By Rafiq Raji, PhD
“I will not give any money to failing banks.” In typical style, President John Magufuli has adopted a no-nonsense approach to the troubles of the Tanzanian banking sector. In March 2018, he ordered the central bank not to rescue any failing bank. Mr Magufuli’s angst towards bankers is underpinned by his view that previous government bailouts for the sector of about 40 banks currently were squandered or misused. In any case, it has been about a year since the Bank of Tanzania (BoT) announced new capital rules for banks, as non-performing loans rose sharply. How have Tanzanian banks fared since then? NPLs continue to rise, hitting profits. As a proportion of total loans, NPLs rose by almost a percentage point to 11.7 percent in December 2017 from 10.6 percent six months earlier; a deterioration from what was already double the offical cap of 5 percent. Most recently, though, in April 2018, NPLs to gross loans stood at 11.3 percent. The central bank has been wielding the big stick to stem the tide. It shut down 5 community banks in early January; namely: Covenant Bank for Women, Efatha Bank, Njombe Community Bank, Kagera Farmers’ Cooperative Bank and Meru Community Bank. The January move brought the number of such banks closed to eight. While this is laudable, it is the domineering few big banks that probably require greater scrutiny and supervision. Tightening of controls on foreign exchange has also been weighing on banks’ bottomlines. Return on assets declined to 1.7 percent in April 2018 from 2.2 percent only a year before. Return on equity dipped as well; to 7.2 percent in April 2018 from 10.1 percent in April 2017.
Interest rates falling, PSCE still low
Unsurprisingly, bank lending to the private sector has slowed. In mid-December, the IMF highlighted reduced public spending and policy uncertainty as some of the reasons why. The central bank gives the sector a clean bill of health, however; reporting in June 2018 that “the banking sector remained sound, stable and profitable with levels of capital and liquidity generally above regulatory requirements.” As at end-April, the BoT put banks’ core capital to total risk weighted assets and off-balance sheet exposures at 18.7 percent; well above the minimum 10 percent. Also, liquid assets to demand liabilities was 39.1 percent in the same period; well above the minimum 20 percent. The BoT did highlight a palpable deterioration in NPLs. Some of the measures it has put in place to remedy the situation is an insistence that banks compulsorily use credit reference bureau reports for the appaisal of loans; in addition to other strategies it wants banks to develop to “strengthen credit application processing, credit management, monitoring and recovery measures.”
To the BoT’s credit, though, a joint World Bank/IMF financial sector assessment programme (FSAP) vindicated its position on the soundness and stability of the Tanzanian financial services sector. They note the country’s payments, clearing and settlement systems are operating efficiently. In this regard, the central bank has begun engagement with relevant stakeholders to develop a national switch. While still far off, once in place, the national switch would greatly reduce the cost of payment services. Also to this end, the BoT is licensing more payment service providers. There has also been an increase in transactions in the banking system on the back of an increasing adoption of digital channels. And the BoT continues to make efforts to reduce interest rates. In this regard, it cut its discount rate by 300 basis points to 9 percent in the period between July 2017 to April 2018. Yields on government securities have certainly followed suit; easing to about 4 percent in April 2018 from a little above 13 percent a year before. By and large, interest rates on commercial loans eased as well; albeit still high at about 17-18 percent. But it is an improvement from about 22 percent hitherto. Encouraged by easing measures by the BoT, which in addition to slashing its discount rate also reduced the statutory minimum reserve requirement, one bank cut its interest rate by half to 11 percent from 22 percent previously. Consequently, private sector credit extension (PSCE) should improve. Still, PSCE growth of almost 1 percent in April 2018 is an improvement from negative growth rates in late Q3-2017 and early Q4-2017. Total assets have also been growing steadily; up 5.3 percent year-on-year to 29.9 trillion shillings in April 2018.
Moody’s, a rating agency, is similarly optimistic. In a mid-March 2018 research note, it avers the Tanzanian “banking system will remain resilient, with improving operating conditions, solid capital and liquidity, despite asset quality and profitability pressure.” Christos Theofilou, vice president and senior analyst at Moody’s explains further: “We expect operating conditions to gradually improve as private sector businesses adapt to higher taxes and liquidity in the system improves with the payment of government arrears and more focus on infrastructure and development plans by the authorities.” Moody’s also assesses the country’s banks’ capital buffers as “among the strongest in sub-Saharan Africa and globally.” However, it acknowledges their declining profitability “due to lower interest income, reduced business activity and rising loan-loss provisions.” It also believes NPLs might rise some more “due to the continued, delayed impact from last year’s public sector job cuts, a corporate liquidity crunch and lower corporate margins following a crackdown on tax collection.”
More consolidation expected
On its part, the government has been tidying up its act in the sector, approving the merger of two of the banks it owns in mid-May; Twiga Bancorp and TPB Bank. It is part of a broader planned consolidation of state-owned banks. BoT deputy governor Bernard Kibesse explained the authorities’ thinking to the media thus: “We will see more mergers of government-owned banks until we remain with one or just a few banks owned by the government.” The central bank would like to see more consolidation in the sector: “We would like more mergers and acquisitions to take place between the existing banks in Tanzania, including those that are privately owned, so that we remain with a few efficient banks”, Mr Kibesse added. Key stakeholders in the sector seem receptive to the idea. In about mid-April, Ineke Bussemaker, chief executive of National Microfinance Bank (NMB), the country’s largest bank, told Reuters “if there is a coordinated effort to do a consolidation in the banking sector….NMB will play a role.” And Bussemaker, who took over as CEO in 2015 from a role at Rabobank in The Netherlands, which owns a 34.9 percent stake in NMB, is not just buying into the idea of the government, which has a 31.9 percent stake in NMB, it believes consolidation has become a necessity; with its chief executive telling Reuters further that “there are a number of small banks that are struggling with a relatively small capital base…[and thus]…forsee some consolidation in the sector.”
An edited version was published in the Q3 2018 issue of African Banker magazine
Also published in my BusinessDay Nigeria newspaper column (Tuesdays)