There's certainly a light at the end of the tunnel—"Kazi iendelee.”Esther Kitoka who is Equity Bank Tanzania’s Executive Director, perhaps the most insightful panelists on the night, spoke eloquently of the evolution of the Tanzania Banking sector and gave expert opinion on current issues like the interest rates and nonperforming loans.
She also spoke dotingly about the hostility the banks face in loan recoveries and the growing tendency of loans defaulters to resort to court injunctions, to frustrate the process. Take a loan, default, and then frustrate recovery. The story of having a cake and eating it (too).
Looking back, similar sentiments were once shared by the former President, the late Dr. John Magufuli, when he directed the Judiciary fraternity to ensure timely disposal of commercial-related disputes--stating that over Sh500 billion were tied up in about 400 commercial cases, after default customers filed lawsuits or sought court injunctions against the Banks, consequently depriving the economy of the anticipated capital.
Loans are the livelihood of Commercial Banks. To be able to issue loans, Banks collects funds from the public at interest, and then make them available for investments. For this to happen, Banks must enjoy public confidence and trust.
A loan portfolio therefore, constitutes the Bank’s most significant asset and source of revenue, and thus requires the highest degree of diligence and professionalism from origination, onboarding, monitoring and collection. To avoid inherent credit risks.
All businesses sell products and services, but the Bank's product is money. Lending, therefore, represents the heart of the banking industry—the lifeblood. Lending is also a prerequisite for economic growth and transformation—the sector that gets the most of the disbursed loans grows faster! As intimated above, issuing loans or lending money is a risky business.
Though the Banks takes proper precautions to ensure that the borrowers honor their repayments obligations, they can't be water tight—mostly due to lack of perfect information about the borrowers and businesses they want to be financed. There are also unforeseen events such as natural calamities, bad weather and the like. This underlies the requirement of banks for borrowers to provide collaterals as a safeguard. It is a matter of principle.
Non-performing loans and defaulters' intentsWhen a borrower fails to repay a loan and accrued interest within a consented period, commonly 90 days, it goes into a non-performing (NPL) status.
Meaning, the odds that the debtor will repay it in full are substantially lower; and bank has to start making provisions against its profits so as to safeguard depositors’ money in case the loan turns into a loss. It is a painful process for a banker who aspires to make dividends to shareholders. It follows, as a matter of common sense that, NPLs are dangerous to the livelihood of banks as they affect Banks’ capital base and ability to advance additional or new loans.
As a preventive measure, Bank of Tanzania (BoT) makes it imperative for banks to adhere to strict regulations, including timely provisions against loan losses. One of such regulations is the cap on NPL at a limit of (5%) come December 2022--failure to which, they can say bye-bye to dividends and bonuses. A precise statement of intent. Indeed.
Several factors could lead to loans falling under NPL, some within and some beyond the borrowers' management capability. However, the more striking reasons for loan defaults are related to borrowers’ deficiencies including poor supervision, diversion of funds from the intended purposes, and lack of financial management capabilities in the business setting.
There are also ‘Willful defaulters’— those not repaying the loans despite having financial ability. Those failing to meet payment obligations after utilizing the finances against the intended purposes or siphoning off the funds. Majority in this category rush to courts for injunctions against foreclosure.
It should be documented that contrary to popular beliefs; Banks do not set out to auction Defaulters’ assets. This is the very last resort measure in loan collection. The exercise is very emotional and rarely yields the projected commercial value. If you factor in depreciation of asset value and the possibility of daunted public image, the diplomatic route of helping the borrower to repay, either by rescheduling or introducing some concessions in conditions, makes more sense.
However, as we all know; capital knows no emotions. As the old Latin saying goes, "Debita solventur Omnia," all debts must be paid. When push comes to shove; when all the roundtable discussion with offers for restructuring and adjusted repayments terms fails, Banks are left with no choice but to seize the collaterals. This measure is made painful when a bank is impeded by a court injunction.
While this is a legal matter and very little could be done against or around it, the situation has significant economic and social impacts—lesser credits, increased interest rates, soaring operating expenses, to name a few. For instance, the tied-up capital of TZS 700 billion held in court cases by June 2020 was enough to support significant private and public projects.
As we strive to create a conducive business environment and attract strategic investors, these are crucial areas that need immediate attention. Efficacy of the judicial system in commercial-related claims ranks highly in any investors' pointers.
Let's also act tough on all types of willful defaulters, or we could end up building a culture of defaults. In May 2017, according to HESLB records, out of 142,470 defaulters, only about 45,000 started repayments after being served 30 days notice or being publicly shamed.
Similar stories are echoed in many other areas of credit provision. We all ought to honor our credit obligations and uphold financial discipline.As we evaluate 60 years of our financial sector let’s also address thorny pointers and implement strategic reforms in commercial-related cases. In this particular field, Justice delayed is development denied.