Despite likely risks, banking sector still safe – BoT

16Aug 2016
Victor Karega
The Guardian
Despite likely risks, banking sector still safe – BoT
  • • The domestic financial system continued to be resilient supported by adequate liquidity and capital buffer, reinforced by positive macroeconomic environment, diversified export base and low oil prices

IN a new report, the Bank of Tanzania (BoT) has given a vote of confidence to the country’s banking sector, saying it remains safe, well capitalised and profitable owing to sufficient liquidity, proper supervision and strict regulation.

However, the central bank says the sector still faces risks that mostly emanate from the quality of assets in the form of increasing bad loans. The banks also face the challenge of depreciation of the shilling and export price falls.

“The banking sector remained sound as reflected by financial indicators, but faced risks stemming from declining asset quality,” BoT notes in the current Financial Stability Report (FSR) that covers the period between March and September 2016.

The report says the whole financial system will remain stable during the period.

The other main risks, according to the report, are stability of the domestic financial system up to next month, tightening of global financial conditions and increase in the non-financial corporate debt.

“Risks arising from the global financial environment are expected to increase on account of further tightening of the US monetary policy. This may trigger strengthening of US dollar against other currencies and create domestic financial markets volatility,” the central bank report further notes.

Due to strengthening of the greenback, the shilling depreciated sharply against the dollar in 2014/15 by about 25 per cent and experienced high volatility. The IMF says that while the shilling depreciated a bit further since mid-2015, the situation in the foreign exchange (FX) market has normalised, with improved liquidity and participation by commercial banks.

The banking sector continued to play a dominant role in the financial system, with its market share averaging 71.3 per cent in the year ending March 2016. Pension funds accounted for 26.5 per cent while insurance companies and collective investment schemes accounted for 1.9 per cent and 0.5 per cent, respectively.

BoT Governor Benno Ndulu said that since the release of the September 2015 FSR, global risks have been elevated with weaker growth prospects than earlier anticipated amid tighter financial conditions and lower commodity prices.

While these conditions remain challenging, he explains, the domestic financial system continued to be resilient supported by adequate liquidity and capital buffer, reinforced by positive macroeconomic environment, diversified export base and low oil prices given that Tanzania is a net oil importer.

Prof Ndulu said that during the period, BoT issued the Payment Systems Licensing and Approval Regulation, 2015, to lay ground for operationalisation of the National Payment Systems Act, 2015. The development gives explicit mandate to the central bank for licensing and supervision of all payment services providers.

According to him, this is a major development in the financial system regulatory infrastructure considering the growing role of mobile money and other digital platforms in financial services delivery in the country.

“Going forward, increased role of non-bank financial intermediaries and interaction between the financial system and the rest of the world may pose risk to the domestic financial system. Accordingly, BoT in collaboration with other financial sector regulators will intensify surveillance and expand macro-prudential toolkit in order to preserve the stability of the financial system,” the governor said.

The report notes that capital and liquidity ratios remained above prudential requirements, at 18.0 per cent and 36.6 per cent against 12.5 per cent and 20.0 per cent respectively, except for few banks which require close monitoring.

In contrast, it adds, the asset quality declined as depicted by an increase in non-performing loans (NPLs), which were 8.3 per cent of total loans at end March 2016, compared with 6.8 per cent in September 2015. The NPLs were concentrated in credit extended to personal, agriculture and trade categories.

The three sectors constituted about 56.2 per cent of the total NPLs at end March 2016 compared to 52.0 per cent in September 2015. BoT says that despite the surge in bad loans, banks are still in position to absorb losses without resorting to depositors’ funds.

“Core capital to risk weighted assets remained above the regulatory minimum requirement of 12.5 per cent, increasing to 18.0 per cent in March 2016 from 16.7 per cent in September 2015.

“The strengthening of capital was attributed to increase in profit, paid up share capital and premium. Large banks had capital levels above minimum regulatory requirements, when combined with medium banks over 95 percent were above regulatory requirements,” the reports notes.

The banking sector remained profitable with improved operational efficiency. Return on assets increased to 3.2 per cent from 2.7 per cent in September 2015, mainly attributed by increase in returns on Government securities and non-interest income.

The central bank said liquidity risk declined as reflected by the ratio of liquid assets to demand liabilities. The ratio remained above the regulatory requirement of 20.0 per cent at 36.6 per cent in March 2016 compared with 35.7 per cent recorded in September 2015.

“Similarly, loan-to-deposit-ratio increased to 82.7 per cent in March 2016 from 78.9 per cent in September 2015, mostly driven by ongoing transfers of some parastatals’ deposits from commercial banks to special accounts held at the Bank of Tanzania and rapid growth of credit to private sector.

“Consequently, some banks are opting for alternatives funding sources domestically and abroad to boost their assets, however at the risk of high interest and exchange rates volatility,” the report says.