Despite many challenges that the Bank of Tanzania (BoT) and the banking industry in general face, there has been notable development in the economy of the people.
Before explaining going far, let us look on the development of the banking sector which started way back in the early 1990s.
During the period, commercial banks were the dominant financial institutions in the then Tanganyika. During the German rule there were two commercial banks established in Tanganyika namely the Deutsche Ostafrikanische bank, which was established in 1905 and the Handelbank fur Ostafrika in 1919. These banks were mainly for serving colonial rulers and a few businesspersons.
After World War 1 in 1918, the British took over the control of the county from the Germans. Three commercial banks were established in order to replace the German banks. These banks were the National Grindlays, the Standard Bank and the Barclays Bank D.C.O.
In the early 1950s other banks from India opened branches in Tanganyika. They are the Bank of India and Baroda Bank, which opened branches in Dar es Salaam, Moshi and Mwanza.
There were a number of banks which established their branches in the country before independence.
By the time of independence in 1961, the country’s banking industry was comprised of Standard Bank of South Africa, Grindlays, Barclays and Ottoman. Non-bank financial institutions (NBFIs), which were present on the day of independence were Post Office Savings Bank, Land Bank, Local Development Loan Fund, African Productivity Loan Fund and a few housing and loan associations catering mainly for Asians and white settlers.
The colonial banking system was characterized by dominance of foreign owned commercial banks, inability to sufficiently mobilize savings and deploying funds to productive sectors of the economy.
After independence the government established new financial institutions to compliment existing ones. The Tanzania Bank of Commerce (TBC) was established in 1965 and the government of Zanzibar established the People’s Bank of Zanzibar in 1966 to act as a government banker as well as provide financing to state-owned companies in Zanzibar.
Post Arusha declaration and the period prior to 1991
In 1967, following the Arusha declaration, all private commercial banks were nationalised and their assets and liabilities were merged resulting into the establishment of one big commercial bank namely National Bank of Commerce, which was wholly owned by the government.
The period after Arusha declaration was marked by rapid development of non-bank and development financial institutions. This was due to the increased role of public sector in development and the need to mobilize long-term funds to finance various productive sectors in the country.
In 1970 and 1972 Tanzania saw the establishment of Tanzania Investment Bank (TIB) and Tanzania Rural Development Bank (TRDB) respectively.
The period after 1991
In 1998, the government formed a Presidential Commission on Banking under the chairmanship of the former BoT governor Charles Nyirabu.
Three reasons were advanced for the formation of the Commission. First, the banking industry was performing very poorly, which led to increased losses and non-performing assets resulted from lending to financially distressed parastatals and cooperatives.
Second, there was an increase in the subsidies to the banks which were a burden to the government. Thirdly, was a non-declaration of dividends by the banks. Since the government had invested in those banks, it expected to get a return from its investments but due to poor performance nothing was gained.
Following recommendations of the Commission, the banking and financial institutions Act (BFIA) was enacted in 1991 to govern the conduct of banking business in Tanzania.
The act gave the BoT powers to licence regulate and supervise banks and financial institutions. It allowed entry of foreign and domestic private banks in the market.
Some of the early entrants into the banking system with years of entry in brackets were Meridian Biao bank Tanzania (1992) which was later taken over by Stanbic bank Tanzania (1995), Standard Chartered bank (1993) Eurafrican bank ( 1994) and Citibank Tanzania (1995).
The NBC was restructured in 1997 and three separate entities were formed namely NBC (1997) , the National Microfinance bank and Consolidated Holdings. Since the enactment of BFIA , the banking sector in Tanzania has experienced failures of six banks and financial institutions namely Tanzania Housing Bank (1995) Meridian Biao (1995) Trust Bank (1998) Greenland Bank(1999), First Adili Bancorp (2000) and Delphis Bank (2003)
Most of these failures were triggered by failures of their parent banks in abroad. In all these cases, no depositor lost a cent, only two banks (Greenland and THB) were liquidated while others were taken over by other banks.
The government also encouraged formation of regional or community banks and financial institutions in various parts of the country in order to assist Tanzanians to have access to banking services in their localities.
The BFIA act was amended in 2003 to give powers to BoT to prescribe lower capital threshold for establishment of regional and community banks.
As of December last year, there were eight community banks operating in the country, namely Mbinga Community Bank, Dar es Salaam Community Bank, Mwanga Community Bank and Mufindi Community Bank. Others are Kagera Farmers Cooperative Bank, Kilimanjaro Cooperative Bank, Njombe Community Bank and Tandahimba Community Bank.
As of December 2010 the banking sector was made up of 42 banking institutions .The total number of bank branches and agencies nationwide was 475 of which most were concentrated in commercial city of Dar es Salaam
Four banks namely NMB, CRDB , Dar es Salaam Community bank and Kenya commercial bank have been listed on the Dar es Salaam Stock Exchange (DSE).
However, experts say liberalization of the banking sector in the country has brought many advantages.
Some are significant improvement in the asset quality of banks which has led to increased profitability, increased competition in the sector which has led to better banking services, improvement of corporate governance in the banking sector and increased lending to private sector.
Other achievements are the use of Information Technology and Communication (ICT) which has helped banks to offer better services and new products to its customers like automated teller machines (ATMs).
One of the lessons from the recent global financial crisis is the need for putting in place an effective financial stability oversight in the economy.
The oversight covers the supervision of the entire financial system and the monitoring of stystem.The financial system is made up of the three components namely the financial intermediaries, financial markets and financial system infrastructure .
The Bot established the financial sector stability department in 2009 with the key responsibilities of undertaking a macro surveillance of financial system aimed at assessing financial performance of the sector, identifying financial imbalances.
While pursuing the activities the BoT faces a number of challenges one being the degree of preparedness to cope with the fast changing technological advancement in the world economy in general and financial system in particular.
In the course of formulating and implementing monetary policy the BoT has faced a number of challenges include thin and shallow financial markets, unpredictability of government budgetary flows coupled with large and unpredictable expenditure floats, weak monetary policy transmission mechanism, dominance of currency in circulation in the reserve money and the presence of multiple regulatory bodies in the financial sector.
Credit risks, unregulated microfinance operations, overlapping membership to regional groupings
Given the challenges, the BoT which is the regulator of financial institutions operating locally pledge to remain vigilant to maintain a modern central bank embracing best practices.
The Bank will endeavor to continue improving the effectiveness of the conduct of monetary policy. As fiscal agent, the Bank will continue to intensify its collaboration with the government.
The objective is to ensure that public finances are managed prudently and fiscal policy is supportive of monetary policy , thus achieve the ultimate objective of price stability..