At the heart of a sound banking system is good regulatory supervision. One of the Bank of Tanzania’s main duties is to ensure that the banking system is functioning properly and that depositors’ money is safe.
On September 9, 2013, Maendeleo Bank opened for business in Dar es Salaam, and became the 53rd bank in Tanzania. That is a large number of banks for the relatively small economy that is Tanzania’s. While most people will have heard of the big banks - CRDB, NMB, NBC, Barclays Bank - there are many more smaller ones operating in the country that remain unknown to most.
Why are there so many banks in Tanzania?
For the past several years, the regulator has registered several new banks. Ostensibly, one reason for this is to expand access to financial services to more Tanzanians across the country. The objective is sound, commendable and very much in the national interest. But has the policy been effective? Should it continue? Or is it time to change tactics?
According to the Bank of Tanzania’s Financial Stability Report (March 2013), the target is to reach 50 per cent financial inclusion by 2015. If the aim of allowing more banks into the market is to boost financial inclusion to such levels, then this strategy appears to be failing.
Despite having 53 banks, the percentage of the adult population in Tanzania that has formal access to financial services is between 14 and 17 per cent according to Finscope, a research organisation. Tanzania has more banks than Rwanda, Uganda and Kenya but it has the lowest percentage of formal financial inclusion amongst those countries. Kenya has achieved 50 per cent financial inclusion largely due to two recent innovations, according to its regulator, the Central Bank of Kenya (CBK) - mobile banking and agency banking.
The introduction of M-Shwari and agency banking services in Kenya helped the country to boost total bank accounts by two million to 17.6 million in 2012. M-Shwari, a joint product of telecoms operator Safaricom and the Commercial Bank of Africa, was introduced in November 2012 as a mobile-phone based application for saving cash and borrowing small, short-term loans.
Agency banking, which involves the use of third parties to carry out bank transactions, started about two years ago. It has made it easier for customers in Kenya to access financial services by allowing them to do their banking activities at non-bank locations such as their local supermarkets.
Kenya’s example shows that financial inclusion can be achieved through mobile technology and new ways to distribute banking services rather than just the number of banks in the country. In 2009, Kenya had 45 licensed banking institutions; today Kenya has 43 according to the CBK. During that time period financial inclusion in Kenya rose from 40 per cent in 2009 (FinAccess 2009) to 50 per cent today. In contrast, Tanzania had 40 banking institutions in 2009 and today we have 53 yet Tanzania has relatively little to show for it with financial inclusion of between 14 and 17 per cent.
Are so many banks stretching the regulator’s ability to supervise them properly?
At the heart of a sound banking system is good regulatory supervision. One of the Bank of Tanzania’s main duties is to ensure that the banking system is functioning properly and that depositors’ money is safe. The detailed on and off-site inspections and monitoring to make sure every bank has enough capital, is lending responsibly, has good managers, is making profits and has sufficient cash is no easy task.
With 53 banks to monitor, spare a thought for the Bank of Tanzania’s Directorate of Banking Supervision. They must remain eternally vigilant to ensure that all 53 banks fully comply with the banking regulations. It must be assumed that they have the required human and financial resources; are collecting the necessary information to properly assess the banks, and can assure Tanzanians that no bank is engaging in any fraudulent behaviour.
The Bank of Tanzania is also mandated to produce an annual banking supervision report. As the end of 2013 approaches, the most recent such annual report available on the regulator’s website dates back to 2011. Is this an indication that the Directorate of Banking Supervision is overstretched? Or does the timely public disclosure of the health of Tanzania’s banking sector rank rather low on the regulator’s priority list?
Are so many banks destroying rather than creating wealth?
Most of the new banks are small and these small banks tend to be a poor investment for shareholders. Analysis conducted in Serengeti Advisers’ recently published ‘Tanzania Banking Survey 2013’ shows that smaller banks, defined as those with total assets of less than Sh100 billion have, as a collective, been generating negative returns for the past four years.
In other words, small banks on average have been losing money for their investors during this period.
Loss making banks are not only bad for investors; they are also bad for customers and the wider economy because the money they lose cannot be lent out. Loss making banks effectively suck capital out of the banking system and become a drain on the economy because they are not able to fund investment or consumption.
Can so many banks help Tanzania become a middle-income country?
Small banks cannot make big loans. In the coming decades, Tanzania will need trillions of shillings for investment. Developing the country’s energy reserves, building new roads, houses and power plants are critical if Tanzania wants to become a “middle income” country in a decade’s time.
Tanzania should seek to draw as much of the investment capital domestically as possible as relying entirely on foreign banks and investors is risky. However the large number of small banks that make up a sizable portion of the country’s banking sector simply do not have the financial capacity to provide this large scale funding. Tanzania may therefore be better served by fewer, bigger banks with larger capital bases that can provide the financial muscle that Tanzania needs to build its future.
Bigger might be better - time for some consolidation?
Currently, Sh15 billion is needed to start a commercial bank, and Sh2 billion for a community bank. Commercial banks and community banks have until 2015 and 2017 respectively to meet this new target.
A radical way to strengthen the banking sector by reducing the number of smaller marginal banks, is to require capital of Sh25 billion from commercial banks and Sh10 billion for community banks. Banks would have to merge and pool together their capital in order to meet the higher capital requirements.
This would bring down the number of small banks considerably, leaving Tanzania with fewer but larger and better capitalised banks that are able to service the needs of the country.
There is precedent for this. Ten years ago, Nigeria had 89 banks, many of which were small and weakly capitalised.The Central Bank of Nigeria (CBN) raised the minimum capital requirements which led to a wave of consolidation leaving only about 40 banks.
A second wave of consolidation followed the 2009-2010 financial crisis forcing the CBN to bail out and recapitalise several poorly managed and weakly capitalised banks.
The banking sector now has 22 licensed banks and is much stronger. And financial inclusion in Nigeria today stands at about 60 per cent. There is no need to wait for a financial crisis in Tanzania to act. The time now, is just about right.
