Bank of Tanzania: Impact of supervisory actions

In recent months, we have seen the Bank of Tanzania (BoT) utilise its power to supervise certain banking and financial institutions in Tanzania. In turn, these institutions have resulted in taking much needed measures in order to meet the requirements set out by the BoT, as well as obtaining and enhancing other services following the revocation of licences of bureaux de change. In this article, we highlight the BoT's powers in the banking and financial services sector and their impact.

Background

The Banking and Financial Institutions Act 2006 (the Act) states that the power related to supervision of all banks and financial institutions is vested in the BoT. Section 4(2) of the Act provides that the BoT is vested with the power to carry out inspections of every banking and financial institution as well as ensuring compliance with any order, directive or determination issued or made by them. We discuss ways in which the BoT has used some of its supervisor powers on Tanzanian commercial banks below:

China Commercial Bank

During the inspection of China Commercial Bank in the last quarter of 2020, the BoT had noted that the total capital amount of China Commercial Bank had fallen below the requirement set out in section 17(1) of the Act. Due to the failure to comply with the minimum total capital amount requirement, the BoT was entitled to seize China Commercial Bank and did so in November 2020. The BoT then placed China Commercial Bank under its management in accordance with section 56(1)(g)(i) and section 56(2) of the Act. Upon seizing and placing China Commercial Bank under its management, and undergoing a lengthy process of due diligence, scrutiny and delegation, the BoT appointed the National Microfinance Bank (NMB) as the acquirer of all the assets and liabilities of China Commercial Bank. NMB’s total assets portfolio after acquiring the assets and liabilities of China Commercial Bank increased to over TZS 7.1 trillion.

Akiba Commercial Bank

Akiba Commercial Bank took a different approach in a similar situation relating to the required total capital amount to be held by a banking institution. Akiba Commercial Bank merged with the National Bank of Malawi in order to meet the total capital amount requirement provided under section 17(1) of the Act. To achieve this, the National Bank of Malawi curated a strategic investment deposit towards Akiba Commercial Bank worth TZS 17 billion. This in turn has kept Akiba Commercial Bank above the minimum core capital of TZS 15 billion as provided by section 17(1) (a) of the Act.

Bureaux de change

As a result of the closure of many bureaux de change following the illegal acts undertaken in contravention of the Foreign Exchange (Bureau de Change) Regulations 2019 (see our article on this here), commercial banks within Tanzania have now seen an increase in collection of foreign currency and are leading in forex transactions. A managing director of a Tanzanian commercial bank has claimed that due to the intervention by the BoT in curbing the unlawful and illegal actions of bureaux de change, they are now able to capitalise on foreign exchange services that were previously minimal.

Measures to Increase Credit to Private Sector and Contain Non-Performing Loans.

In response to the high magnitude of Non-Performing Loans (NPL), the BoT provided measures and reliefs which banking and financial institutions could take advantage of. The benchmark for NPLs is set at 5% by the banking and financing industry in Tanzania. However in the third quarter of 2017, it was identified that the NPL for over 19 banks and financial institutions was over the benchmark, reaching highs of 51%. 

The BoT utilised their supervisory powers by revoking licenses of banks that had unsustainable NPL ratios. In response to the high percentage of NPLs, the BoT also provided recommendations to minimise the number of NPLs. These recommendations included:

• setting strategic time limits to reduce the NPL ratio to no more than 5%;
• setting up a permanent recovery function with predefined roles and responsibilities;
• establishing options and key performance indicators to reduce and aid recovery of NPLs in the short and long-term basis; and
• reassessing the credit process of banking and financial institutions to ensure lending takes place systematically, identifying gaps and curing defects in internal processes.

The BoT also waived certain provisions found in the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014 (the Banking MRA Regulations) for a period until December 2020 in response to the high percentage of NPLs in Tanzania. Some of these measures are set out below:

1. The BoT had permitted banks to restructure NPLs up to 4 times. This is an increase from the previous limit of 2 times which was in accordance with the Banking MRA Regulations. In order to take advantage of this waiver, banks and financial institutions had to demonstrate that borrowers have a good track record of repayment but lacked working capital to support their business. Banks and financial institutions were also only able to apply this measure for borrowers whose businesses have been affected by external factors as opposed to their characters or overexposure and maintain a list of NPLs which had been restructured more than twice.
2. Banks and financial institutions were able to upgrade term loans to a better classification category once their borrowers had paid two consecutive loan instalments as the BoT waived compliance with Regulation 7(4) of the Banking MRA Regulations which required banks and financial institutions to upgrade term loans only after four consecutive instalments had been paid.

As a result of the measures taken, the ratio of non-performing loans declined to 9.8 percent in December 2019 from 10.7 percent in June 2019 as provided in the BOT Monetary Policy Statement 2019/2020. Nevertheless, due to the impacts of COVID-19, in April 2020, the ratio then rose to 11 percent as stated in the BOT Monetary Policy Statement 2020/2021.

For further reference on Measures to Increase Credit to Private Sector and Contain Non-Performing Loans see our article here.

Conclusion

As provided above, it is evident that the BoT has taken greater effort to utilise its supervisory powers over the past couple of years. Through the risk based supervision framework, the BoT is capable of monitoring the status of a bank or financial institution to ensure that they continue to meet the requirements to be licensed in Tanzania as provided under the Act. As a result of supervising the banking and financial institutions, the BoT has created a market which is more conducive for both institutions as well as for customers.