Washington Gikunjwa
28 August 2008
Aggressive financial sector reforms undertaken by the three East African countries in the 1990s have contributed to the current regional economic boom; an analytical survey by the Bank of Tanzania (BOT) has shown.
The BOT Governor Prof Beno Ndulu says that there is overwhelming empirical evidence that links the current regional economic growth to financial services sector reforms that have eased availability of credit to the private sector.
The survey reveals that in the '70s and '80s; the regional financial services sector had many similarities characterized by a bureaucratic government control that directed banks to extend loans to sectors such as agriculture, cooperative unions and other government entities.
Interest rates were also administratively determined, while the regulatory supervision framework was inadequate. Prof Ndulu said this while making his key note presentation at the ongoing eighth annual East African school of banking in Dar es Salaam, Tanzania.
He noted that the financial repression resulted in a weak banking sector, negative real interest rates, wide interest rate spreads, low levels of savings and crowding out private sector credit, which led to low levels of economic growth.
The average real deposit rates during the period stood at a low of negative 25.8 per cent in Tanzania, while the average real lending rate was negative 17.4 per cent.
In Kenya, the average real deposit and lending rates were at negative 1.6 per cent and positive 1.1 per cent respectively, while the average real deposit and lending rates in Uganda stood at negative 129.5 per cent and negative 123.3 per cent respectively.
Heavy domestic government borrowing crowded out the private sector from access to credit, with the Central Government taking up 33.7 per cent and 63.1 per cent of total credit allocation in Kenya and Tanzania respectively.
Public entities accounted for 3.6 per cent and 31.4 per cent of total credit allocation in Kenya and Tanzania respectively, while the private sector took up the remaining 60.9 per cent and 5.4 per cent of credit respectively.
The three countries recorded low average real Gross Domestic Product (GDP) growth rates of 3.6 per cent in Kenya, 0.1 per cent in Tanzania and 0.6 per cent in Uganda in the period between 1980 and 1986.
Aggressive sector reforms have however seen the region liberalise its financial sector, allowing operation of market forces through removal of credit directives and liberalisation of interest rates and giving room for private sector access to credit.
The reforms have also involved privatisation of state owned banks and strengthening of banking regulations and supervision. As a result, there has been a rapid growth in the number of commercial banks from about 23 banks in Kenya in 1985 to the current 44, three in Tanzania in 1991 to 30 currently and from nine in Uganda in 1992 to 15 by 2004.
This has increased financial intermediation, narrowed interest rate spreads and supported rapid growth of private sector credit.
Profitability of regional commercial banks currently exceeds the Sub Sahara Africa countries' Average of 1.1 per cent of GDP, with Kenya recording profitability to GDP ratio of 3.5 per cent, Uganda 3.1 per cent and Tanzania 2.5 per cent. Real GDP has grown at an average of 5.1 per cent in Kenya, 7.3 per cent in Tanzania and 6.1 per cent in Uganda in the period between 2004 and 2007.
Challenges however still remain in the sector, including low penetration of banking services, relatively high interest rate spreads, unavailability of long term credit and low level of savings. There is also still a high level of concentration in the banking system limiting competition and promoting inefficiencies.
For example, the thirteen largest banks in Kenya (out of about 44) hold about 79 per cent of total bank assets and 80 per cent of total bank deposits. The eight largest banks in Tanzania hold 82.8 per cent of total bank assets and 84.5 per cent of total bank deposits.
"High bank concentration limits vigorous competition and leads to inefficiencies," said Prof Ndulu. Going forward, Prof Ndulu admitted that more reforms including the adoption of Basel I and II principles will help in sustaining the current growth in the sector.
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