Bank of Tanzania moves to rein in operating costs, NPLs

Wednesday January 27 2021

Customers in a banking hall. The Bank of Tanzania has moved to ensure that the banking industry strictly adheres to regulations on operating costs and nonperforming loans. PHOTO | FILE

By Samuel Kamndaya

Dar es Salaam. The Bank of Tanzania (BoT) has moved to ensure that the banking industry strictly adheres to regulations on operating costs and nonperforming loans (NPLs) in a decision expected to benefit customers in the long run.

BoT issued a circular on Monday requiring commercial banks and financial institutions to effectively manage NPLs and operating expenses.

The central bank says in the document that commercial banks and financial institutions must maintain their cost-to-income ratios at not more than 55 percent, while NPLs should not exceed five percent of total loans.

“Banks and financial institutions with cost-to-income ratios above the acceptable level of 55 percent are granted a period of up to 31st December 2022 to regularize the ratios,” says the circular signed by Dr Bernard Kibesse, BoT deputy governor in charge of financial stability and deepening.

The cost-to-income ratio – which is calculated by dividing operating expenses by operating income – is important in determining the profitability of a bank.

Operating expenses include salaries and other benefits, fees and commissions as well as those classified as “other expenses”.


Analysis of commercial banks’ financial statements published in the mainstream media in the recent past shows that expenditure categorised as “other expenses” as well as salaries and benefits account for the lion’s share of lenders’ operating costs.

Analysis also shows that almost all commercial banks have cost-to-income ratios that are above BoT’s recommended ceiling of 55 percent.

Cost-to-income ratios among the ten first-tier banks (those with assets valued at over Sh1 trillion) in Tanzania range from 57 to 80 percent. Only three banks in the category reported NPLs of less than five percent as of December 31, 2019.

Analysts say these expenses are ultimately factored into the cost of accessing banking services, which eventually make borrowing expensive.

“In my view, the circular is a positive development. It means that commercial banks will be compelled to revise their charges to align them with a reduction in their operating expenses and drop in NPLs,” said Mr Lawrence Mafuru, co-founder and managing partner of Bankable Tanzania Limited.

This, he added, was good news to customers, who would eventually be able to access cheaper loans, and shareholders who would see their dividends go up due to tighter management of operating expenses. “NPLs are considered in the calculation of the risk premium. When NPLs go down, it translates into a reduction in borrowing costs, which is a desirable thing as far as borrowers are concerned,” Mr Mafuru said.

High operating costs also affect profitability. A reduction in operating expenses means more money for shareholders.

“So, in short, the circular seeks to bring about efficiency in the management of operating costs. This should stimulate financial inclusion because Tanzanians will no longer be suspicious of banking services because there will no longer be hidden costs attached to loans,” Mr Mafuru added.

Dr Kibesse says in the circular that the aim is to ensure that the banking industry continues to operate in a safe, sound and stable manner.

The circular warns that banks and financial institutions that have either cost-to-income ratios of more than 55 percent or NPLs above the five percent limit will be barred from paying dividends and bonuses.

Banks and financial institutions that will fail to comply for two consecutive years from December 31, 2022 will face regulatory sanctions to be determined by the regulator.

Reports on lenders’ cost-to-income ratios and NPLs have to be submitted to BoT in soft copy within seven days after end of the reference month, Dr Kibesse says.