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.
AJASSS Volume 4, Issue No. 1, 2022 page 245
Keywords: Credit, Transaction Cost, Commercial bank
