TANZANIA: The winding road to bank consolidation
Aiming is not the same as hitting, so goes a popular Kiswahili proverb. In Tanzania, this is true for the banking sector, which is a source of anger for policymakers, not least President John Magufuli. “The President is saying he wants banks which are efficient. That’s the point. So if the bank is not efficient, then we don’t need that bank to operate in our country,” presidential spokesman Gerson Msigwa tells The Africa Report. “There are some banks which were only making business with government, just in treasury bills and all, but not serving the people,” Msigwa adds.
Since his 2015 rise to power, Magufuli has railed against weak lenders and ordered the central bank to close struggling institutions. Sharing the same concerns, the International Monetary Fund (IMF) said addressing non-performing loans (NPLs) should be Tanzania’s priority in order to reduce financial sector vulnerabilities and revive credit growth.
In this land of the Serengeti, bad loans are a stench that will not easily go away. There has been a recent downturn in key sectors, including trade and transport. By the close of 2017, the NPL ratio was 11.7%, up from 10.6% in June 2017, which is more than double the regulatory benchmark of 5%. Annual growth of credit to the private sector was a mere 1.7% in December 2017, comparing poorly with a growth high of 23.6% in 2016.
Spurred into action, the central bank liquidated five community banks in January and put another small lender under a provisional licence. It has also called for consolidation among the 59 licensed financial entities, 40 of which are fully fledged commercial banks.
Yet for some players who are eager to see consolidation, the central bank should not stop there. “I think we could expect more from Bank of Tanzania,” says Ineke Bussemaker, CEO of the National Microfinance Bank. “The minimum capital requirements are still what they are. [Increasing them] could be an option, and then you would see a natural consolidation,” she says.
Charles Kimei, CEO of CRDB, Tanzania’s largest lender by assets agrees. “But now the banks are dealing with implementing International Financial Reporting Standard (IFRS) 9, they have been forced to do a lot of provisioning […], so now that is the major market development that is going to force consolidation,” Kimei says. IFRS 9 is a new global financial reporting standard that came into effect this January.
Some of Magufuli’s reforms – taking government and parastatal cash from commercial banks while also tightening budget implementation – have hurt the sector. “Especially for the smaller banks, cost-cutting is an issue and the only way to manage is also to explore economies of scale,” Kimei says. “We are expecting acquisitions. We can do some acquisitions and some other deals,” he concludes.
While CRDB and NMB, two of the largest lenders, maintain an interest in mergers and acquisitions, the third-largest, National Bank of Commerce – a unit of Barclays Africa – is focused on consolidating Barclays’ other, eponymous, unit in the country. Other international banks in Tanzania, including Standard Chartered and Stanbic, have largely stayed away from expansion in the country.
IMF urges action
Tanzania requires bold actions to ensure the viability of its banks and avoid contagion, the IMF said in its latest country review. But the government, while encouraging consolidation, is unlikely to use statutory powers to achieve it.
Benny Mwaipaja, spokesman for the ministry of finance, tells The Africa Report: “When two of the banks merged, it was just an advice that the other banks should follow the same, if at all they find themselves in crisis.” The central bank is also implementing the Basel II capital requirements, which will allow the regulator to set capital adequacy ratios based on individual risk assessments.
Understandably, the regulator’s cautious approach may be informed by a recent experience with Twiga Bancorp, an undercapitalised state-owned lender brought under statutory management in October 2016. Whereas the central bank stated that it would find a buyer “soon,” it found no takers until this May, when it agreed to merge it with another state-owned lender, Tanzania Postal Bank.
Voluntary consolidation has its proponents, too. “I concur that the banking industry in Tanzania should consolidate,” says Hildebrand Shayo, head of research at TIB Development Bank. “Most of the small banks are not adequately capitalised and it has been difficult for these small banks to meet regulatory requirements for minimum capital, which is currently capped at TSh15bn ($6.6m) for commercial banks.”
Shayo adds that problems of asset quality may be hampering consolidation, a factor Bussemaker is also acutely aware of. “Issues of valuations and asset quality are there,” Bussemaker says, “but as long as there’s no compelling reason, they reckon that the market is just what it is.”
For Patrick Mususa, executive director of The Tanzania Institute of Bankers, the discussion that matters is not consolidation but the rate of financial inclusion. “At only nine million Tanzanians with bank accounts, we still have a long way to go to achieve effective mobilisation of both capital and liquidity in the financial sector,” Mususa says. Surely, aiming is not the same as hitting.
From the July / August 2018 print edition
Photo: NMB, one of the two largest lenders, is still interested in mergers and acquisitions