Review banking laws to avoid financial crisis

If recent developments in banking in Tanzania are anything to go by, then perhaps it’d be best for the government to revisit what’s really a sub-sector of the larger, all-embracing financial sector.

This fervent call by The Citizen to revisit the banking legislative and related frameworks was sparked by the latest such development, whereby the Bank of Tanzania (BoT) has liquidated, and placed under the Depositors Insurance Board, five banks ‘for failing to pass the capitalisation threshold of Sh2 billion’ each!

Such a ‘development’ cries out for ‘looking’ at banking with a fresh eye and mind.

The general idea is to assess the sub-sector’s overall performance down the years after what later turned out to be a highly-controversial, fundamentally-flawed privatisation programme that begun in earnest in the 1990s.

That was when Tanzania was ‘home’ to a handful of banks – a number that had grown to 41 commercial banks, 12 community banks, four microfinance banks, three financial leasing companies and three ‘other financial institutions’ by June 2016!

That’s all the more reason why the government must revisit banking – preferably doing so from a different perspective – to diligently appraise the sub-sector’s efficaciousness and sustainability under constantly-changing scenarios.

This is considered necessary especially in the light of rapidly-advancing technologies, socio-economic upheavals and other societal challenges. The five banks bring the number of closed banks to eight in the last two years – with three more undergoing scrutiny.

Admittedly, these are a drop in the ocean in terms of capitalisation, market-share and such factors that are the love of econometricians.

The who is who in the banking sub-sector

This is especially considering that, for example, only four banks – CRDB, NMB, NBC and StanChart – controlled 50 per cent of the market-share, held 48.58 per cent of the total assets, 47.54 per cent of the total capital, 49.82 per cent of total deposits, 49.4 per cent of total loans, advances and overdrafts in 2015-2016!

By comparison, the ‘small five’ – including banks for cooperatives, women, local communities, small farmers and a faith-based’ one – had cumulative deposits totalling Sh67.8 billion: a measly 0.38 per cent of the deposits in the banking sub-sector! So, one may pooh-pooh the failure of ‘such’ small banks that are mainly intended to serve largely-disadvantaged segments in society, including struggling women, subsistence farmers, small-scale entrepreneurs, teeming jobless youths and other hapless hoi polloi.

But, it’s self-defeating to peremptorily axe such banks after licensing them to operate in the first place!

What needs to be done now is to constantly review the financial sector most thoroughly – admittedly routinely closing dubious operators, as the central bank seems to be doing.

But, while at it, the authorities must also explore ways and means of aiding struggling banks – such as facilitating the formation of a single national ‘community,’ ‘regional’ and/or ‘cooperative’ bank out of the existing ones, and reducing these latter to branches of the national ‘parent!’

When announcing the closure of the banks on Friday the outgoing governor Benno Ndulu said community banks had ignored the advice of the central bank to form one institution.

But as the regulator, the BoT must act, not only advise in order to safeguard the financial sector. The community banks serve too small bases that can’t provide enough liquidity to ensure smooth cash flow and operations. We dare hope, expect and pray that the incoming BoT Governor, Prof Florens Luoga, will rise to the challenge anon.