What ‘Bank M’ takeover means for the public
The other day I read on social media that the Bank of Tanzania has closed down Bank M. What does this imply for the general public, including customers, vendors, employees and even potential buyers of the bank?
First of all, it is important to be clear that the Bank of Tanzania (BoT) has not yet closed down Bank M, although the BoT said in its press statement that Bank M will not operate for 90 days to allow for “the [determination] of an appropriate resolution option.” What the BoT has done is to take over the administration of Bank M in accordance with the powers under section 56(1) (g) (iii) of the Banking and Financial Institutions Act No. 5 of 2006 (“the BFIA 2006”). It means the BoT now has full and exclusive power of management and control of the affairs of Bank M.
In consequence, the BoT has suspended the bank’s board of directors and management; and appointed a statutory manager to take charge of the managerial and operational affairs of Bank M in accordance with the BFIA 2006.
On why the BoT has taken that decision, it’s important to remember that the BoT put in place regulations; in particular, the Banking and Financial Institutions (Capital Adequacy) Regulations, 2014, requiring banks in Tanzania to manage their risks and hold adequate capital for hedging against the risks that they face.
The press statement released by the BoT acknowledges Bank M has “critical liquidity problems and is unable to meet its maturing obligations,” and notes that “this poses a systematic risk to the stability of the financial system.”
This is why the BoT has announced its decision to take control of Bank M’s affairs and disbanded and locked out the board and management from running the bank.
At the end of October 2018, the BoT, represented by the statutory manager, will have to decide whether to restructure, reorganize or liquidate Bank M – and establish a plan of resolution informed by any combination of these options, in line with section 59 (4) of the BFIA 2006 which sets a 90 days’ period within which to make any such decision after the BoT takes possession of a bank.
Depending on the specific terms of reference (ToR) issued by the BoT to the statutory manager, the manager can exercise the powers, and perform the functions, of Bank M’s board of directors until when the BoT finds it necessary to appoint new directors to constitute the board.
Supplementary powers of the statutory manager include tracing and preserving Bank M’s property and assets; recovering all debts due to and owing to Bank M; and obtaining from officers of Bank M any document and information, including books and accounts apropos of the bank. The bank’s officers will not be discharged from complying with this requirement on the ground that doing so would seem to implicate them or make the officers liable to a penalty.
The statutory manager can also execute contracts on behalf of, and engage in capital raising activities for, Bank M; and even sell or otherwise dispose of the whole or any part of the bank’s business.
If amending the constitution of Bank M will be necessary or expedient for supporting the mandate given to the statutory manager or for safeguarding Bank M’s depositors and encouraging stability of Tanzania’s financial system, then the statutory manager may amend the constitution.
However, in executing his mandate, the statutory manager can take such standard precautions as: stopping or limiting payment obligations, discontinuing employment of any employee of Bank M, or freezing all premature withdrawal of fixed deposits maintained at the bank.
If the period for statutory management elapses and Bank M is still unable to adhere to the minimum prudential standards or its continued operation is found to be no longer in the best interest of depositors, the public, and the financial sector; the BoT will liquidate the bank or sell it – if a buyer can be identified.
Where a turnaround effort cannot be made to reverse the declined fortune, the BoT will ask Bank M’s shareholders to appoint a provisional board of directors. And if the board’s performance is found to be satisfactory, the BoT will allow it take over responsibility for the ultimate direction of the management of the bank’s affairs.
The predicament of Bank M may give impetus to other unprofitable banks in Tanzania to merge or be acquired, in light of the new economic realities (see, Letea, Halili et al. “Banks cut jobs in the face of new realities.” The Citizen, August 1, 2018).
