Following a new circular recently issued by the Bank of Tanzania, we look at the requirement for banks and financial institutions to adopt new measures in relation to the ratios of cost-to-income and non-performing loans in Tanzania.
In summary, the Circular states that all banks and financial institutions in Tanzania:
- must maintain a cost-to-income ratio of not more than fifty five percent (55%) over a rolling period of twelve months. The ratio must be computed as follows using figures for the preceding twelve months;
- with cost-to-income ratio above the acceptable level of fifty five percent (55%), must regularise the ratio by 31 December 2022. Additionally, such banks and financial institutions are required to submit to the Bank of Tanzania (BOT) by 31 March 2021, a comprehensive plan with timelines clearly indicating how they will attain the acceptable level within the prescribed timeframe;
- must continue implementing their strategies to contain non-performing loans (NPLs) and reduce the ratio to the acceptable limit of five percent (5%);
- with either cost-to-income ratio above the prescribed acceptable limit of five percent (55%) or the NPL ratio above the acceptable limit of five percent (5%) are restricted from paying dividends and bonuses, effective from the date of the Circular;
- must report the ratios to the BOT on a monthly basis in soft copy within seven (7) days after the end of the reference month; and
- which fail to comply with the acceptable limit of the ratios of cost-to-income and NPLs for two consecutive years from 31 December 2022 shall be subjected to regulatory sanctions as may be determined by the BOT.
With the outbreak of COVID-19 globally, the measures introduced by the Circular aim to ensure that the Tanzanian banking sector continues to operate in a safe, sound and stable manner.
 Circular number FA.130/170/01/5 (the Circular) issued on 22 January 2021