Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaAugust 1 2012

Tanzania moves closer to realising its potential

Despite a recent surge in inflation and exchange rate volatility, the prospects for Tanzanian banks are bright. With the country growing fast, banks are looking to exploit its large unbanked population and start offering more sophisticated products.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Tanzania moves closer to realising its potential

For much of the past decade, Tanzania’s economy has been one of the most buoyant in Africa. Since 2004, gross domestic product (GDP) has expanded by 6% or more annually in real terms.

Banks have benefited handsomely from this robustness. Asset growth among the largest local operators is not as fast as during the few years up to 2009, when it reached about 45%, but it is still as high as 25%. And many are making returns on assets of 2.5% to 3%, ranking them among the most profitable lenders in Africa. “The favourable developments in the economy have definitely had an impact on the banks, which have been growing quite rapidly,” says Mark Wiessing, chief executive of National Microfinance Bank (NMB), the largest lender in the country by Tier 1 capital, according to The Banker Database.

Most bankers, including Mr Wiessing, believe the sector’s expansion can be sustained in the long term. The strength of Tanzania's GDP, which is expected to rise 7% this year and in 2013, should see to that, with increasing consumer demand and local private investment leading to plenty of opportunities with the country’s largest firms. “On the corporate side, the prospects are immense,” says Jeremy Awori, head of Standard Chartered Tanzania. “We have big plans.”

Banks are competing fiercely to do business with mobile phone companies, transporters, construction firms and fast-moving consumer goods groups such as brewers. Many of these are growing and looking for trade finance and longer-term loans as they do so.

Inflationary dangers

Yet some dangers lurk in the short term. Inflation surged from 6% to 20% during 2011 thanks to low rainfall, which led to food shortages, and rising costs for fuel imports. It had fallen to 17.4% by June this year after the central bank tightened monetary policy and an improved harvest. But bankers say an increase in non-performing loans (NPLs), which are already fairly high at 7% across the sector, is possible. “People are finding it harder to manage their cashflows,” says Mr Awori. “Their disposable incomes have been hit by things such as an electricity tariff increase of 40% in January. Those with loans could struggle. Something has to give and NPLs will rise for some institutions.”

Even so, the majority of lenders, especially the larger ones, should be able to weather any pick-up in defaults fairly easily. The industry’s capital adequacy ratio stands at a hefty 17.5% – well above the minimum requirement of 10%. And loan-to-deposit (LTD) ratios, capped at 80%, are 65% on average.

“Our banks are profitable and safe,” says Benno Ndulu, the governor of Tanzania’s central bank. “We’ve done stress-tests for different shocks, including foreign currency, interest rate and liquidity shocks. Virtually all of the big banks survived this well. There are some community ones that might come under stress. But the magnitude of it would be so small that we could easily handle it.”

Despite their quick growth, Tanzanian banks are trying to offer more sophisticated products to their corporate customers. Most feel that, if they want to sustain their current levels of profitability, they cannot just live off interest from vanilla loans. “We’ve got quite aggressive plans,” says Mr Awori. “Asset growth is part of that. But we’re looking for holistic growth. We want to have a greater share of a client’s total business, whether it’s cash management, transaction management or foreign exchange. We want to move up the value-added curve.”

People are finding it harder to manage their cashflows... Something has to give and NPLs will rise for some institutions

Jeremy Awori

However, greater lending will also be needed. Wilfred Mushi, a former banker and now head of Matsinde Holding Co, which is a Tanzania-based consultancy that works with financial institutions, says banks remain reluctant to provide credit to companies, instead preferring to buy treasury bills, the rates of which shot up last year along with inflation. “If they all [increased] their LTD ratios, it would be beneficial for the economy,” he says. “And it would in turn create an environment more conducive for them to grow.”

Provision of credit to the private sector in Tanzania is low even by African standards, amounting only to about 16% of GDP. In Kenya and Nigeria the figure is 30% to 35%, while in South Africa it is well over 100%. Yet lenders are unlikely to raise their LTD ratios much beyond 65% unless they can access long-term funding. Some have taken on dollar loans with the likes of the International Finance Corp, the World Bank’s private sector lending arm. But all are still wary of the maturity imbalance between their local currency liabilities and their assets. “The reality is that most of the deposits in this market are short term,” says NMB’s Mr Wiessing. “And most of the loans are longer term. So the issue is not so much the loan to deposit ratio, but rather a liquidity mismatch.

“We’d be happy as a bank to go beyond 65%. But the mix of our funding would have to change.”

SMEs struggle

While banks are usually happy lending to the country’s biggest companies, small and medium-sized enterprises (SMEs) struggle to raise finance, as is the case throughout Africa. These businesses are often denied credit because of poor governance structures and a lack of transparency. A lot do not carry out even basic financial accounting. “The challenge with SMEs is multi-fold,” says Mr Awori. “Many haven’t been formalised in the sense that there’s no clear distinction between an individual owner and his company.”

The central bank views deeper financial inclusion, both of businesses and individuals, as a priority. It wants to see Tanzania’s banked population, which stands at about 4.5 million, or only 10% of the total, increased. “Financial exclusion is one of the biggest challenges that we’re facing,” says Bank of Tanzania’s Mr Ndulu.

The establishment of the country’s first credit reference bureau, which is expected to start operating later this year, will help, say bankers. But they add that it will make little difference unless a proper national identification system is created, too. “When that is in place and people can be traced easily, it will give the banks [more confidence] to lend,” says Mr Mushi. “It would allow them to know who they are really lending to and be able to get hold of them if they default.”

Tanzania’s mobile banking market is in its infancy. Of the country’s 20 million-odd phone subscribers, about 5 million use mobile banking, a far smaller number than in neighbouring Kenya. But Mr Ndulu believes that will change, saying that mobile banking has the potential to reach people, particularly in rural areas, unable to access financial services through existing branch networks. “It presents a huge opportunity for financial inclusion and to reach almost everywhere and everyone,” he says. “It is a platform through which not only payments can flow, but all sorts of financial services can be offered.”

A growth in mobile banking would, moreover, help the government reduce Tanzania’s large cash economy and bring more money into the formal system, which bankers say would boost lending to the private sector. As part of this process, the stock exchange in Dar es Salaam, the country's largest city, and Tanzania’s capital markets regulator are developing a way for government bonds to be sold directly to and traded by retail investors via their mobile phones.

“Once that takes off, particularly if we reduce the threshold for how much one can trade, it will really help us promote savings,” says Mr Ndulu. “It would help with monetary policy. There’s a lot of cash outside the banking system that we can’t influence. That will be brought in to the system this way.”

Inevitable consolidation?

Tanzania has 48 banks. Although the top five dominate, holding 75% of assets and deposits, that is plenty for a country with a GDP of just $30bn and population of 45 million. Nigeria, which has a $250bn economy and 160 million people, has 22 lenders.

Mr Ndulu denies that consolidation is inevitable, saying that the competition generated by having a large number of banks often benefits Tanzania. Others argue the country would be better served by having fewer but bigger institutions. They believe that some top-tier lenders, many of whom have little presence outside the main urban centres, will look to buy smaller rivals that specialise in rural areas.

“The major cities in Tanzania are almost exhausted [from a banking point of view],” says Mr Mushi. “So it’s very likely that the bigger lenders will look for deposits elsewhere. But they can’t go in themselves and grow organically. They’ll simply look for small banks doing well in these regions and make offers for them.”

Recent discoveries of huge natural gas fields off Tanzania’s coast will transform the economy once exports commence, probably in 2018 or 2019. The country's banks will doubtless benefit from the resulting rise in public infrastructure spending and liquidity in the country. The impact could be similar to what has happened in the past 10 years in Angola, where oil has seen the economy boom and the banks become the fastest growing in Africa.

The run up to large-scale gas production is hardly going to be dull for Tanzanian banks, however. With only $6bn of assets between them, they have ample scope to expand their balance sheets, especially in an economy already growing at 7%. Still, they will not be able to rest on their laurels. The ones able to sustain their high levels of profitability will be those quickest to develop more sophisticated models and tap Tanzania’s unbanked population.

Was this article helpful?

Thank you for your feedback!

Read more about:  Regulations , Africa , Tanzania