Tanzania Banking and Finance Sector Report

The Tanzania banking sector embarked on a plan for financial liberalization in 1992 in order to sustain its economic growth.

This has been accomplished through the mobilization of financial resources as well as by increasing competition in the financial market and by enhancing the quality and efficiency of credit allocation.

As a result of the liberalization, the banking sector in Tanzania has been booming, particularly over the last few years.

The total assets have increased by 60%, from $ 1.7 billion at the end of 1999 to $ 2.7 billion at the end of June 2004.

Because of this, new merchant banks, commercial banks, bureau de change, insurance companies, a stock exchange and related financial units have entered the market.

With a total of 27 banks and a few non-banking financial institutions, which are not allowed to open current accounts, the market is characterized by a few big players and several small banks.

In Tanzania, 90% of deposits are in the hands of eight banking institutions, namely three local banks and five foreign banks.

The two groups are characterized by very different market strategies and corporate structures.

While local banks are more diffused within the national territory, with larger and more capillary branch networks, foreign banks have only a few branches based in Dar es Salaam and other major cities.

Foreign banks tend to operate as subsidiaries of large groups, such as Citigroup and Barclays, using strategies oriented to the international market.

As a consequence, foreign banks focus on international customers and national clients who prefer to keep their deposits in foreign currencies.

In contrast, local banks primarily service local customers.

{xtypo_quote_left} Our strategy is built on three key elements: continued innovation and excellence at service, deeper involvement in the largest sectors of the economy and expansion of our distribution network to gain greater access to customers across Tanzania.{/xtypo_quote_left}There are four categories of banks, oriented towards different markets and clientele operating in Tanzania.

Local private banks service small to medium size business and retail banking.

Regional banks also service small to medium and retail banking business, but on a larger national scale.

International banks, which benefit from an African regional network, are positioned to mediate the business flows from their respective countries.

Finally, the multinational banks are mainly dedicated to medium and large corporation banking and to donor intermediation business.

One of the latter, Standard Chartered Bank, has recently diversified its business into consumer banking and is opening branches throughout the country.

This strategic move is evidence of the dynamism and the opportunities arising in the banking sector.

“Our strategy is built on three key elements: continued innovation and excellence at service, deeper involvement in the largest sectors of the economy and expansion of our distribution network to gain greater access to customers across Tanzania,” says Standard Chartered Bank Tanzania Chief Executive Officer and Managing Director Hemen Shah.

Improved Vitality of the Tanzania Banking Sector

Following liberalization of economic policy, the vibrant Tanzania banking sector is consistently attracting foreign financial institutions to enter the market.

The latest entry is the Indian Bank of Baroda, which opened its first branch in Dar es Salaam at the end of 2004.

At the same time, local financial institutions exemplified by Twiga Bancorp, are developing and expanding, with some of them acquiring status as a full-fledged financial institution.

“Our move from a non-banking financial institution to the status of commercial bank is due, not only to the need to serve our clients on a 360 degree basis, but also because of a problem of confidence we are facing with foreign banking institutions.

If we aim, as we do, to forge relationships with foreign and international banking groups, they will decline any further discussion until we do not have a proper status”, explained Mr. Ralph Mwamukonda, former General Manager of Twiga Bancorp.

The need to look beyond the national borders is influenced by the growth in export oriented activities in Tanzania, combined with the recent government focus in this direction as well.
{xtypo_quote_right}This country has a great potential for export, but the major problem remains the lack of financing for exporting activities.{/xtypo_quote_right}

“This country has a great potential for export, but the major problem remains the lack of financing for exporting activities.

Other banks now support exporting Small and Medium Enterprises from a local front, such as for production, but to make them sustainable they need financial support specifically to export their products and this is what Twiga Bancorp focuses on,” said Mwamukonda.

Despite such dramatic improvements, the Tanzanian banking sector remains small in respect to the country’s booming economy.

The total amount of funds managed by the banking and non-banking institutions are estimated at little more than 26% of GDP.

However, the outlook for the banking industry in Tanzania is very positive and there are appealing opportunities for new comers to the sector.

“There are a few more players to come in, right now there is enough room to expand so the attraction is still there,” explains the Governor of the Central Bank of Tanzania, Mr. Saudi Ballali.

Impediments to the Growth of the Tanzania Banking Sector

The sector remains affected by structural impediments and anomalies including excess liquidity, the conservative investment portfolio of the banks and financial institutions with a large set of assets kept in government securities, the inadequacy of the legal framework and the absence of a widespread loan repayment culture.

For this reason and because of the lack of viable projects say local bankers, many Small and Medium Enterprises (SMEs) have difficulty obtaining loans.

Importantly, such banking practices are changing very fast as banks are beginning to realize the role that the strategic SMEs will be playing in the further development of the economy.

For instance, Standard Chartered recently posted an increase in unsecured loan activities in Tanzania.

A contributing factor to servicing traditionally excluded sectors is the microfinance lending that is carried out by social banks, such as the Dar es Salaam Community Bank.

{xtypo_quote_right}Our microfinance bank is geared toward assisting SMEs and those people who are actually left out by commercial banks in this country.{/xtypo_quote_right}“Our microfinance bank is geared toward assisting SMEs and those people who are actually left out by commercial banks in this country, because [they are being] considered as a credit risk,” explains the bank’s Managing Director, Mr. Edmund P. Mkwawa.

Mr. Mkwawa goes on to say that, “Dar es Salaam Community Bank is an attempt by the government to reach those people who, as experience has shown, can […] invest in their small businesses for growth.

While the big commercial bank[s] in Tanzania are concentrating on corporate clients and invest in import and export business, we focus on the domestic market of those small people in order to develop and expand their businesses.”

Interestingly, the positive trend in lending to SMEs is producing greater confidence in their growth potential among financial institutions and more generally in the economy as well, which is generating a positive spiral.

In addition, the government is also introducing new laws that are expected to enhance lending activities.

For instance, the recently enacted Land Act facilitates the use of land as collateral and aims to expand credit to the agricultural sector.

The introduction of identity cards is also underway, as well as the reform of the administrative and judiciary systems.

It is worth noting the ongoing decline of excess liquidity over the past four years, along with the banks’ investments in government securities, as well as the significant results of the increased market liberalization and competition within the sector.

Regarding efforts to combat the widespread loan non-repayment culture, several banks have introduced character based lending or group lending.

“Under this methodology people come together in groups of five, it is a self selecting methodology after a five weeks training provided by the bank providing the loan.

If one client defaults to repay the loan granted, all the other will pay,” says Mkwawa.

The Tanzania Banking Sector Outlook

Overall the Tanzania banking sector is booming, indeed.

Some structural impediments limit the pace of development in the sector, but such issues are being addressed and tackled by the government.

At the same time, private banks are assuming more risks by increasing their financing to sectors that had formally been excluded and they are taking advantage of the investment opportunities arising in this growing economy.

{xtypo_quote_left}This country has a population of about 36 million people, and only 2 million people are banking.{/xtypo_quote_left}
“This country has a population of about 36 million people, and only 2 million people are banking.

Indeed, there is increasing competition, but the banking sector remains completely underdeveloped and the market is so huge that the twenty or more players already present will not be able to saturate it,” adds Mkwawa.

Within this framework, the Central Bank continues to plays a crucial role.

While the Bank is criticized for excessively restrictive precautionary banking regulations, it is also praised for the implementation of successful monetary policies and for having brought down inflation to acceptable levels so that both the Tanzania banking sector and the national economy have greatly benefited.