Usefulness of collateral as a means of mitigating credit risk by banks in Tanzania: a case study of CRDB Bank Limited.

The main objective of this research was to establish the extent to which collateral taken by banks in Tanzania mitigate the credit risk in case of default by borrowers. It was prompted by the fact that despite having stringent collateral requirements, the public has witnessed collapse of some banks and is still observing high loan loss provisions and charge off by most banks in Tanzania after they failed to recover in full the defaulted loan amounts from sale of collateral. CRDB Bank Limited has been taken as a case study because it has many features that represent most of the local and international banks and financial institutions operating in Tanzania. The study compared the actual prices achieved when the collaterals were sold with their respective valuation prices as determined by professional valuers at loan granting stage. The results obtained show that professional valuers regardless of whether appointed by banks or borrowers tend to overvalue assets pledged as collateral for bank loans. The results of this study are expected to help banks to think of alternative credit risk mitigation measures other than collateral, the valuation profession to launch appropriate remedial measures in their valuation system in order to protect integrity of the profession, the Bank of Tanzania to review its regulations in respect of collateral requirements for bank loans, and the academic institutions in Tanzania teaching valuation subjects to review their methodologies so that they are more practical and Tanzanian oriented.