Tanzania has 53 banks. These are too many in a country where many households live on less than $2 (about Sh3,200) a day and the majority people are financially illiterate.
To many bankers, it even makes extremely little economic sense when these banks are operating in an economy plagued by high levels of unemployment and policy uncertainties.
Many banks operating in the country are not only small but poorly capitalised to effectively compete for survival.
Analysts say they should be merged to save them from collapsing which would lead to a financial crisis like it happened in Nigeria 10 years ago when it had 89 banks. The central bank there had to timely intervene by consolidating them, which reduced the number to 40.
The second round of mergers in Nigeria that led to the current 22 banks was necessitated by the global financial crisis late last decade. The move also boosted the financial inclusion in the country that has now reached about 60 per cent.
"There are more than enough banks to serve the Tanzanian market," Tanzania Postal Bank (TPB) managing director Sabasaba Moshingi told The Citizen on Saturday when highlighting the performance of the bank last year.
He said the country had a small formal sector relative to the population and a substantial informal sector. That, he explained, made most banks operating here to have similar target markets that overlap in the formal sector.
"The high levels of competition we see are driven by many players operating in the same space. If banks were to diversify and tap into the unbanked who are over 80 per cent of the population, which presents a huge opportunity, the level of competition would drop," he noted.
Most worrying for financial gurus about the banks glut is the prospect of more players being licensed by the central bank. To them, it is high time the Bank of Tanzania (BoT) determined the appropriate banking size for the country.
According to them, BoT's liberal policy of licensing banks is not only a regulatory risk and an economic liability but also a blind financial inclusion strategy. Its critics doubt the central bank's technological ability and human capacity to adequately and effectively supervise such a big number of banks.
They are also not comfortable with the industry being in the grip of a few banks. The top 10 banks held 80 per cent of total banking assets in 2012 and not much has changed since then.
The critics say the increasing number of cyber thefts in banks is a sign of poor banking supervision. Cases of frauds in the sector are also alarming with some banks even accused of facilitating money laundering and capital flight.
"Logically, the BoT will become increasingly stretched if the number of banks it has to monitor keeps on increasing. There are signs that it is being stretched already," noted a financial expert, who asked for anonymity.
He said BoT had problems in timely producing banking supervision reports. Its latest, which covers 2012, was released late last year and he sees the one for 2013 not being ready any time soon.
He also wondered why BoT provided relatively little banking sector information to the public unlike its counterparts in Kenya and Uganda.
A Mzumbe University economics lecturer, Dr Honest Ngowi, said if the central bank leveraged modern ICT it could effectively do what it is mandated to do. According to him, the more the financial institutions, the more it becomes challenging to supervise them.
The World Bank chief economist in the country, Mr Jacques Morisset, is one of the experts who say BoT can effectively regulate the 53 banks. However, he is also of the view that the Tanzanian market is small for so many banks to operate efficiently.
According to him, small banks have more difficulties to reduce costs (economies of scale) and diversify risks. He said banking is a risky business and one way to mitigate risk is to lend to many and diverse customers so that the bank minimises the risk that one of its clients will default.
"These many banks have to compete for the same few customers both in the narrow corporate and retail customer base. The challenge is in offering competitive services that can attract and retain demanding customers," Dr Ngowi of Mzumbe University Business School said.
To another BoT licensing policy supporter, Mr John Mashaka, the issue is not about too many banks but too many regulations since they are not good for a healthy and vibrant banking system. Arguing that for the country's economic security, it is advisable and much safer not to have a few large banks, he wants the government to tame the current predatory lending that has made borrowing expensive through exorbitant interest rates.
"Too many regulations will definitely kill some banks… it will keep too much money in the vaults and not enough in the economy. An increase of smaller banks is good for small businesses. However, things could be different especially if these banks are not properly regulated," he told The Citizen on Saturday.
"The many the banks there are the more competitive and better they become in terms of servicing the public. Increased competition compels them to eliminate unnecessary charges at the same time better their services. This is the only way for them to remain operational."
And that is the view of the central bank. According to Deputy Governor Lila Mkila, experience shows that the existence of a few big banks tends to create inefficiencies in service delivery that arises out of monopolist tendencies, as it was the case during the times when all Tanzanian banks were state-owned.
He said big banks normally target the higher end of the market such that households, small and micro-enterprises would normally be disadvantaged as they would not fit in the nature of target clientele of such big banks. Having such a variety of banking institutions including small banks, he argues, promotes competition and efficiency in service delivery.
"It is worthwhile to note that currently there are various types of banking institutions licensed by BoT that operate in the country which include commercial, development, community and microfinance banks with different missions and target markets."
In their 2013 Tanzania Banking Survey, which covered the previous year, consultants Serengeti Advisers grouped banks in the country into three tiers with large 11 institutions being those with assets in the excess of Sh400 billion. The mid-tiers were 16 and their assets were between Sh100-400 billion whereas the assets of the last category comprising 20 banks had assets of less than Sh100 billion.
According to expert Manzi Rwegasira, at the heart of a sound banking system is good regulatory supervision to ensure that the banking system is functioning properly and that depositors' money is safe.
He argues that the detailed on- and off-site inspections and monitoring to ensure every bank has enough capital, offers loans, has good managers, is making profits and has sufficient cash are difficult.
"Tanzania could be better served with 20-25 large and medium sized banks competing aggressively together rather than 53 banks of which more than 20 are small and cannot compete with the largest 10 banks that dominate the market," he opined.
To BoT, the sky is not even the limit in licensing the banks and it says it has no difficulties in supervising the current number. Mr Mkila told The Citizen on Saturday that banks would always be licensed as long as their shareholders see economic and business opportunities in the country.
"However, the new banks will have to meet the set banking business criteria and other laws in the country and the various regulations put in place by the central bank," he added.
"Supervising banks is not difficult but has challenges that are normal in the course of the Bank of Tanzania executing its regulatory function. BoT is equipped with the necessary tools that enable it to supervise banking institutions in an effective way," he said.
"The tools include the Risk Based Supervision System which encompasses both off-site and on-site processes; a robust reporting framework that enables it to get updated reports and returns on both financial and non-financial information for each banking institution on periodic basis (i.e. daily, weekly, monthly and quarterly) supported by a robust Banking Supervision Information System which enables BoT to take action in a timely manner."
BoT critics say the government has no clear vision and strategy for the type of financial sector that is needed to transform Tanzania into a prosperous country. Bankers confided to this paper that Tanzania has too many banks because of the relative low barriers to operate in the country.
The glut of banks is mostly associated with the lenient minimum bank capital requirements for licensing them. In 2012, BoT increased the capital levels from Sh5 billion to Sh15 billion and from Sh250 million to Sh2 billion for commercial banks and community banks respectively.
The threshold is considered to be too low to act as a strong barrier for new entrants. When the new requirements were instituted, Tanzania had 31 fully-fledged commercial banks and 17 financial institutions.
A treasury expert who spoke on condition of anonymity opined that a radical way to strengthen the banking sector was by reducing the number of smaller marginal banks. To him, the best way to do that was by increasing the capital for commercial banks to Sh25 billion and Sh10 billion for community banks.
By December 31, 2012, only 23 of the 32 commercial banks had complied with the new minimum capital requirement. No community bank had managed to do so. Treasury expert Mashaka says the minimum capital cannot simply be raised or lowered anyhow.
"There must be thorough scientific research within the economic sphere to determine the minimum amount required to establish either a community or commercial bank. The most important thing is legislation put in place to protect the consumers from rogue and predatory banks," noted a Tanzanian who works for the Bank of America.
Most of the new banks in Tanzania are small which the experts said tend to be a poor investment for shareholders. A Serengeti Advisers report shows that smaller banks have been generating negative returns for the past four years.
"Loss making banks are not only bad for investors; they are also bad for customers and the wider economy because the money they lose cannot be lent out. Loss-making banks effectively suck capital out of the banking system and become a drain on the economy because they are not able to fund investment or consumption."
Despite its impressive growth rates in recent years and the many banks licensed to operate in the country, the banks are yet to play their due role in the national economic growth and overall development.
BoT Governor Benno Ndulu says although the banks' stability has improved a lot in recent years it does not contribute much to the overall economy. According to him, it only accounted for only 2.36 per cent of national output (GDP) in 2012 up from 2.2 per cent in 2011.
That was partly due to the low level of financial inclusion in the country, he notes in his message for the Directorate of Banking Supervision Annual Report 2012. However, he says efforts have been initiated to address some of the challenges which hold back access to financial services.
"Tanzanian banks account for a significant share of the total assets of the financial system, followed by pensions and insurance. However, in terms of contribution to GDP, the banks only account for 2.36 per cent from 2.20 per cent in 2011," he said.
"This is partly due to the low level of access to finance by most bankable population. Whereas a rapid growth is being experienced in the financial system as a whole and in the banks in particular, access to finance is still very low."
Buoyed by economic growth of 6-7 per cent for over a decade now, Tanzania's banking assets have grown at a cumulative average growth rate of 20 per cent per year since 2009. According to independent sources, total banking sector assets grew from Sh12.1 trillion to about Sh21 trillion during the three-year period.
Financial services were the second fastest growing activity of the national economy after communication last year at 12.2 per cent. Treasury forecasts show that financial intermediation will grow by 12.3 per cent this year and surge to nearly 14 per cent in 2015.
http://www.thecitizen.co.tz/News/SPECIAL-REPORT--BoT-faulted-for-licensing--too-many--banks/-/1840392/2364524/-/item/4/-/v09kp0/-/index.html
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