Florens Luogoa
Tanzania’s banking sector is "sound and stable" but commercial banks must bring their non-performing loan (NPL) ratios down to under 5%, says professor Florens Luoga, governor of the Bank of Tanzania, the country’s central bank.
The industry-wide ratio of core capital to total risk-weighted assets and off-balance-sheet exposures stood at 16.3% at the end of December 2018, well above the minimum legal requirement of 10%. The ratio of liquid assets to demand liabilities was 35.63%, again above the minimum regulatory requirement of 20%.
“During the first half of the 2018-19 financial year, the banking sector remained sound, stable and profitable, with levels of capital and liquidity above regulatory requirements,” says Mr Luoga, who assumed the central bank governorship in January 2018 (he had been deputy vice-chancellor of the University of Dar es Salaam).
Curbing NPLs
Indeed, the Tanzanian banking industry has witnessed steady growth, with total assets reaching TSh30,210bn ($13.04bn) at the end of December 2018, up from TSh29,800bn at the end of December 2017. Though some banks have continued to face challenges around asset quality, the central bank has taken measures designed to bring sector-wide NPLs to below 5%.
“Some of the measures instituted during the period included directing banks to improve the loan-granting process, requiring banks with high NPLs to submit strategies to contain them, as well as enforcing the requirement to use a credit reference system by submitting credit information to the system and using that information to scrutinise credit applicants,” adds Mr Luoga.
The fastest growing area of the banking business in Tanzania is commercial loans, which make up more than 98% of financial institutions’ assets.
“These loans focus primarily on large corporate borrowers and the government, leaving smaller enterprises widely underserved,” says Mr Luoga. “More than two-fifths of formal enterprises in Tanzania identify access to finance as a significant constraint to doing business and only 13% of small formal firms have a bank loan. Although digital credit products have started developing, these still primarily target individuals with short-term microcredit products and are not well adapted to serve the needs of companies.”
He adds that mobile money in the country is mostly used for person-to-person transfers but the platforms have not yet been exhaustively employed to upgrade consumers from transactional services to full financial services – in particular, savings and credit services.
The country’s five microfinance institutions have had an important impact on society, although they only account for 0.6% of banking sector assets.
“The existence of microcredit in Tanzania has, in one way or another, helped to reduce poverty by enhancing economic growth and minimising the level of unemployment in the country,” says Mr Luoga. “It has contributed to increasing the level of household income. Specifically, microcredit has had a positive impact on poverty reduction, despite the fact that microfinance institutions are mostly based in urban areas while poverty is mostly concentrated in rural areas.”
Fuelling growth
The central bank estimates that Tanzania’s gross domestic product expanded by 7.2% in 2018, supported by public investment (particularly in infrastructure mega-projects), strong global growth and favourable weather conditions.
“The transformation of the economy – through an industrialisation strategy with great focus on the manufacturing industries to promote diversification and value addition in output – is expected to add impetus to economic growth,” says Mr Luoga. “Agricultural modernisation through improved agro inputs, irrigation schemes, enhancing extension services – coupled with measures instituted to increase transparency in doing business and the management of natural resources – are expected to boost economic growth in the medium to long term. Meanwhile, the recovery in private sector credit growth – due to improving the business environment and measures to reduce risk and NPLs – will further induce growth.”
Mr Luoga says the economy enjoys a low annual headline inflation rate, which rose to 3.3% in December 2018 from 3% in November 2018. Headline inflation is expected to remain around the medium-term target of 5% in the second half of the 2018-19 financial year.
“Sustaining the interaction between fiscal and monetary policies in implementing economic reforms remains critical as the [central] bank continues to implement an accommodative monetary policy in the remainder of the 2018-19 financial year,” says Mr Luoga. “This policy stance will help to boost further the recovery of credit to the private sector and aggregate demand, while benefiting from low inflation expectations.
“The bank will continue to manage liquidity in a manner that maintains stability of money market interest rates and remains ready to address any inflationary pressures. It will also continue to implement prudential measures to strengthen risk management practices in the financial sector to ensure greater transparency and stability.”
