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Our Financial System Needs Urgent Reform
2006-07-08 09:39:09
By Dr. Sadikiel.Kimaro
Our financial sector is at present a major obstacle to Tanzanians in their efforts to grow the economy and free themselves from poverty.
Barring a very small fraction of Tanzanians, the majority of our people cannot readily place their savings with, or borrow from a licensed and properly supervised financial institution.
Accordingly, our economy is denied the benefits of pooling savings and deploying them efficiently. For the few Tanzanians with bank access, their deposits have for the most part attracted negative rates of interest, when adjusted for inflation.
Moreover, credit is obtained at relatively high rates of interest; a phenomenon that is commonly blamed on lending risks.
In the non-banking area, there are also serious drawbacks. The majority of retirees have to manage on miniscule pensions, while the pension schemes are focusing on development and policy-directed lending.
Moreover, many Tanzanians have been financially or commercially ruined by the state-sponsored general insurance schemes, following their inability to come through with anticipated payments.
A relatively small amount of leasing finance is available, mostly for consumer durables.
Virtually all Tanzanians, including the few that have access to reputable financial institutions, cannot obtain financing for certain legitimate needs, such as housing construction, improvement or repair.
They have to rely almost entirely on their own savings to fund such big-ticket items—a factor which, perhaps, contributes significantly to underlying corruption in our society.
Investment banking and financial advisory services are at their infancy. A few brokerage firms trade at the Dar Es Salaam Stock Exchange, the smallest equity market in Africa.
There is a number of local accounting and auditing firms struggling uphill alongside reputable international firms.
And, available financial consultancy services are, for the most part, one- or two-person businesses specializing in feasibility or marketing studies, export-import finance and other basic services.
This rather unsettling picture should not detract from the achievements of the reforms that have been adopted since the early 1990s.
In 1991 the Government adopted a reform strategy that was essentially aimed at ending state monopoly in banking, by privatizing existing banks.
The reform also paved the way for the lifting of controls on interest rates and credit operations.
A major component of the financial sector reform was the privatization (through partial asset sale) of the only state-owned commercial bank, National Bank of Commerce (NBC).
The initial proposal to restructure and privatize the NBC along regional lines was rejected. Instead, the NBC was unbundled into two relatively large banks.
The first bank, NBC (1997) Ltd, was expected to specialize in commercial and corporate lending. Now Barclays Bank owns 55 percent of the bank, and the International Finance Corporation and our Government own 15 percent and 30 percent, respectively.
The second bank, National Microfinance Bank Ltd. (NMB), was expected to specialize in retail banking in rural and urban areas. After prolonged debated over the issue of empowerment, the privatization of NMB was completed only in 2005.
A consortium led by Rabobank of the Netherlands and including local investors, now owns 49 percent of the NMB; our Government owns the rest.
Apart from the NBC, the other state-owned bank, the Cooperative and Rural Development Bank (CRDB) was wholly privatized in 1996.
Its shareholders include the Danish International Development Agency (DANIDA), the single largest investor, as well as local cooperative organizations and other investors.
Of all the banks, the CRDB, aided by DANIDA, excels in its efforts to extend banking services to agriculture and other pro-poor sectors.
Another important component of the reform adopted in 1991 was the liberalization of entry into banking. As a result of this, today we have 22 licensed banks, 5 regional unit banks, and several regional unit financial institutions.
All these institutions are firmly supervised by the Bank of Tanzania, and the partially state-owned NBC as well as most of the other banks are making profits.
More recently, commercial and corporate lending has picked up at a healthy pace.
Some banks are making a serious effort to diversify their loan products to accommodate borrowing by their employees and other salaried persons, leasing and house finances, and government-guaranteed lending to small- and medium-scale businesses.
Financial sector reforms outside the banking sub-sector have been very uneven. The insurance market has been liberalized, and privately owned insurance companies are offering much-needed respite to our citizens.
But the reform of the pension and postal savings schemes, the privatization of National Insurance Corporation and the establishment of effective development and housing finance facilities are moving at a disappointingly slow pace.
In retrospect, the reforms, which have been implemented since the early 1990s, have resulted in a bank-dominated economy, with a strong bias toward macroeconomic stabilization and the financing of commerce (rather than production).
In our dialogue with development partners and at the national policy level there is, perhaps, an underlying assumption that Tanzania can develop just as well with a bank-based financial sector.
In particular, it is believed that commercial banks in Tanzania—much like those of other more developed countries—should be able to provide essential banking and other financial services, given appropriate policy and institutional environment such as sound system of property rights, enforceable collateral, availability of information on individual credit worthiness, and supervisory flexibility.
We, of course, have to recognize the indispensable role that banks are playing in our economy to provide liquidity and ensure orderly payments.
We should also welcome whatever role the banks might be able to play to accommodate relatively riskier and long maturity financing of investment.
It would be unwise of us, however, to depend too heavily on commercial banks to finance housing, equity and other investments, the risk and maturity profiles of which are outside their normal practice.
We would be equally unwise to believe that we could, somehow, avoid substantial demands on the central government budget in our efforts to build a robust financial sector for Tanzania.
Serious governments in the OECD, emerging, and other developing countries take forceful steps, including providing substantial budget support to correct market and systemic failure and ensure that they have healthy financial sectors.
Initially, when we embarked on the reform of the financial sector, we were understandably eager to curb run-away spending and lending by state-owned institutions.
This was a key step in reducing budget deficits and restoring macroeconomic stability. So we closed the housing bank, sold off the NBC and CRDB, and mothballed the development bank.
More recently we have consulted with some of our development partners on the establishment of the various credit guarantee facilities, the cumbersomeness of which was acknowledged by Minister Meghji in her maiden budget speech.
We have also attempted (rather unsuccessfully) to get some of our development partners to approve our plans to revive development-banking services.
It would seem that the development partners have not been sufficiently forthcoming in these areas, partly because they are too narrowly focused on macroeconomic stability.
We need a more balanced financial sector, capable of promoting a more diversified expansion of our economy and accelerating empowerment of our people.
In order to achieve these objectives we have to take action on three fronts.
First, we should continue to consolidate our banking sector, without falling victim to the worldwide phenomenon of bank mergers and acquisitions.
We should also start to support strongly banks that are seeking to extend services to the pro-poor sectors.
It is not enough to have large banks controlling the network of most banking outlets in our country.
The record of our relatively large banks (barring the CRDB) in promoting pro-poor growth and empowerment has not been very impressive.
Because of this, our Government should prohibit the relatively large foreign controlled banks from merging with or acquiring locally owned financial institutions, such as the regional unit banks, the regional unit financial institutions, or the smaller locally owned banks (say, Akiba Commercial Bank Ltd.), which are struggling to reach the rural, informal and other pro-poor sectors.
Furthermore, the Government should resist the temptation of forcing mergers and acquisitions among locally owned institution, say by raising the level of required capitalization.
Second, our Government should actively support, including through the budget, ongoing efforts, especially by the locally owned institutions, to provide banking and other financial services to the rural population and to small- and medium-scale enterprises.
The bigger banks prefer to concentrate on low-risk commercial and corporate lending in urban areas. The smaller banks, which are struggling to reach the poorer segments of our population, have no vested interest in risky lending.
Neither are these banks responsible for the multitude of factors that impede lending to the majority of Tanzanians.
Commercially oriented institutions—no matter how financially strong or well meaning—cannot on their own create an environment of secure property rights and enforceable collateral or educate our people to understand and respect the fundamentals of banking.
Problems of this kind can only be tackled through serous commitment (morally and materially) by our Government and, ultimately, by all of us.
In this connection, the (empowerment) measures announced in the recent budget speech go in the right direction, but they lack concreteness and substance.
According to the speech, the Government intends to continue to build on the admittedly cumbersome and modestly useful (until now) credit guarantee facilities.
It was also announced that the Government is preparing procedures for establishing SACCOS and that ”…for TIB to perform the function of a ’development bank’ it needs a minimum capitalization of 50bn/-.” As a matter of fact, the number of SACCOS in our country has increased steadily, with or without such procedures.
Moreover, instead of focusing on the development bank’s minimum capitalization (barely enough to cover one-fifth of the investment of Kahama Gold Mine), we should be aiming at a bank that is sufficiently strong for Tanzania.
A more forceful way forward should include (a) establishment of a full-fledged development bank, with substantial capitalization (of, say,.500bn/-) and a window for development credit guarantees; or, alternatively, establishment of about three development banks, to focus on the key sectors (agriculture, industry and infrastructure) or on distinct regions of our country; (b) provision of strong government support for the organization, capacity building, and capitalization of micro-finance institutions; (c) requirement that all banks share responsibility in supporting agriculture and other pro-poor sectors, by devoting at least 5 percent of their lending portfolio to this purpose; (d) subsidization (temporarily) of banking outlets or mobile banking service in the poorer areas of our country; (e) deliberate redirection of government financial business—including placement of deposits and payment of salaries—toward locally owned banks; and (f) completing the privatization of NBC and NMB through the sale of the retained government shares to local investors.
Finally, we have to develop more robust institutions—including investment banks, pension and insurance schemes and mortgage banks—capable of meeting the diversified financial needs of our people.
In building our specialized financial institutions we should seek technical advice and support from similar institutions elsewhere, especially other developing countries.
Our investment in this area could yield substantial dividends, including a step-up in domestic savings and investment and availability of more reliable support for our Government and fledgling domestic private sector in negotiating and managing large and demanding financing arrangements.
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