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FINANCIAL WATCH:How fares the banking sector?
2005-07-20 08:55:19
By Theo Mushi
There were no financial markets worth the name in the era of the centralized economy. There were only two state owned commercial banks, namely NBC and CRDB.
There were the development banks which were Tanzania Investment Bank, Tanzania Housing Bank and Cooperative and Rural Development Bank (CRDB).
These gave politically directed loans to various sectors of the economy including agriculture, cooperatives, Ujamaa villages and parastatals. Since most of the lending was rarely based on the economic and financial viability of the projects, most of the loans could not be repaid and hence the huge portfolio of non performing loans which were transferred to LART.
There was no competition among the banks, and hence customer services and innovation of new financial products was non existent In 1991, the banking and financial institutions act was passed and this led to the liberalization of the financial sector.
Exchange control was abolished and the exchange rate was left to be determined by the forces of supply and demand of hard currency. This means the era of floating currency was introduced, and there was full liberalization of the Bank of Tanzania current account.
Recently, there has been partial liberalization, or deregulation of the capital account to allow foreign investors to bring portfolio investment and trade in equities into the Dar es Salaam Stock Exchange.
The Bank of Tanzania set the guidelines and prudential regulations to be followed by the licensed foreign banks. They owned the core capital to establish banks now raised from Ths. 1 billion to Ths 5 billion.
Other areas included credit concentration, insider lending by directors, statutory Minimum Reserves and accounting and reporting of financial performance which banks are required to produce quarterly, and annual financial reports for the benefit of the depositors and shareholders.
There are now over 30 commercial banks and financial institutions operating in the country both local and foreign. Foreign banks now include WBC, Standard Chartered, Barclays, and Euro African Bank.
Local banks include Akiba Commercial bank, CRDB, Azania.
Bancorp,Tanzania Postal Bank, Exim Bank, CF Union Bank, and Twiga Bancorp. Most of these banks are operating profitably and one of the reasons is that they have been investing in risk free treasury bills and bonds which constitute what is called non-interest income.
Most of the banks were not lending much to productive sectors of the economy in the early 1990s because they feared to burn their fingers like the former NBC, CRDB and THB.
Tanzanians are slowly building a loan repayment culture, and hence banks are gradually becoming less risk averse, and they are reducing lending rates to single digits for well known large corporates but the spread between lending and saving rates is still big, and in some cases fixed deposit rates are below the inflation rate estimated to be around 5 percent.
The other area to be examined is the charges and commissions charged by banks which are major sources of income to the banks but a disincentive to savers because they erode interest rates paid on deposits. There have been a few bank crises but these have been contained by the central Bank.
Bank failures included THB (non repayment of loans), Meridian Biao (big foreign exchange exposure) and Trust Bank, and Greenland Bank whose problems originated from liquidity problems at their headquarters.
The BoT has improved the screening of banks before licensing and strengthened the supervision department to detect potential bank crises and prevent them with the introduction of a credit rating bureau.
Banks now feel more comfortable to lend to businesses. Large banks have now returned to micro-financing and giving loans to SMEs.
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