Financial technology and credit risk management: the case of non-performing loans in Tanzanian banks

The evolution of financial technology (FinTech) globally is reshaping the banking system, including Tanzania's financial sector. This study examines the influence of FinTech on Tanzania's banking sector, particularly its impact on non-performing loans. Using a financial technology index alongside bank-specific and macroeconomic variables, the analysis covers data from 30 Tanzanian commercial banks spanning 2010 to 2021. Employing a two-step system, a Generalized Method of Moments, the study tests the hypotheses and provides robust findings. The results reveal that FinTech significantly reduces non-performing loans across all bank categories, with the strongest effects observed in small banks, followed by medium and large banks. This indicates that advancements in FinTech improve credit risk management and reduce loan default rates. Conversely, a cost-to-income ratio and a high loan-to-deposit ratio increase non-performing loans, particularly in medium-sized banks. These findings have critical implications for policymakers and practitioners. Policymakers should prioritize fostering a supportive regulatory environment to encourage FinTech integration, particularly among small and medium banks. Bank managers are encouraged to leverage FinTech innovations to enhance credit risk management and operational efficiency. The study highlights the transformative potential of FinTech in managing credit risk and driving sustainable growth in Tanzania's banking sector.