Real reasons behind closure of five banks

Dar es Salaam. The closure of five banks in Tanzania on Thursday this week is indicative of a deeper problem in the banking sub-sector, stakeholders and experts who spoke to The Citizen say.

The sources stressed that closure of the banks is palpable evidence that all is not that well in the banking industry – and that, although the closed banks are small this could still signify the beginning of bigger problems to come.

Announcing the revocation of the business licences and liquidation of the five banks on Thursday, the outgoing governor of the central Bank of Tanzania (BoT), Prof Benno Ndulu, said “the community lenders had failed to beat the December 31, 2017 deadline to raise the Sh2 billion capital” as required of them.

“We had given them a six-months grace period when the original deadline expired in June last year; still, they failed to meet the required capitalization threshold” of Sh2 billion, the governor explained.

The five closed banks are the Covenant Bank for Women (Tanzania); Efatha Bank; Kagera Farmers Cooperative Bank; Njombe Community Bank, and the Meru Community Bank. But interviewed stakeholders said that the liquidity crunch which is adversely impacting the performance of various sectors of the Tanzanian economy is largely to blame for the persisting woes – some of which have resulted in closure of the five banks.

Another even more worrying problem, the sources said, was the high level of poor management in the five banks. This, they say, puts the spotlight on the regulator’s oversight role. “Other reasons notwithstanding, closure of the banks reflects the underperformance of other sectors of the economy – as evidenced by the high rate of Non-Performing Loans (NPLs),” Prof Honest Ngowi of the Mzumbe University’s Dar es Salaam Business School told The Citizen on Thursday.

A banking sector insider who spoke on condition of anonymity said failure by the five banks to meet the deadline for the Sh2 billion capital adequacy could not be the only reason for closing the banks.

“How do you explain the fact that three other banks that did not meet the December 31 deadline have been given more time to raise the capital?” the source queried – quizzically adding: “I am told that the level of NPLs of most of the banks that were closed had reached shocking levels!” An official of the Covenant Bank for Women (Tanzania) Limited who also spoke on condition of anonymity said it was not true that the bank had not reached the Sh2 billion threshold!

“We beat the deadline, there’s no doubt about that,” he said. “It was the level of non-performing loans that was intolerably high,” the source explained – but declined to go into details. ‘Poor management’ as one of the factors that resulted in the closure of some of the banks was claimed only a day after the banks were closed.

In any case, the Prevention and Combating of Corruption Bureau (PCCB) revealed yesterday that it has launched an investigation into the alleged loss at the Njombe Community Bank of more than Sh848 million during the 2016/17 financial year.

Apparently, the loss was largely caused by ‘toxic loans,’ most of which were issued irregularly by some of the bank’s staff.

“There are clients (of the bank) who pledged fake assets as collateral. Others used fake names to access multiple loans… There is a smell of collusion with the bank’s staff in the whole affair,” the Njombe Region PCCB chief, Mr Charles Nakembetwa, told reporters. Shareholders of the Meru Community Bank (MeCoB) have also heaped blame on the bank’s management for the way they bungled the issue meeting the newly-required capitalization of Sh2 billion.

“It was only last month that we were told the capital had been raised to Sh1.6 billion,” one of the shareholders, Felix Nnko, revealed. “It is risky when the management of a bank is left to do whatever it wants to do with its customers’ money. Remember what happened regarding the sub-mortgage crisis in the US in 2007/08!

“But, also, enough liquidity in the market is crucial for the growth and survival of small, cash-based economies like ours. And – whether one likes it or not – the government is the largest spender,” the insider charged.