The Quest for Depth


If Tanzania is to meet its 2025 vision of attaining middle-income status, it will need to corral its bank-centric financial and capital markets for greater depth by extending participation and rendering credit more accessible to SMEs, women, and the young to spur economic growth.

The banking sector represents over 71% of total financial assets, with an equal split among domestic and foreign lenders. Pension funds and insurance companies account for 27% and 2%, respectively, followed by collective investment schemes on 0.1%. With benefit payments notably outweighing contributions, the return on assets for pension funds is poor. By way of some context, the shallow financial sector is reflected in the ratio of total financial assets to GDP of 43%, of which 30pp were total banking assets, and 15% credit to the private sector for 2016. Moreover, the IMF’s data for Sub-Saharan Africa points to a median ratio of private sector credit to GDP of around 21% by 2014, just half that of the Middle East and North Africa, as well as East Asia, Latin America, and the Caribbean.

Languishing in the Shallows

There is no doubt that Tanzania must galvanize its private sector through investment, which requires proactive financial markets. Therefore, political stability will be key, along with effective regulation—in evidence—to inculcate a savings and investment culture based on systemic confidence. And yet an unwelcome hallmark of the banking system is the very short-term deposits collected and preponderance of sight deposits that could flee the system at any time. This renders many banks unable or unwilling to finance longer-term loans.
Just half of Tanzania’s total banking assets are directed to lending, which itself is wholly funded by customer deposits; as of mid-June 2016 the loan-to-deposit ratio was at 85.8%. The top-three banks extend around 45% of total bank lending. Since in Tanzania commercial banks hold the lion’s share of government securities (approximately 40%), there is scant incentive to lend to the private sector, while NPLs, too, are a sectoral headache. These were up 9.5% YoY at end-December 2016 from 6.4% presenting risk to banks’ profitability as well as future lending. As of March 2016 private sector credit growth had ground to a halt, threatening broader economic growth. Recent Bank of Tanzania (BOT) data show that YoY total domestic credit lost 1.2% in March 2017 contrasting growth of 21.1% a year earlier. State borrowing from the banking system shed 17.5%, while credit to the private sector rose 3.7%, down from 23.6% growth in quarter-ending March 2016. For 1Q2017, the overall interest rate on time deposits averaged at 10% compared with 8.86% a quarter earlier. Interest rate on one-year deposits rose to 11.65% from 11.12% QoQ. Meanwhile, the interest rate on one-year loans averaged at 16.89%, notably above the 13% of the previous quarter as banks tempted depositors, while higher overall lending rates were a telling indicator of greater systemic risk profile.

Consolidation Inevitable?

The banking sector overall is stable, where at end-December 2016 commercial banks’ capital ratio was at around 17.8% with a ratio of liquid assets to demand liabilities of 42.4%, greatly exceeding the regulatory 10 and 20%, respectively. Yet, the sector is also highly concentrated, as close to 60 banks vie for business, despite 40% of the population being absent from the formal sector. The four-largest institutions hold a combined 50% market share of total loans and deposits; the figure reaches 72% for the top-10 lenders. These are trailed by small banks incapable of any tangible contribution to the system. Yet the prevailing low minimum capital requirements—USD7 million for commercial banks, USD2.3 million for deposit-taking microfinance institutions, and just USD900,000 for community banks—has thus far curbed sector consolidation.

Recent Housekeeping

In their 1Q2017 results, many local banks tellingly revealed NPLs (15%) far greater than the BOT’s 10% threshold. State-owned Tanzanian Investment Bank (TIB) saw an alarming 30% level as of September 2016. In May 2017, the central bank, the Bank of Tanzania (BOT), seized Mbinga Community Bank (established in 2003), revoking its banking license for being critically undercapitalized and insolvent, in violation of the stipulations of the Banking and Financial Institutions Act of 2006. Earlier in the same month the same fate had befallen FMBE Bank for financial irregularities, and in 2016 state-owned bank Twiga Bancorp, for lack of adequate capital.

Financial Inclusion

While the formal banking sector is lagging, due to curbed credit lending capacity, Tanzania has taken great strides in mobile financing over recent years. By 2016, over 260,000 active mobile money access points were in use nationwide, promoting the use of m-wallets. Consequently, today over 60% of adults use mobile financing, dramatically up from 11%, although the urban bias should be stressed. More than half of local electronic transfers utilize Mobile Financial Services (MFS), the volume of which, on a nationwide network of 240,000 MFS agents, itself equates to half of GDP.


While the benefits of insurance for farmers against natural disaster is clear, a wider awareness of the benefits of saving and health insurance coverage is being spread through mobile and micro-insurance offerings. A recent product of 2016 was Bima Mkononi, launched jointly by Tigo and Bima Milvik to provide affordable hospitalization, life, and personal accident insurance as cheaply as USD0.96 for two-month coverage, or USD7.7 for 13-month coverage. Its popularity is confirmed in over 500,000 subscribers nationwide. In a bird’s-eye view, BMI estimates total insurance premiums appreciating 16.4% on average between 2016 and 2020, or 10.3% in USD terms. Life insurance has a mere 10% market share, with penetration of just 0.1%. Factors familiar to all EMs such as rising disposable income will be looked to remedy this over the coming five years. Life premiums are foreseen rising from TZS77.5 billion in 2016 to TZS127.5 billion in 2020, at an average rate of 13.3%. Meanwhile, the non-life insurance segment seems poised for an average annual growth rate of 16.8% in the 2016-2020 period, from TZS672.9 billion to TZS1.224.8 billion, driven by the motor branch. BMI estimates average growth of around 8% from 2017 to 2020 boosting gross premiums to USD48 million by the end of the period.

Capital Markets

Tanzania’s capital markets are far from a prominent generator of long-term financing. As of July 28, 2017, the MCap of the Dar es Salaam Stock Exchange (DSE), established in 1998 and listed in 2016, was TZS18 trillion. The total market capital-to-GDP ratio is at a low 20%. The state has sought to boost depth, notably by requiring mining enterprises and mobile telcos to list a minimum of 25-30% of their shares at the DSE. Moremi Marwa, the CEO of the DSE, explained to TBY that, “The government’s five-year development plan, and its emphasis on industrialization and human development, will require considerable financing.” With the economy over the next five years needing to drum up TZS107 trillion for spending on capital investment, “This is where the DSE comes in,” as FDI cannot be relied upon alone. Among several new fixed-income instruments being considered for launch shortly “are diaspora bonds, infrastructure bonds, as well as industrial development bonds (…) to maximize local and foreign resources.” Tanzania needs to shore up its financial market shortfalls in order to render itself capable of expediting economic growth through broader participation and greater depth.

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