18 December 2018

Tanzania: Is Tanzania's Banking Sector Caving In?

The banking sector in Tanzania currently comprises 41 banks that had a combined portfolio worth Tsh.22.5 trillion ($9.7 billion) as of 2014 which was a 15.11 per cent increase from Tsh.19.15 trillion ($8.4 billion) in 2013.

Major components of the banking sector assets include loans advances, overdrafts, cash, balance with other banks, items for clearing and investment in debt securities.

In 2014 the total capital in the banking sector increased by 17.10 per cent to Tsh. 3 trillion ($1.3 billion) in 2014 from Tsh. 2.5 trillion ($ 1 billion) in 2013. This boom was attributed to the entry of new banking institutions, retention of profits and additional capital injection.

The rosy climate however took a U-turn in 2016 when the sectors net profit dropped heavily from Tsh. 438 billion ($190 million) that had been realized in 2015 to Tsh. 423 billion ($183 million) and Tsh. 286 billion ($124 million) in 2017.

By June 2018, 40 banks had jointly shed a total of 381 jobs off their payrolls to remain with a total of 12,156 employees citing the need to align their operations with the new economic realities and cope with declining profit margins. Some of the banks that adopted the retrenchment policy are Exim Bank, Access Bank, Akiba Commercial Bank (ACB), Commercial Bank of Africa (cba) and CRDB Bank Plc. Access Bank laid off a total of 142 employees remaining with 634 employees making it top the list with the highest retrenchment numbers.

As of 30th June 2018, CRDB Bank had cut down its employee numbers to 2,882 from 2,912 in June the previous year despite opening five new branches. Eco Bank reduced one branch from its portfolio and cut down employee numbers from 185 to 128. Commercial Bank of Africa (cba) closed down five branches in addition to laying off 21 employees. In 2017, banks cut down on lending and opted to purchase government securities due to high levels of Non-performing Loans (NPLs).

Tanzania Womens Bank had the highest amount of non-performing loans with a 51 per cent rate followed by TIB Development Bank that registered an NPL rate of 46 per cent in the third quarter. Tanzania Womens Bank losses grew by almost 3,000 per cent - shooting from a relatively minor loss of Tsh. 20 million ($8,000) in the 2016 third quarter to a whooping Tsh. 610 million ($265,217) in 2017.

The loss streak continued steadily in 2018 where National Microfinance Bank (NMB), CRDB Bank, Exim Bank, Standard Chartered Bank and TPB Bank registered declining profits in the first half. NMB Bank which is currently the most profitable bank in the country saw its net profit dwindle to Tsh. 66.8 billion ($29 million) from Tsh.76.2 billion ($33 million) in last years first half.

Standard Chartereds net profits dropped to Tsh.12.6 billion ($5.4 million) from Tsh.19.5 billion ($8.4 million) that was realized in last years half. The main reason for the drop in the profit was due to the write off on NPLs that banks had to make in accordance with the central banks directive which aimed to boost credit in the private sector and strengthen the financial system. In January this year, five banks (Covenant Bank, Efatha Bank, Njombe Community Bank, Kagera Farmers Cooperative Bank and Meru Community Bank) had their licences revoked on grounds of being undercapitalized hence violating the requirements of the Banking and Financial Institutions Act of 2006.

The central bank stated their continued operation in their capital position then was detrimental to the interests of the depositors and posed a threat to the stability of the financial system.

Later on in August, undercapitalized Tanzania Womens Bank (TWB) and Twiga Bancorp were merged with TPB Bank Plc. while the Bank of Tanzania took over Bank M that had similar problems. Worse news hit the sector last week when International Monetary Fund (IMF) warned that nearly half of the total number of banks in Tanzania were vulnerable to adverse shocks and risk insolvency in the event of a global financial crisis, though declined to mention individual banks.

IMFs solvency stress tests revealed that 22 banks would become undercapitalized in the tail risk scenario. A tail risk scenario is an incident that is less likely to occur, but its occurrence would results into adverse problems. The IMF urged the banks to improve asset quality, address non-performing loans and increase their capital buffers.

The way forward to save the country's banking sector from this deep ditch would be to heed the advice from IMF.

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