Bank of Tanzania issues new directives on foreign exchange operations
In this article, we assess the impact COVID-19 has had on the banking and financial services sector in Tanzania and what policy measures have been introduced through the Ministry of Finance and the Bank of Tanzania to maintain financial stability. These measures include the ease of requirements on Statutory Minimum Reserves, discount rates, haircuts on government securities, regulatory flexibility on restructuring loans, transaction limits plus daily balance amounts for mobile money operators.
In April 2020, the United Nations Development Programme (UNDP) issued a Rapid Social-Economic Impact Assessment of COVID-19 in Tanzania (the UNDP Impact Assessment). It took note of key stakeholders in the finance sector, including over 40 corporate banks including 30 commercial, 6 community and 2 development banks. Microfinance institutions and mobile money operators were also acknowledged as financial players in the country.
The UNDP Impact Assessment also stated that the closure of borders and lockdowns in countries where imports and exports originate, travel bans and social distancing were likely to hinder credit growth. This would severely affect businesses due to a reduced flow of credit facilities. Ultimately, customers will likely fail to service their loans because of the slowdown or total collapse of their businesses. As a result, Non-Performing Loans (NPLs) would increase beyond the Bank of Tanzania's target of 5% by December 2020.
Furthermore, the UNDP Impact Assessment stated that it was likely that banks would face liquidity issues because of customers finding it difficult to repay outstanding loans, and a general decline of deposits from customers.
The BOT published a Monetary Policy Statement of 2020/2021 in June 2020 and an Economic Bulletin for the Quarter Ending June 2020 (the June 2020 Bulletin).
According to the Monetary Policy Statement, the banking sector was stable as banks had enough capital reserves to withstand financial hurdles. The recorded ratio of core capital to total risk weighted assets and off-balance sheet exposure as at April 2020 was 17.4% whereas the minimum regulatory benchmark is 10.0%. Furthermore, banks remained liquid as the ratio of liquid assets to demand liabilities was around 32.7% whereas the minimum regulatory requirement is 20.0%.
However, the ratio of NPLs to gross loans rose to 11% in April 2020 compared to 10.7% in June 2019, hence a deterioration of the quality of banks’ assets. This was largely caused by the slowdown of business due to COVID-19.
In the June 2020 Bulletin, it was reported that the BOT sustained an accommodative monetary policy and enhanced liquidity easing measures to shield the economy from the effects of COVID-19. As a result, extended broad money supply grew at an annual rate of 9.5% in June 2020 compared with 7.7% in June 2019. The growth of credit to the private sector was also recorded at 5.5% compared to 7.6% in the corresponding period in 2019.
Interest rates on loans and deposits by banks were reduced in response to the BOTs measures to limit and minimise the effects of COVID-19. The overall lending rate decreased from an average of 16.81% in the preceding quarter to 16.75% by June 2020. In addition, the rate of deposit eased to an average of 6.75% from 6.86% in the preceding quarter.
NPLs: under Tanzanian law, loans are declared NPLs when the obligation for repayment is past due for more than 90 days, or when the loan is classified as substandard, doubtful or a loss.
Business engaged in import and export, transportation, tourism and accommodation have been heavily hit by measures of countering COVID-19. Following the BOTs policy measures to tackle the effects of COVID-19, banks have restructured loans to their customers by reducing interest rates, instalment amounts and extension of the return period. Banks have also issued moratoriums to the extent of giving relief to their customers. However, the issue of NPLs persisted and most businesses are still recovering from the impacts of COVID-19.
Deterioration of customer and bank relationship: this is relative to the issue of NPLs as customers and banks failed to establish a common ground due to operational challenges for both sides.
Reduction of bank deposits: this is largely attributed by loss of business due to closure of borders by neighbouring countries, reduction of tourism activities due to flight cancellation and slowdown of business in the country. The general chain of business activities being affected by COVID-19 has led to significant reductions of income generation.
Increase of costs in operations and logistics: banks have had to adhere to international standard health and safety measures to minimise the risk of contracting and spreading COVID-19. This has led to restructuring of business operations at branches and general banking activities in the country.
Banks and financial institutions in Tanzania have taken advantage of the BOT policy measures to implement various relief measures to ease the effects of COVID-19.
Most banks have implemented relief packages for their customers especially small and medium enterprises in an effort to offer financial reprieve from the effects of COVID-19. The relief packages include payment holidays (moratoriums) ranging from 3 – 6 months, and restructuring of loans to extend repayment periods.
Despite the COVID-19 situation, some major commercial banks in Tanzania have reported an increase of net profits during the quarter ending June 2020 in comparison to the same period in 2019. It remains to be seen whether a continuation of the strong financial performance will be reflected in the quarterly reports for the period ending September 2020.