16 May 2017

Tanzania: High NPLs - Many More Banks May Crumble, Experts Caution

Photo: Mohamed Mambo/Daily News
A pedestrain looks at an advert on the windows and door of a closed FBME Bank located along Samora Avenue in Dar es Salaam. Tanzania's central bank revoked the business licence of the bank and placed it under liquidation after it was accused by the U.S. government of large-scale money laundering.

More small banks may be liquidated due to capital inadequacy as soaring default rate on loans is eating into core capital, economists are warning.

After the Central Bank revoked the licence of Mbinga Community Bank due to capital inadequacy last week, the economists say survival of other small banks Survival of many small banks cannot be guaranteed with such a high defaulting rate on loans.

They urged that high default rate on loans which has pushed non-performing loans to a record high levels, was a result of weakness on the bank's management in loan provision and liquidity challenges in the economy.

In this year's quarter one three banks registered more than 50 per cent of NPLs ratio compared to industry benchmark of 5.0 per cent. Efatha Bank, linked to Efatha ministry and foundation, has the highest NPLs in this year's Q1 at 63 per cent increased by almost five times from the same period last year. The bank posted a 23m/-loss from a net profit of 12m/- in quarter-to-quarter.

The second on list was EconBank Tanzania after reporting NPLs of 57 per cent in Q1, this year up from 38 per cent in similar quarter last year.

The bank made a loss of 4.75bn/- up from 1.26bn/-, in the quarter. Tanzania Women's Bank, which Controller and Auditor General (CAG) suggested the Central Bank intervention, reported NPLs ratio of 52 per cent, which also went up from 43 per cent of last year's Q1.

Dr Hildebrand Shayo of TIB Bank said banks with NPLs levels of over 50 per cent were more likely to collapse if there would be no new capital injection. "Something must be done..., otherwise collapse of these banks is imminent," Dr Shayo, said.

To address the problem of rising NPLs banks, investors and borrowers need to work together and be creative in finding solutions to the problems they collectively face. "There is no one size fits all approach.

Different banks pursue different strategies in relation to different types of loans," Dr Shayo said. The Tanzania Bankers Association (TBA) Chairman, Dr Charles Kimei said the current situation may result in acquisition or mergers of small banks.

"I think given the difficulty of obtaining good working capital, because [small banks] are not very profitable... will be forced somehow to go into acquisitions or mergers," he said in an interview with International Banker.

Apart from NPLs, some economists are of the view that the decision of the government to have a single treasury account for its departments and authorities added salt on the wound.

Mzumbe University senior economist, Prof Honest Ngowi said government austerity economic measures have disturbed some businesses leading to general economic slowdown for various reasons--including contraction of fiscal and monetary policies.

"NPLs leads to a negative phenomenal... banks earnings fall, may lead to financial instability, the financial sector may collapse," Prof Ngowi said. The phenomenal was seen last week as in span of four days two banks were closed by the central bank--Mbinga and FBME.

Due to high NPLs banks, now 59 in total have tightened their credit terms as bad loans top 1.98tri/- against the economy credit stock of 20.89tri/- in February.

To avoid running into yet another bad debt trap, lenders have turned to risk-free government securities. Prof Ngowi said the country needs expansionary fiscal and monetary policies to reverse high non-performing loans.

The economist said reversing NPLs the authority should introduce low and fewer taxes and low interest rates.

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