&ampshare=https%3A%2F%2Fcleartax.in
%2Fg%2Fterms%2Fcash-credit,

https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-overdrafts

https://fbs.com/glossary/financial-institution-fi-30

https://www.investopedia.com/terms/c/commercialbank.asp,