10 December 2018

Tanzania: This Is What BoT Should Do to Bolster Banking System

Dar es Salaam — The closure of five banks in January due to low capital, the forced merger of three others and the protracted non-performing loans crisis are clear indicators that all is not well in the banking system.

The banks closed in January this year include Tanzania Women Bank, Efatha Bank, Covenant Bank for Women, Njombe Community Bank, Kagera Farmers' Cooperative Bank and Meru Community Bank. Twiga Bancorp and the Tanzania Women Bank were forced to merge with the Tanzania Postal Bank in May and August this year respectively while Bank M was put under BoT statutory management.

But more banks could collapse if a new International Monetary Fund assessment of the Tanzanian financial sector that shows that at least six more banks are undercapitalized is anything to go by.

In fact, the IMF assessment, contained in the Financial System Stability Assessment (FSSA) released on December 6 shows that 11 banks that represent 12.8 per cent of assets in the system would most likely be undercapitalised at some point during the period between 2018 and 2020.

If that is not enough a solvency stress test has revealed that 22 banks, representing 32 per cent of banking assets would become undercapitalised in the Tail Risk Scenario.

A tail risk is an event with a small probability of happening but when it does could have catastrophic effects on the banking sector such as the global financial crisis that happened in 2008/09.

In the Tanzanian situation, the combine effects of thing such as sharply declining real Gross Domestic Product growth, rising interest rates, and depreciation of the Tanzanian Shilling could comprise of a tail risk as it would reduce banks' profitability and capital ratios.

But the IMF further says of the 54 banks and financial institutions supervised by the Bank of Tanzania (BoT), 20 are CAMELS composite 3-rated and 9 are 4-rated. This means 29 (about half of all banks) are approaching the red line towards collapse.

CAMELS is a recognised international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym. Supervisory authorities assign each bank a score on a scale. A rating of one is considered the best, and a rating of five is considered the worst for each factor.

CAMELS is the acronym for Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity.

What the BoT should do to rescue the banking system

The IMF says risks in Tanzania such as those which cause the non-performing loans (NPLs) crisis are abundant and could continue for a while. But there are several measures that the central bank could do to prevent a possible catastrophe in the system.

Strengthen the Banking Supervision Department (BSD)

The BSD of the central bank is inadequately staffed and functions in ways that makes it difficult to detect danger in the banking system, the IMF complains.

As of February 2018, the BSD had 52 staff members including ten managers. There is a gap of 19 technical staff positions, with 10 of them quitting their jobs since 2015. Meanwhile the burden of responsibilities the BSD have increased. The number of supervised banks have increased. About 20 staff were needed to supervise the closure of five small banks in January 2018 leaving the department depleted.

"The BoT's BSD has been operating for several years at levels below the authorized number of staff, and far below the level considered as adequate compared to the activities required to effectively discharge its mandate," the IMF report reads in part. Rather than each relationship officer at BSD being responsible for one bank as contemplated in the the BoT's own manual, each relationship officer is now responsible for several banks, the IMF notes.

"In the BoT structure of unified offsite and onsite functions, relationship officers also participate in the onsite examinations of other banks. ... This means that relationship officers are stretched... " the IMF says. The IMF also has advised the BoT to enhance BSD relationship with external auditors as currently there are no regular technical contacts either during offsite or on-site work.

Supervision of foreign-owned banks

The IMF wants the BoT to introduce systems that will enable it to assess parent banks that own foreign-owned banks operating in Tanzania. This should include the two banks, CRDB and Exim, which have branches outside the country.

"The consolidated supervision procedures need to be implemented for the two Tanzanian banks with international operations, other domestic banks with financial sector affiliates, and more than 20 banks which are part of foreign groups.

BSD should put in place procedures to assess the quality of supervision in home countries of foreign bank subsidiaries in Tanzania," the report reads in part.

It adds "develop formal procedures to assess the quality of supervision in home countries of foreign banks subsidiaries in Tanzania, the quality of supervision conducted by host supervisors, and a formal policy for assessing whether on-site examinations of a banking group's foreign operations are necessary or whether additional reporting is required," the FSSA report reads in part.

Ownership, licensing and structure of banks

The IMF proposes that the central bank strenghteh the vetting processes for directors and senior management of new banks that request licenses.

The BoT should stop relying on desk reviews, the IMF says, and instead conduct interviews.

"The BoT should as a matter of routine interview proposed new owners of significant shareholdings, whether this takes place as part of the licensing of a new bank or transfer of ownership in an existing bank," the FSSA report says. Doing this would ensure that the BoT always obtains the potentially valuable insights from verifying details in person and confirming the depth of involvement and knowledge of key individuals, the IMF says.

The IMF also wants the BoT to introduce a specific requirement for banks to have codes of conduct, and extend provisions on conflicts of interest to exclude staff, not only directors, from a decision-making process from which they might benefit.

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