12 June 2012

Tanzania: Tight Liquidity Bites As Banks Struggle

THE impact of tight liquidity introduced by the Bank of Tanzania (BoT) about a year ago to tame inflation and curb the shilling's free fall has led to low level of money in circulation which has increased competition for deposits.

The competition for deposits has intensified because the 48 commercial banks in business are fighting for the local market which has seen a meagre 20 per cent of the bankable population covered.

The Bank of Tanzania (BoT) measures were aimed at arresting the situation by reducing the core capital of foreign exchange dealers from 20 to 10 per cent.

The central bank also increased cash reserve requirements on government deposits from 20 to 30 per cent and upped discount rate by 200 basis points to 9.58 per cent. Though the measures managed to bring down and stabilize the shilling from 1,860/- to between 1,560/- and 1,600/- per US dollar as well as rescue the macroeconomics fundamentals, the move failed to lower inflation rate substantially which has kept on sticking to double digit at 18.7 per cent in April.

"Our policy is not to target the exchange rate but to stabilise the shilling by maintaining circulation of money," BoT Director of Economic Research and Policy, Dr Joe Massawe, said. He added: "We have to strike a balance between intervention and interest rates on Treasury Bills to avoid distortions in the market."

This resulted into a number of challenges that spurred the market such as liquidity scarce that pushed up interest rates on deposits, which later increased costs of lending to impact negatively on production output. For instance, deposits rates at the beginning of this year were around five per cent, which could not match with Treasury Bills yield rates of between 15 and 18 per cent. A return on equities at the Dar es Salaam Stock Exchange (DSE) of over 10 per cent was also another factor.

To attract more cash flows, banks uplifted the deposits rates while some even went a mile ahead and introduced promotions that offered not only prizes but also high interest rates. The first to embark on upping deposit levels was the National Microfinance Bank (NMB) which has offered up to 10 per cent interest rates on its bonus and junior accounts.

The two account holders also stand a chance to win building materials, school fees, school bags and some other awards in monthly draws for the next three months of the promotion. NMB is the most profitable bank in the country and the second in deposits level. The bank controls between 30 and 40 per cent of total customers.

On other hand, competition in the local banking sector intensified in the recent months after the coming of new entrants, FNB of South Africa and Equity Bank of Kenya. CBA Bank followed suit almost the same week and launched a promotion aimed at increasing its deposit levels to push up its lending capacity.

The three-month promotion dubbed "Deposit and Win with Your CBA Account" targets new and existing customers from both personal and corporate categories. The promotion targets to increase its liquidity and grab new customers. CBA Head of Personal Banking, Mr William Mungai, said the bank was in a dire need for deposits for both mortgage and personal loans.

"This is just a strategy to increase deposits and at the same time reward our customers in the next three months up to September", he said. Ecobank also joined the race and launched of a mega promotion to encourage people to open accounts where the ultimate prize would be a car worth 65m/-.

The bank, which opened shop in Dar es salaam in 2010, said it has grown the balance sheet with 90bn/- in assets in the last two years and the current total deposits standing at 47bn/-. Ecobank Head of Treasury, Mr Erik Mushi said that the central bank measures to tighten money supply in the economy have had an immediate impact of the liquidity level.

The liquidity squeeze was also a blessing to investors and depositors because, for the first time in money markets history since the liberalization of the financial industry,they have won a wider option of where to put their money due to lucrative interest rates offered at the moment.

"Investors have a wide option where to invest their money as returns rates are very good", said Mr Moremi Marwa, CEO of Tanzania Securities. He added that the banks' deposit rates are at all time high at 8.3 per cent on average, Treasury Bills rates range between 15 and 18 per cent and equity yields are trading above 10 per cent.

However, the CEO of the stock brokerage firm said that practically,individuals don't benefit from the positive trend in the market because they end up, at times, getting around 5 per cent. "Those with big money like pension funds and fund managers are the ones who benefit most, with some negotiating a better deal of up to 18 per cent," he said.

CRDB Bank Managing Director, Dr Charles Kimei, told the 'Business Standard' recently that commercial banks had limited options in mobilising deposits.

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