Samia@3: Banking sector's journey from obstacles to achievements

Dar es Salaam. That the banking sector traversed through muddy waters between 2016 and 2017 is an open secret.

It all started in 2016, when it was directed that billions of shillings held in commercial banks by ministries, public corporations and local government authorities be immediately transferred to an account at the Bank of Tanzania (BoT).

Though the decision was meant to give the government a close eye in the monitoring of its revenues, it also slowed down liquidity in commercial banks.

At that time, it was estimated that commercial banks were holding upwards of Sh600 billion at any given time from various government entities.

And, before the dust had settled, another decision was made in April 2017, when the government ordered the immediate dismissal of more than 9,900 civil servants after a nationwide verification of academic credentials uncovered workers with forged school and college certificates.

While the decision was meant to safeguard the credibility of those employed in the public service, it also had a negative impact on the banking business.

This was because some of those who were dismissed had used their public service IDs to acquire personal loans from commercial banks.

As such, they would no longer repay.

That was also precisely the time when the desire to defeat corruption and simultaneously raise revenues resulted in some mistrust between the government and the private sector.

Some businesses were closed, while others were complaining of inhumane treatment at the hands of tax-collection task forces.

It was obvious that those who closed shop also failed to honour their loan repayment obligations.

As such, the outcomes were evident and the banking sector felt the pinch. The amount they registered in profits started falling miserably, while the accumulation of Non-Performing Loans (NPLs) became the order of the day.

With tight liquidity in the economy, other borrowers also failed to honour their obligations, resulting in an accumulation of high NPL levels.

Until the end of December 2016, the NPL to total gross loans ratio had risen to an average of 9.5 percent from an average of 6.4 percent in 2015 and against an accepted threshold of five percent.

Similarly, while the sector’s profitability rose to about Sh438 billion in 2015, the amount started dropping, reaching a meagre Sh286 billion in 2017.

An analysis of all the first tier lenders, done by The Citizen in January 2019, put their [that of all first-tier banks] combined net profits at only about Sh263 billion for the year ending December 2018.

That was the situation that banks found themselves in by the time the global Covid-19 pandemic struck the world in 2019.

It, however, took the wisdom of the Bank of Tanzania (BoT), which took several measures to cushion the economy from the impact of the pandemic. The measures included lowering its statutory minimum reserve requirement and reducing the discount rate.

Another measure was allowing banks to borrow from BoT with less collateral than before by reducing haircuts on government securities from 10 percent to five percent for Treasury bills and from 40 percent to 20 percent for Treasury bonds.

These initiatives, coupled with more supportive policies and the innovativeness of commercial banks themselves, saw the situation improve.

Therefore, upon assuming office in 2021, President Samia Suluhu Hassan directed her efforts towards stabilising the economy.

Her consistent pro-business declarations conveyed the message that Tanzania was unequivocally open for business.

During her nearly three-year tenure in office, President Samia Suluhu Hassan has demonstrated a significant emphasis on fostering economic stability and growth, with the banking sector playing a pivotal role in advancing these objectives.

Her administration has orchestrated a symphony of business-friendly policies and an economic renaissance that resonates deeply within the banking sphere. Market data analysed by The Citizen indicated that by the end of 2023, the banking sector remained liquid, profitable, and adequately capitalised.

Within three years, she has effectively set a blend of fiscal prudence and progressive reforms, transforming Tanzania's financial landscape into a vibrant hub of opportunity and growth.

The BoT’s data show that from March 2021 to December 2023, commercial banks' assets increased by over 50 percent.

The total value of the commercial banks’ assets rose from Sh37.87 trillion to Sh57.21 trillion.

“The increase in assets was in tandem with deposits, attributable to the expansion of the agent banking model, the growth of financial products and digital banking services,” the BoT said in its February 2024’s Monetary Policy Statement.

As the business environment continued to improve, so did the credit portfolio. Data reveals that Commercial Banks' Domestic Lending, as reported by the central bank, stood at Sh22.52 trillion when President Samia Suluhu Hassan assumed office in March 2021. By December 2023, this figure had surged to Sh35.03 trillion, marking a notable increase of 55.5 percent.

In terms of the deposits for the commercial banks, there was also a rise from Sh24.63 trillion in March 2021 to Sh37.87 trillion by the end of last year, which was a 53.7 percent increase.

The central bank states that the liquidity in banks was adequate and enough for loan provision, with the ratio of liquid assets to demand liabilities and total assets hovering above the regulatory requirements.

The credit growth was mostly driven by personal loans, agriculture, and trade activities. Personal loans also constituted the largest share of outstanding credit to the private sector and were mostly extended to small and medium business undertakings.

Earlier this year, commercial banks also released statements of profits and losses for 2023, which show a significant rise in profitability levels, reaching a record level of slightly above Sh1.5 trillion, while NPLs are effectively contained to levels that are mostly within the regulatory threshold.

Bankers say the situation signals that they are now doing business with clients that actually get loans and repay them.

The managing director for KCB Bank Tanzania, Mr Cosmas Kimario, told The Citizen recently that the banking sector has experienced growth due to what he termed ‘a very friendly policy environment’, which has boosted business activities and flourished financial markets.

"We have witnessed a rapid pace of business growth during President Samia Suluhu Hassan’s tenure. The banking sector now has clients who deposit and withdraw money, as well as borrow and repay,” Mr Kimario told The Citizen recently.

He predicted that the year 2024 will see further growth in the banking sector, supported by favourable regulatory frameworks and policies. “For example, the new monetary policy framework by the Bank of Tanzania (BoT), which we anticipate will stimulate business and financial activities in the country,” Mr Kimario added.

The NBC managing director, who doubles as the current chairman for the Tanzania Bankers Association (TBA), Mr Theobald Sabi, said what people see in commercial banks’ financial results is testament to an improving business climate, perpetuated by President Samia Suluhu Hassan’s administration.

“I attribute this positive performance to the improving business environment due to efforts by President Samia Suluhu Hassan’s administration. The government has built a conducive business environment and a strong economy that is encouraging for a functioning and inclusive financial services industry,” said Mr Sabi.

The operating environment, regulated by the BoT, he said, has been supportive for banks and financial institutions to reach a broader customer base.

“We remain optimistic about the potential for sustained growth in the banking sector and the sector’s ability to support economic and social activities as the country looks forward,” he said.

The sustainability reforms

The government, through the icon bank BoT, has implemented several measures to strengthen the resilience and stability of the banking sector so that it can sustain its growth momentum in 2024 and beyond.

According to the central bank, these measures include an amendment to the Banking and Financial Institutions Act to allow compliance with the requirements of capital adequacy as a step towards the migration to Basel II/III risk-based supervision standards.

There is also the issuance of new Capital Adequacy, Liquidity Management, and Prompt Corrective Action Regulations in line with Basel II/III standards.

As highlighted in the monetary policy statement, the government also plans for the implementation of the Real-Time Supervisory Information System to ensure the real-time availability of supervisory information to facilitate timely and proactive policy and regulatory actions.

That will be aligned with the implementation of the National Financial Inclusion Framework 2023- 2028, which aims at improving access to and usage of financial products and services.

Overall, the risks to financial stability remain moderate on account of a positive economic outlook reinforced by a stable macroeconomic and business environment, and the banking sector continues to be the most significant part of the financial sector.

The BoT also states that mobile phones continue to be the key instrument in filling the infrastructure gap by providing a platform for the unbanked population to access financial services.

Tanzania's Instant Payment System provided a platform for facilitating instant and secure settlement of retail payments and transfers between digital financial service providers, both banks and non-banks.