THE INSTITUTE OF FINANCE MANAGEMENT

(IFM)

FACULTY OF ACCOUNTING, BANKING AND FINANCE

DEPARTMENT OF BANKING AND FINANCE SERVICES

BACHELOR DEGREE OF BANKING AND FINANCE

YEAR - III

ACADEMC YEAR: 2021/2022

PROJECT REPORT ON FINANCIAL SECTOR STABILITY

STUDENT NAME: SWAIBU ABDALLAH

REG NO: IMC/BBF/1912537
SUPERVISOR NAME: DR. RAMADHAN KHALID MNDEME
SUBMISSION DATE: 15TH September, 2022

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 DEDICATION
This project is dedicated to my father who saw to it that I got the best education in my life and
encouraged me to do my best. To my brothers and friends who supported me.

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 ACKNOWLEDGEMENT
First of all I would like to thank God for everything in my life whose protection and unfaltering
love have helped me pursue academics to this level. My heartfelt appreciation goes to my parents
who nurtured me with love and even encouraged me to pursue this bachelor degree.

I would like to express my sincere appreciation to my supervisor for the patience, guidance and
even stimulating discussion on all the various aspects concerning this project report.

Finally, my thanks go to my fellow students for their knowledge and company during the study
was quite an experience to remember. May God bless them all.

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 LIST OF ABRIVIATION
BOT................................................................Bank of Tanzania

CMSA ............................................................Capital Markets and Securities Authority

CRDB .............................................................Cooperative and Rural Development Bank

FSSI................................................................Financial System Stability Index

IMF ................................................................The international monetary funds

MFIs ...............................................................Monetary Financial Institutions

MNOs .............................................................Mobile Network Operators

NBC ...............................................................National Bank of Commerce

NMB ..............................................................National Microfinance Bank

RGoZ..............................................................Revolutionary Government of Zanzibar

RWAs .............................................................Risk-weighted assets

SACCOs .........................................................Savings and Credit Co-operative Societies

SAPs ...............................................................Structural Adjustment Programs

SMR ...............................................................Statutory Minimum Reserves

SRR ................................................................Statutory required ratio

SSRA..............................................................Social Security Regulatory Authority

TCDC .............................................................Tanzania Cooperative Development Commission

TIRA ..............................................................Tanzania Insurance Regulatory Authority

URT................................................................The United Republic of Tanzania

VICOBA ........................................................Village Community Banks

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 EXECUTIVE SUMMARY
This report is being prepared for academic purpose as part of IFM requirement to accomplish the
project or field report as a core module in pursuing Bachelor of banking and finance. The main
focus of the report is to review the performance of the banking sector in Tanzania based on the
key indicators of banking sector provided which were; Deposits and Lending rates,
Nonperforming Loans, Capital adequacy, Total deposits and Total Liabilities. The report will
also focus on key actions to be taken by BOT to poor performing banks from 2017 to 2021.

This report has been organized in five chapters in which each chapter will connect the report
through the financial sector stability in Tanzania practice.

Chapter one will provides the background of finance sector in Tanzania and the Role of the
Central Bank in Financial Sector Stability. Chapter two will provide overview of Financial
Sector Stability Reporting in Tanzania and the Trend of Financial Sector Stability in Tanzania as
well as Key measures taken by BOT to poor performing banks. Chapter three provide the
literature review on the key factors necessary for Financial Sector Stability. Chapter four provide
Tanzanian Practices on stabilizing the finance sector with comparison to Global Experience and
final chapter will provides conclusion and recommendations as per report findings.

The study reveals that, Deposits and Lending rates declined from 17.0% in 2019 to 16.7% in
2020. Meanwhile, the overall time deposit rate averaged 6.7% in 2020 compared to 7.2% in
2019. The study further revealed that, the banking sector experienced increase in lending,
leading to more interest income and profitability. Aggregate core capital and total capital ratios
stood at 16.7 percent and 17.9%, against regulatory thresholds of 10.0% and 12.0%,
respectively. The banks liquidity remained above minimum regulatory threshold of 20 percent,
at 32.4 percent.

TABLE OF CONTENTS
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ACKNOWLEDGEMENT...............................................................................................................i

LIST OF ABRIVIATION..............................................................................................................ii

EXECUTIVE SUMMARY...........................................................................................................iii

TABLE OF CONTENTS..............................................................................................................iv

LIST OF TABLES........................................................................................................................vi

LIST OF FIGURES......................................................................................................................vii

CHAPTER ONE...........................................................................................................................1

INTRODUCTION........................................................................................................................1

1.1. Chapter Introduction...........................................................................................................1

1.2. Background of Financial Sector in Tanzania......................................................................1

1.2.1. The structure................................................................................................................2

1.2.2. Regulations...................................................................................................................3

1.2.3. Important Authorities in the Sector..............................................................................4

1.2.4. Reforms........................................................................................................................4

1.3. The Role of the Central Bank in Financial Sector Stability................................................5

CHAPTER TWO..........................................................................................................................6

FINANCIAL SECTOR STABILITY OF TANZANIA.............................................................6

2.1. Introduction.........................................................................................................................6

2.2. Overview of Financial Sector Stability Reporting in Tanzania..........................................6

2.3. The Trend of Financial Sector Stability in Tanzania..........................................................7

2.3.1. Deposits and Lending rates..........................................................................................7

2.3.2. Non-Performing Loans................................................................................................8

2.3.3. Capital adequacy..........................................................................................................8

2.3.4. Total deposits and Total Liabilities..............................................................................9

2.4. Key measures taken by BOT to poor performing banks in recent Years.........................10

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CHAPTER THREE....................................................................................................................11

LITERATURE REVIEW..........................................................................................................11

3.1. Chapter Introduction.........................................................................................................11

3.2. Key factors necessary for Financial Sector Stability........................................................11

3.3. Important Lesson to Tanzanian from Global Experience.................................................13

CHAPTER FOUR......................................................................................................................15

ANALYSIS..................................................................................................................................15

4.1. Chapter Introduction.........................................................................................................15

4.2. Tanzanian Practices and Global Experience.....................................................................15

4.3. Prospects of Tanzania Financial Sector Stability in the Near Future...............................17

CHAPTER FIVE........................................................................................................................18

CONCLUSION AND RECOMMENDATIONS......................................................................18

5.1. Chapter Introduction.........................................................................................................18

5.2. Conclusion........................................................................................................................18

5.3. Recommendations.............................................................................................................19

REFERENCES...........................................................................................................................20

APPENDICES.............................................................................................................................22

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 LIST OF TABLES
Table 1: Deposits and Lending rates for the finance sector since 2016-2020 ................................
7

Table 2: Non-Performing Loans for the finance sector since 2016-2020 .......................................
8

Table 3: the financial sector Capital Adequacy from 2016 to 2020 ...............................................
9

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 LIST OF FIGURES
Figure 1: Tanzania Financial sector as at 2020 ...............................................................................
2

Figure 2: Trend for deposits and Lending rates for the finance sector since 2016-2020 ................
7

Figure 3: the trend for Non-Performing Loans for the finance sector since 2016-2020 .................
8

Figure 4: the trend represents the financial sector Capital Adequacy from 2016 to 2020..............
9

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 CHAPTER ONE

INTRODUCTION
1.0. Introduction
This chapter provides the details on the background of finance sector in Tanzania and the Role of
the Central Bank in Financial Sector Stability. In presenting the background of finance sector in
Tanzania the key issue will be its structure, regulations, important authorities and its reforms.

The financial sector in Tanzania offers a diversity of financial service providers, specifically
banks, MFIs, insurance companies, pension providers and SACCOs. Furthermore, it
encompasses other financial service providers, like MNO, through their provision of mobile
money services.

Financial stability is an essential requirement not only for price stability, the policy goal of the
central bank, but also for healthy development of the economy. Financial instability entails heavy
costs for an economy, since the volatility of price variables in the financial markets increases.
Since the 1980s, many countries around the world have achieved the positive effects of rapid
financial industry growth owing to the progress of financial liberalization. (Lee Ju-yeol, 2021)

When the financial system becomes unstable, such as with financial market turbulence and
deterioration in the soundness of financial institutions, a massive supply of funds is generally
needed to solve the problem. Historically, the central bank has therefore naturally performed the
role of promoting financial stability, since it has the ability to promptly inject a huge amount of
liquidity by virtue of its exclusive right to create fiat money. BOT has shown continuously
commitment in widen and strengthen its surveillance of the financial sector activity, and promote
measures to mitigate the incipient risks to financial stability. This report will highlight
performance of the finance sector and measures taken by BOT to poor performing banks in the
last five years.

1.1. Background of report

This Report is being released at a time when risks arising from global macro-financial
environment have moderated. However, new risks have emerged to developing countries, as
inflation in advanced economies is moving closer to the target, opening the possibility of exit
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from accommodative monetary policies that may lead to tightening of global financial
conditions.

Our banking sector remained resilient supported by stable macroeconomic environment,

however, credit risk continues to persist, with higher provisions squeezing banks profitability and
reducing credit flow to the private sector, as banks take precautionary lending stance. We have
eased monetary condition to reduce cost of funding, engaged banks to take various options
including loan restructuring and directed them to use credit reference bureau for loan
underwriting as measures to contain credit risk going forward.

Ongoing implementation of the Electronic and Postal Communication Act, 2010 is expected to
increase vibrancy of the equity market as telecommunication companies make their initial public
offers.

Vodacom Tanzania Limited, the first telecommunication company to issue shares to the public in
March 2017, included use of mobile money platform in its issuance in order to increase
geographical outreach and accommodate small-scale investor

Other financial sub-sectors have also been implementing a number of measures to enhance
operational perfomance and mitigate potential risks. Introduction of a web based application for
tracking motor vehicle insurance premium payment in April 2017 and planned guidelines that
will require direct payment of premium to insurers will foster liquidity management and
consumer protection. Social security sector continues to improve administrative efficiency in
compliance with the Social Security Schemes (Administrative Expenses) Guidelines, 2016.

1.2. Background of Financial Stability in Tanzania

Tanzania financial stability sector is the results of a plan for financial liberalization in the 1990’s
created in order to sustain the country’s economic growth. The plan was 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. The liberalization makes
the banking sector in Tanzania to boom, particularly over the last few years and new merchant
banks, commercial banks, bureaus de change, credit bureaus and other financial institutions have

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entered the market. As of March 2015, there are 56 licensed banks and other financial institutions
in Tanzania, versus 38 in 2009 (invest, 2015).

1.2.1. The structure

BOT is the main regulator of the finance sector in support by the ministry of finance and
planning. The structure is presented as following in Figure 1;

Figure 1: Tanzania Financial system structure as at 2020

THE BANK
OF
TANZANIA
(BOT)

FINANCIAL FINANCIAL
INSTITUTIONS MARKETS

BANKING Capital
NON-BANKING Market OTHERS
SECTOR SECTOR (CMSA)

Commercial Banks DSE Treasury

Development Banks Insurance sector Bonds and
(TIRA) Bills
Community Banks
MNOs
Brokerage REPO
SACCOs/VICOBA firms/Bureau de
Investment Banks change
IFEM

Source: (BOT, 2021)

The report in 2018 by Clickpesa provided that, the Tanzania financial sector has 41 commercial
banks, 3 developments banks, 6 community banks, 2 microfinance banks, 7 MNOs, around 100
microfinance institutions, approx. 6000 SACCO’s and many VICOBA groups. Banks and
Mobile Network Operators (MNOs) are key players in the Tanzania financial sector. Banks play
a big role in deposit holding, lending and corporate banking activities. (clickpesa, 2020). As of
December 2018, the Tanzanian insurance sector consisted of 30 insurance companies, 109
insurance brokers, and 635 insurance agents. As of November 2021, there are 28 companies
listed at the Dar es Salaam Stock Exchange (DSE) with a total market capitalization of TZS 15,4

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trillion. The DSE All Share Index (DSEI), which comprises all listed companies at DSE, reached
TZS 1,858.26 on 29th November 2021.

1.3. Source of information regarding financial stability

Bank of Tanzania is main source of information regarding to financial stability in Tanzania. The
primary objective of the Bank is to formulate, define and implement monetary policy directed to
the economic objective of maintaining domestic price stability conducive to a balanced and
sustainable growth of the national economy

1.4 Main content of financial stability and rational to user

Global Economic Developments
Global economic and financial environment improved, reducing macroeconomic risks in the near
term. Global economic growth picked up in the fourth quarter of 2016 and the pace is expected to
persist in 2017, on the back of a general increase in global demand, improving labour market
especially in advanced economies and higher commodity prices that will boost economic
activities in emerging market and developing economies.
Non-Financial Corporate Sector
Non-Financial Corporates (NFCs) financial condition survey is one of the macro-prudential tool
that the Bank uses annually to monitor and identify vulnerabilities arising from the Non-
Financial Corporates with a view to devising appropriate macro-prudential policy actions to
mitigate identified potential risks.
Performance of financial sector
Financial sector continued to grow in terms of assets supported by macro-economic environment
and innovation in digital finance platforms. Total assets of the sector increased by 5.0 percent to
TZS 40,670.9 billion as at end March 2017, from March 2016 position, with the banking secor
contributing about 70.0 percent of the total assets

1.5. Organization structure of the report

This report has its structures whereby they are categorized on different chapters coverage as
follows;

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Chapter one is covered with introduction of the whole report, background of the report,
background of the financial sector in Tanzania, the structure of financial sector in Tanzania with
its regulations, sources of information regarding financial stability in Tanzania and main contents
of the Financial Stability Reports and rationale of each to the users.
Chapter two covers the analysis of financial stability of Tanzania over the last five years based on
indicators such as deposits and lending rates, Non-Performing Loans, Capital adequacy, Total
deposits and Total Liabilities and challenges to the BoT in ensuring financial Stability in
Tanzania.
Chapter three covers literature review related to key factors necessary for financial sector stability
with important lessons to Tanzanians from global experience.
Chapter four covers the trend of financial stability in Tanzania relative to the reviewed literature
as it shows comparison analysis of Tanzania Financial Stability trend relative to other east
African countries.
Chapter five is covered with conclusion and recommendation whereby the conclusion is based
on achieving the research objectives and summary of the research findings. The
recommendations will be made to the banking sector and to the institute of finance management
for further studies.

CHAPTER TWO

FINANCIAL SECTOR STABILITY OF TANZANIA

2.1. Introduction
This chapter provides the details on Tanzania financial sector stability. The chapter will start by
providing the overview of the financial sector stability reporting and followed by the trend
analysis of Financial Sector Stability in Tanzania by checking the Lending and deposits rates,
NPLs ratios, capital adequacy and Total deposits and Total Liabilities trend in 2016 to 2020

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2.2. Overview of Financial Sector Stability Reporting in Tanzania
The financial stability report is prepared by the BOT and released every march to reflect the
financial sector stability in Tanzania financial market. Through the report BOT provides
information’s on the macroeconomic and financial environment status, reflects the global
economic developments with the country economic status. It also provides information’s on the
domestic macroeconomic and financial environment

Most importantly through the Financial Sector Stability Reporting BOT provides review of
performance of the financial sector and cover the banking sector, non-banking financial sector.
The reporting also covers the financial system infrastructure and regulatory developments of the
country financial system. Other key issues include; payment system infrastructure; financial
system regulatory developments; financial sector resilience and financial stability outlook.

The Financial Sector Stability Reporting also used by BOT to provides Financial System
Stability Index (FSSI) which provides an early warning indicator, which measures stability of the
financial system. The Index uses financial market data and banking sector prudential indicators
measuring capital, assets quality, earnings and liquidity. The indicators are transformed into a
composite index using standardized common scale on assumption that the data are distributed.

Moreover, the report by BOT on finance stability also, highlights policy recommendations to
mitigate the identified potential risks under the auspices of the Tanzania Financial Stability
Forum. The Forum is composed of the Ministry of Finance and Planning – URT, Ministry of
Finance, Tanzania Insurance Regulatory Authority, Social Security Regulatory Authority,
Capital Markets and Securities Authority, Deposit Insurance Board and BOT.
2.3. The Trend of Financial Sector Stability in Tanzania
The BOT annual financial sector stability report provides that; Tanzania’s finance sector is still
considered stable and resilient, as financial institutions have more than adequate capital buffers
and liquidity. Banks’ ability to quickly capitalize on alternative channels such as agency, mobile
and internet banking has strengthened the accessibility of banking and related services and
further helped to carter the needs of customers. Competition is intensifying as banks and Non
Banking Financial Institutions looking to grow their profitability by tapping into new product
range. Below are key trends selected from 2015 to 2020 for the finance sector stability.

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2.3.1. Deposits and Lending rates
The annual average overall lending interest rate declined from 17.0% in 2019 to 16.7% in 2020.
Meanwhile, the overall time deposit rate averaged 6.7% in 2020 compared to 7.2% in 2019.
Equally, the spread between the 12-months deposit and short-term lending rates narrowed to
7.5% from 7.9% recorded in 2019. After rise in 2017 both deposits and lending rates, they start
to decline from 2017 to 2020. This is a negative trend. The reason a negative trend/decline of
Deposits rate is due to continues decline in deposits from customer. The decline of customer
deposit will lead to decline in the ability of banks to lend to customers and so the lending rates
will decline. This is presented graphically as following;

Table 1: Deposits and Lending rates for the finance sector since 2016-2020
YEARS 2016 2017 2018 2019 2020
Deposits rates 10.5% 11.2% 8.2% 7.2% 6.7%
Lending rates 16% 17.8% 17.4% 17.0% 16.7%
Source: BOT annual stability report & (WBO, 2021)
Figure 2: Trend for deposits and Lending rates for the finance sector since 2016-2020
Deposits rates Lending rates
40.00%

30.00%

20.00%

10.00%

0.00%
2016 2017 2018 2019 2020
2.3.2. Non-Performing Loans
Tanzania's banking sector saw an improvement in asset quality in the three years prior to 2020.
Non-performing loans (NPLs) have ticked up in 2020 where the level of non-performing loans
increased to TZS1.4t from TZS1.2t in 2019. The ratio of NPLs to gross loan also increased to
7.5% as at December 2020 from 6.4% recorded in December 2019. Although from march 2017
the NPLs ratio have shown positivity by decline from 11.5% to 8.7% a decrease of 2.8%. the
effort is required to reach the statutory required ratio (SRR) by BOT is 5%. The decline in NPLs
ratio simply means that, the banks are employing some measures in reducing the non-performing

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loans as the methods for collection is continue to strengthen throughout years. This is a positive
sign. This trend is presented as following;

Table 2: Non-Performing Loans for the finance sector since 2016-2020

YEARS 2016 2017 2018 2019 2020
NPLs 9.6% 11.5% 9.9% 9.6% 8.7%
NPLs SRR 5% 5% 5% 5% 5%
Source: BOT annual stability report & (WBO, 2021)
Figure 3: the trend for Non-Performing Loans for the finance sector since 2016-2020
NPLs NPLs SRR
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2016 2017 2018 2019 2020

2.3.3. Capital adequacy

The sector remained adequately capitalized during the period under review. The ratios of core
capital and total capital to total risk-weighted assets and off-balance sheet exposures were 16.9%
and 20.7% in 2020 compared to 16.7% and 19.3% reported in the year ended December 2019,
respectively. The increase in capital adequacy ratios is partly attributable to retention of net
income and additional capital injection relative to the growth in total risk-weighted assets. The
ratios remained well above the statutory minimum requirement of 12.5% and 14.5%,
respectively. This is presented in the table 1 and figure 2 below;

Table 3: the financial sector Capital Adequacy from 2016 to 2020

YEARS 2016 2017 2018 2019 2020
Capital Adequacy 15.5% 15.5% 14.9% 15.0% 15.7%
Core Capital to RWAs 16.6% 17.2% 16.3% 16.7% 16.9%
Total Capital to RWAs 19.9% 21.0% 18.7% 19.3% 20.7%
Minimum core capital ratio 12.5% 12.5% 12.5% 12.5% 12.5%
Minimum total capital ratio 14.5% 14.5% 14.5% 14.5% 14.5%

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Source: BOT annual stability reports & (Ernest & Young, 2021)
Figure 4: the trend represents the financial sector Capital Adequacy from 2016 to 2020
Core Capital to RWAs Total Capital to RWAs
Minimum core capital ratio Minimum total capital ratio
25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2016 2017 2018 2019 2020

2.3.4. Total deposits and Total Liabilities

The main source of funding in 2020 remain customer deposits, accounting for 69.2% (69.7% in
2019) of total funding sources, followed by shareholders’ funds at 15.7% (15.0% in 2019). Other
liabilities increased by 1.7% accounting for 11.2% of the total funding compared to 11.5% in
2019. Contribution of deposits from other banks increased slightly to 3.9% (3.8% in 2019) of the
total funding sources. Overall, in past 5 years there has been a gradual decline in relative
contribution of deposits from customers and an increase in reliance on funds from shareholders.

2.4. Key measures taken by BOT to poor performing banks in recent Years
The BOT provided measures and reliefs which banking and financial institutions could take
advantage of. The closure of five banks which are; Covenant Bank for Women (Tanzania);
Efatha Bank; Kagera Farmers’ Cooperative Bank; Njombe Community Bank, and the Meru
Community Bank is the evidence that there are poor banks in the country.

BOT outline the policy measures which the Monetary Policy Committee of the BOT have
recently approved to maintain stability in the financial sector that have been approved by the
Governor of the BOT are as following; to reduce statutory Minimum Reserves (SMR) from 7%
to 6%. To reduce the discount Rate from 7% to 5%. These measures have been conducted so that
to smoothen the business structure of the country and increase the number of customers deposit

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in banks that will increase lending and business banking’s. ( Tenda, Msinjili and Amreen,
Ayub. , 2020)

Injecting capital to that bank, since central bank acts as a lender of last resort, any bank going to
worst condition are provided with assistance in order to avoid total failure of the bank central
bank has a tendency of injecting the fund to failing bank so as it can cover its operating cost.

Merger and Acquisition. This can be instanced from recent acquisition of Chinese Bank by NMB
Bank Plc. The chines bank was performing poorly so regulator has to find acquirer. Once the
bank is badly performing the central bank look for a bank that is giant enough to acquire the bank
so as to avoid the risk.

Control and regulation, to strengthen this BOT, require a bank to submit financial reports every
quarter and also publish to public so they can see health of bank. there are some bank that fail
due to failure in auditing over period of time, central bank tends to intervene and contact auditing
so as to insure financial health of the bank.

The BOT has reduced haircuts on treasury bills from 10% to 5%and on treasury bonds from 40%
to 20% marking a significant change which has been made in the expectation that it would
increase the ability of commercial banks to borrow from the BOT with less collateral than before.
Haircuts are the difference between the current market value of an asset and the amount that can
be used as collateral for a loan. A higher haircut means that if there is a drop in the market value
of the collateral, the lender is still able to recover the amount that has been maintained as
collateral.

While additional lending is expected, for existing loans the BOT is permitting regulatory
flexibility in order for banks and financial institutions to discuss restructuring of loans with
borrowers who are facing financial difficulty due to the pandemic. The restructuring of loans
which will include loan repayment moratoriums and the granting of loan rescheduling will be
determined on a case-by-case basis and done in a transparent and impartial manner.

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 CHAPTER THREE

LITERATURE REVIEW
3.1. Introduction
This chapter provides the literature review related to key factors necessary for Financial Sector
Stability. the chapter will also cover, Important Lesson to Tanzanian from Global Experience.

3.2. Key factors necessary for Financial Sector Stability

The literature will be based on the meaning of financial sector stability and reasons for financial
sector instability as follows;

3.2.1. Financial Sector stability

According to (Allen and Ndikumana, 2000) Financial sector stability is usually defined as the
enhancement in quantity, quality, efficiency and efficacy of financial intermediary services in the
country. This process involves the interaction of many activities and financial institutions. A
strong financial system offers risk diversification and effective capital allocation. The greater the
financial development, the higher would be the mobilization of savings and its allocation to high
return projects (Rihab, et al, 2014)

Financial sector stability can be measured by a number of factors including the depth, size,
access, and soundness of financial system. It can be measured by examining the performance and
activities of the financial markets, banks, bond markets and financial institutions. It is observed
that higher the degree of financial development in a country. A developed financial system offers
higher returns with less risk (Rihab et al, 2014).

3.2.2. Reasons for financial sector instability

Different theories define the causes of financial instability; their relevance may vary according to
the period and countries drawn into the scope of analysis. According to billing and Liu (2006)
and Misina and Tkacz (2008) who in different occasions research on the problem factors
affecting the whole of the financial system, the mentioned the following causes: rapid
liberalization of the financial sector, inadequate economic policy, noncredible exchange rate
mechanism, inefficient resource allocation, weak supervision, insufficient accounting and audit

11
regulation, poor market discipline. The aforementioned causes of financial crises emerge not
only collectively, but also individually, or in a random combination, therefore the analysis of
financial stability is an extremely complex task. The focus on individual branches distorts the
overall picture, thus the issues need to be examined in their complexity in the course of analyzing
financial stability.

Moreover, Demirgüc-Kunt and Detragiache (1998, 2005) who focus on leading indicators for
finance sector crises. Applying a multivariate logit approach, the authors link a set of explanatory
variables to the probability of occurrence of a binary crisis variable. Their results for both
industrial and emerging market economies indicate that low real economic growth, high inflation
and high real interest rates impact significantly on the probability of a banking crisis. The authors
conclude that national factors are relevant for banking instability, whereas international factors
play a role in determining financial sector crises. Their results have been confirmed by an in-
sample and out-of-sample prediction of financial crisis of 2008/2009 by Borio and Drehmann
(2009), who also highlight the important role of property prices in predicting financial sector
crises. At the country-specific level, Hanschel, Monnin (2005) confirm the leading indicators
identified by Borio and Lowe (2002) to be likewise relevant determinants for the Swiss finance
system. Misina and Tkacz (2008) forecast the indicator developed billing and Liu (2006) and
find lending in combination with housing-sector asset price indicators to be the best predictors at
the 1–2-year horizon for Canada

3.2.3. Impacts of Financial sector stability to Economic Growth

The research by Hassan et al. (2011) who compares the key financial and real indicators along
with the economic growth among geographic regions made up of developing countries, Latin
America and Caribbean has the highest GDP per capita followed by Europe & central Asia and
Middle East & North Africa (MENA), whereas Sub-Sahara Africa shows the lowest GDP per
capita. East Asia and pacific countries have growth rate comparable to those of high-income
countries, reflecting the rapid economic expansion of many Asian countries in recent decades.
Furthermore, sub-Sahara Africa has the lowest median GDP per capita followed by South Asia,
which denotes the poverty level of those regions, interesting, despite its low GDP per capita,
South Asia has the highest GDP per Capita growth among the regions. In general, developing
countries have experienced at least for one-year, negative GDP per growth.

12
The cross-country case studies have been carried out by many researchers: Levine et al. (1993)
and Levine et al. (1996) found that higher levels of financial sector stability are positively
correlated with economic development. Their findings suggest that the legal environment facing
finance sector can have a significant impact on economic growth through its effect on bank
behavior. Michael et al (2001) examined whether there is evidence of a causal link from capital
account liberalization to financial deepening and, through this channel, to overall economic
growth on cross-section of developed and developing countries, over the period 1986 to 1995, as
well as over the period 1976 to 1995. With regard to the link between financial development and
GDP growth, they noted a statistically significant and economically relevant positive effect of
open capital accounts on financial depth and economic growth.

3.3. Important Lesson to Tanzania from Global Experience

The Bank of Tanzania introduced various policies to cushion the economy from the adverse
effect of Covid-19 which affect global economy. BOT is safeguarding the financial sector
stability and facilitating the financial intermediation process. The policy measures approved
included: lowering the Statutory Minimum Reserves (SMR) requirements from 7% to 6% to
provide additional liquidity to banks, reducing the discount rate from 7% to 5% to permit banks
to borrow from the BOT at a lower cost; reducing haircuts on government securities from 10% to
5% for Treasury bills, and from 40% to 20% for Treasury bonds, to increase the ability of banks
to borrow from the BOT with less collateral; increasing mobile money operators daily
transaction limits to costumers, from TZS 3 million to TZS 5 million and daily balance from TZS
5 million to TZS 10 million, to encourage digital transactions thus reduce congestion in banking
premises; and promoting loan restructuring by providing regulatory flexibility to banks.

BOT continued to implement accommodative monetary policy, amidst a low inflationary

environment, to cushion the economy from the adverse impact of Covid-19 and facilitate the
provision of private sector credit. This was implemented using a wide range of instruments of
injecting liquidity in the economy, which included reverse repo, purchase of foreign exchange
from the interbank foreign exchange market, and inward foreign exchange swaps with banks.
Tanzania has also enjoyed emergency financial support from both the International Monetary
Fund (IMF) and African Development Bank (AfDB) to better cope with the pandemic. And the
country is one of the few to experience positive economic growth in 2020 and 2021.

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And some major commercial banks in Tanzania have actually reported an increase in net profits
in 2020 while introducing measures to cope with the impact of Covid-19. For example, Stanbic
Bank Tanzania introduced debt reliefs for its clients by providing them with a 3-6-months
payment holiday. The bank continues to provide financial advisory to its clients to ensure that
they have an effective business continuity strategy. Wingfield shares his view on the issue and
his bank’s strategy to cope with it: “The current environment is challenging and no one knows
exactly how long this pandemic will last and how it will impact our environment into the future.

BOT continue to focus on those sectors that are a priority for growth and development in
Tanzania. At present, the likes of tourism, transport, oil and gas, local and cross-border traders
are all finding the environment challenging. There are some sectors that are thriving like medical
and consumer, which present opportunities. As a leading and responsible corporate citizen in the
market we also have an obligation to do what we can to support the efforts of the Government
and other organizations to fight the pandemic and support the economy through this time.”

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 CHAPTER FOUR

ANALYSIS
4.1. Introduction
This chapter presents the Tanzanian Practices on stabilizing the finance sector with comparison
to Global Experience. The chapter will present the Prospects of Tanzania Financial Sector
Stability in the Near Future.

4.0 The performance Trend of Financial Stability in Tanzania

4.1 Performance of the Banking Sector

The financial sector’s total assets as a percentage of GDP stood at 38.3 percent as at the endof
March 2019. The contribution of the banking sector assets to GDP continued to
dominate,followed by social security schemes. In addition, the depth of the equity market as
measured by the market capitalization to GDP ratio declined to 17.2 percent from 22.4 percent
mainly contributed by decline in share prices of major domestic listed companies. During the
period to March 2019, the banking sector contributed 69.9 percent of the total assets, social
security’s schemes 27.3 percent, insurance sector 2.1 percent and collective investment schemes
0.6 percent.

Banking sector

Assets for the sector increased, owing to enhanced deposits mobilization. The banking sector
assets increased by 3.2 percent to TZS 30,888.8 billion as at the end of March 2019 financed
mainly by core deposits. Deposits accounted for 59.2 percent of total funding sourceswhile non-
core deposits contributed 25.9 percent. Borrowing accounted for 8.5 percent of the total funding,
respectively(Table 4.1).

The banking sector continued to be dominated by commercial banks with asset composition of
92.9 percent, followed by development financial institutions accounting 4.4 percent share of the
total assets. As at the end of March 2019, TIB Development Bank Ltd injected additional capital,

15
which increased market share to 4.4 percent from 3.0 percent recorded in September 2018 in
addressing the capital inadequacy problem

4.2. Tanzanian Practices and Global Experience

The financial sector went hand in hand with promotion of innovations necessary for delivery of
financial services in the country. The entry of private sector in the banking sector supported by
the policy approach of allowing fintech’s to offer financial services as well as adoption of agent
banking increased presence of innovative financial products and delivery channels responsive to
the market needs hence increasing accessibility of the adult population to financial services.

Innovations in digital finance brought a potential to revolutionize financial services, improved

data visibility for supply chain efficiency, created alternative payment instruments, increased
productivity, lowered costs of distribution and reduced risks. Digital Financial Services (DFS),
including credit, savings, insurance, transfers and payments, which are provided through
alternative delivery channels such as e-vouchers, debit cards, biometric readers and point of sale
devices made distribution more efficient while requiring accessible networks of service points.

Since the adoption of digital financial services and specifically introduction of mobile money,
over half of the Tanzanian adult population can now access formal financial services. This has
facilitated increase in financial inclusion from 11.2% in 2006 to 65.3% in 2017. Further in 2013,
BOT introduced agent banking as an alternative delivery channel for offering banking services in
a cost-effective way. It is expected that agent banking will unlock the potential of the lower
income markets and facilitate the participation of a significant proportion of the population.

In October 2016, BOT carried out an assessment on implementation of the recommendations of

Financial Sector Assessment Programmes (FSAP 2003 & 2009) and noted that, despite
remarkable achievements recorded in implementation of the recommendations, some gaps still
exist in the banking sector, long-term development finance, micro and rural finance, land reforms
and legal and judicial reforms, among others. The gaps in various areas are as follows:

a) Banking sector: tax treatment for financial leasing and establishment of secured credit
transactions legal and regulatory framework as well as collateral registry, transformation of
Deposit Insurance Board (DIB), preparation of the Banking Sector Development Policy and

16
 its implementation strategy, development of Financial Sector Crisis Management Framework
and development of a comprehensive dataset for financial stability assessment.
b) Long-term development finance: finalization of transformation of Credit Guarantee Schemes,
putting in place a Development Finance Guarantee Facility and developing a long-term
Development Finance Policy.
c) Micro and rural finance: implementation of Rural Financial Services Strategy, development
of a broad-based Financial Consumer Protection framework covering all subsectors of the
financial sector, development of a regulatory framework for credit-only microfinance
institutions, establishment of Registrar for informal financial institutions, development of
Defined as access to digital financial services through non-traditional banking infrastructure
that entails the use of alternative delivery channels that are largely driven by mobile
technology through mobile money and agency banking models. regulatory and supervisory
framework for Savings and Credit Associations (SACAs) and Community Based
Organizations (CBOs) as well as strengthening of Tanzania Cooperative Development
Commission (TCDC).
d) Land reforms: formalization of land titling process, computerization of land registries, and
adoption of measures to strengthen housing market infrastructure, availability of office space
for land and housing tribunals at district level, absence of land registries at district and village
levels as well as absence of land registry for Zanzibar.
e) Legal and judicial reforms: granting of exclusive jurisdiction over credit enforcement to the
commercial courts, formulation of insolvency regulations for the Companies Act and
establishment of a Commercial Court in Zanzibar.

It is worthy to note that Tanzania has requested for another round of FSAP which took take place
in 2018 and shed more light on areas of the financial sector that needed reforms so as to have a
financial sector with the required level of depth and efficiency adequate to support economic
growth and ensured finance sector stability.

4.3. Advice to the policy makers in Tanzania to ensure sustainable financial stability in
Tanzania.

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According to the latest Financial Sector Supervision Annual Report of the Bank of Tanzania
(BOT), in 2019 the Tanzanian banking sector grew in terms of assets, loans, deposits, and profits
compared to 2018. Banking Sector Earnings During 2019, the sector remained profitable as
depicted by Return on Assets (ROA) and Return on Equity (ROE) ratios, which increased to
1.86% and 7.13% from 1.04% and 2.88% in 2018, respectively. The increase in profitability was
driven by an increase in interest income consistent with growth in the loan portfolio, and a
decrease in interest expenses. The sector recorded a record profit before tax of TZS 590 billion in
2019, compared to TZS 313 billion in 2018 (+88%).
The sector experienced increase in lending, leading to more interest income and profitability.
Aggregate core capital and total capital ratios stood at 16.7 percent and 17.9 percent, against
regulatory thresholds of 10.0 percent and 12.0 percent, respectively. The liquidity remained
above minimum regulatory threshold of 20 percent, at 32.4 percent. although NPLs ratio declined
to 9.8 percent from 10.4 percent, it was above the desirable level and the Bank continues to take
measure to address the challenge. Borrowing by banks from domestic banks increased by 25.2
percent, while from banks abroad declined by 15.4 percent. Further, banks’ placements with
banks abroad declined by 11.6 percent suggesting increased interbank lending to domestic
market. The decline in foreign placements reflects low foreign exchange exposure. Therefore I
would advice the policy makers to conduct policy action as follows;

To lower risks and raise resilience of the banking system. In this context, they encouraged the
authorities to implement the recommendations of FSSA.

The FSSA report highlights that the country's bank-dominated financial sector is small,
concentrated, and at a relatively stage of development. Financial services provision is dominated
by commercial banks, with the ten largest institutions being preeminent in terms of mobilizing
savings and "intermediating" credit. Medium-to-small banks rely systematically more on costlier,
short-term, interbank financing and institutional deposits and have markedly higher operating
costs. Stability analysis suggests that even under a benign baseline economic outlook, solvency
positions of government-owned and smaller private banks could come under pressure while the
number of under-capitalized institutions may increase. Although the largest banks appear
relatively resilient in the face of shocks confidence spillovers under stressed times could increase
the adverse impact of shocks on these systemic institutions.
These vulnerabilities underscore the importance of a strong financial system oversight and policy
framework to preserve financial stability. Consideration of additional policy action to lower risks

18
and raise the resilience of the banking system and non-financial firms is recommended. Key
priorities include measures to reduce nonperforming loans (NPLs), increase provisioning,
increase institutional and systemic buffers to manage domestic and foreign currency liquidity
risks, and prompt payment on government-guaranteed loans and resolution of government
arrears. The report further notes that assessment against international standards spotlighted areas
requiring enhancements to banking supervision. Building on the broadly adequate regulatory
framework, priorities to enhance supervisory processes include revising the risk-based
supervision framework to introduce a single, non-formulaic risk rating system; implementing the
consolidated supervision regulation; and adequately and consistently enforcing prompt corrective
action regulations.
Directors encouraged further efforts to align the prudential framework with international
standards and best practices. They welcomed the authorities’ plans for Basel II/III
implementation in line with the East African Community harmonization commitments and
encouraged the authorities to advance the framework for identification of domestic systemically
important banks (D-SIBs).
The February 2018 circular of the Bank of Tanzania for loan classification and restructuring
could present financial stability challenges down the road and should be followed up with further
guidance on the criteria for restructuring and upgrading the problem loans. The circular also
weakens the framework and policies of the Bank of Tanzania on overseeing problem loan
management by providing banks the ability to upgrade the classification of NPLs. It is
recommended that the Bank of Tanzania follow up on the circular with further guidance on
criteria for such credits to qualify for restructuring and upgrade.
Development of agency-specific contingency plans by members of the Tanzania Financial
Stability Forum and of plans for the use of extraordinary powers to maintain financial stability
during a systemic crisis by the Ministry of Finance and Bank of Tanzania is paramount.
Operational independence and effectiveness of the Deposit Insurance Board (DIB) would be
enhanced by appointing its Board and increasing advanced planning for payouts and liquidation.
Bank of Tanzania should require recovery plans from banks and should prepare resolution plans
for D-SIBs, once identified.

19
The accommodative policy stance undertaken by the Bank of Tanzania has led to stable inflation,
exchange rate and growth of credit to private sector. Globally, growth remained subdued, owing
to continued trade tensions between Us and China, with growth projected to slow down in 2020.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1. Chapter Introduction
This chapter provides conclusion and recommendations. The conclusion will be based on
achieving the research objectives and summary of the research findings. The recommendations
will be made to the banking sector and to the institute of finance management for further studies.

5.2. Conclusion
Financial sector is among of the crucial sectors in the Tanzania Economy. It provides financial
products such as securities, protection to all human properties and health, investment, and also
provide credit facilities to the economy of the country. The sector provides facilities to almost
every aspect of human life.

In observing the stability of the sector Bank of Tanzania has a tendency of providing report
reviewing the economy monthly, quarterly, and years to asses where the sector is and also setting
new strategy to ensure the economy is stable. Keeping economy stable is accompanied with
keeping low inflation rate as well as interest are.

20
BOT also provide guidelines on how to handle the Non-Performing loan in the bank this come
from extending repayment period, restructuring of loan term, and also to use other means in
recovering them. Also, bank has taking different step to give emphasis on the banks so as to have
a required core capital and other supplementary capital to help them in period of stress.

The report was organized in five chapters including introductory and conclusion chapter. The
chapter two aimed to provides the overview of Financial Sector Stability Reporting in Tanzania
and finds that, the financial stability report is prepared by the BOT and released every march to
reflect the financial sector stability in Tanzania financial market. The chapter also presents the
Trend of Financial Sector Stability in Tanzania and finds that Deposits and Lending rates
declined from 17.0% in 2019 to 16.7% in 2020. Meanwhile, the overall time deposit rate
averaged 6.7% in 2020 compared to 7.2% in 2019. Equally, the spread between the 12-months
deposit and short-term lending rates narrowed to 7.5% from 7.9% recorded in 2019. Also,
Nonperforming Loans increased to 7.5% as at December 2020 from 6.4% recorded in December
2019. Moreover, the sector remained adequately capitalized during the period under review. The
ratios of core capital and total capital to total risk-weighted assets and off-balance sheet
exposures were 16.9% and 20.7% in 2020 compared to 16.7% and 19.3% reported in the year
ended December 2019.

In determine key measures taken by BOT to poor performing banks in recent Years, the report
finds that, the BOT provided measures and reliefs which banking and financial institutions could
take advantage of. The closure of five banks which are; Covenant Bank for Women (Tanzania);
Efatha Bank; Kagera Farmers’ Cooperative Bank; Njombe Community Bank, and the Meru
Community Bank is the evidence that there are poor banks in the country.

Chapter three presented the literature review on the key factors necessary for Financial Sector
Stability. the chapter will also cover, Important Lesson to Tanzanian from Global Experience.
The chapter four presented the Tanzanian Practices on stabilizing the finance sector with
comparison to Global Experience and the Prospects of Tanzania Financial Sector Stability in the
Near Future and finds that, the banking sector experienced increase in lending, leading to more
interest income and profitability. Aggregate core capital and total capital ratios stood at 16.7
percent and 17.9 percent, against regulatory thresholds of 10.0 percent and 12.0 percent,
respectively. The banks liquidity remained above minimum regulatory threshold of 20 percent, at

21
32.4 percent. although NPLs ratio declined to 9.8 percent from 10.4 percent, it was above the
desirable level and the Bank continues to take measure to address the challenge. Borrowing by
top ten banks from domestic banks increased by 25.2 percent, while from banks abroad declined
by 15.4 percent. Further, the top ten banks’ placements with banks abroad declined by 11.6
percent suggesting increased interbank lending to domestic market. The decline in foreign
placements reflects low foreign exchange exposure. The main challenge faced during the report
writing was time for the preparation of report and collections of data from bank of Tanzania
which mostly data observed from the internet and not physical collected from BOT.

5.3. Recommendations
5.3.1. To banking sector regulated by BOT
In order to increase the Tanzania financial sector stability, BOT needs to develop a strategy for
ensuring stability, to set up a certain “Council” for ensuring financial stability the main function
of which must be the coordination of the structures responsible for ensuring stability and
monitoring the productivity of policies pursued this purpose. To introduce instruments enhancing
the absorption ability of the risks of financial intermediation institutions, to create an efficient
management system of external and internal risks emanating from the functions of stability
insurance. To introduce the strong credit policies and monitoring strategies so to combats NPLs

The above-mentioned proposals will contribute to the improvement of joint activities of the
Tanzania government and BOT by directed to the potential external negative trends and at the
same time the development and implementation of measures which lead to stable finance.

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APPENDICES

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