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Tanzania 2014 | FINANCE | REVIEW: BANKING

Banking the underbanked is the main test facing Tanzania's finance industry, though new initiatives are seeing the challenge being met.

The Tanzanian banking sector has transformed considerably over the past two decades. In the 1980s and up until the early 1990s, the system had consisted of insolvent and inefficient government-owned banks, the largest being the National Bank of Commerce (NBC), which at the time held 90% of all commercial bank deposits, and the Cooperative & Rural Development Bank (CRBD), which accounted for 5% of deposits. The balance was made up by the People's Bank of Zanzibar and the now defunct Tanzania Housing Bank (THB).

Government policies changed in the early 1990s following the implementation of market reforms, such as the Banking and Financial Institutions Act in 1991. The sector was re-opened to private investors, foreign and domestic, and saw the re-entry of the likes of Standard Chartered Bank and Barclays of the UK as well as Standard Bank of South Africa. According to Tanzania Securities research, financial institutions account for roughly $26 billion of the economy.

As of December 2013, there are 53 licensed banks and financial institutions operating in Tanzania, with listed Maendeleo opening its doors on September 9 (3Q2013 operating loss of $79 million). NBC, broken up into multiple separate banks, remains a smaller independent banking entity. Government involvement in the banking sector declined significantly, and it now owns mostly minority stakes in several institutions. Today, NBC is majority-owned by ABSA Bank Group of South Africa, while the government retains a 30% equity stake. Three domestic banks are currently listed on the Dar es Salaam Stock Exchange (DSE); this excludes the cross-listing of Kenya Commercial Bank Group. As of September 2013-mid-June 2013, the top three banks are National Microfinance Bank (NMB) on a net profit of $20.4 million, CRBD at $12.7 million, and Dar es Salaam Community Bank (DCB) at $1.55 million.

Tanzania has seen the influx of a number of foreign banks all attracted by the growth prospects for the banking sector. Some of the banks that have commenced operations include FNB from South Africa, UBA from Nigeria, Ecobank from Togo, and Equity Bank from Kenya.

PERFORMANCE

The banking sector has performed robustly overall, even weathering the global financial crisis of 2008-9. The total loan book has grown at a 22% CAGR since 2009 and deposits have grown by 19% since 2009, reaching TZS8.7 trillion and TZS16.7 trillion, respectively, as at end-2012. Non-performing loans (NPLs) have been kept in check, with the NPL ratio remaining between 6% and 10% over the past several years. According to the Bank of Tanzania (BoT) the ratio of NPLs to gross loans rose to 8.01% as at December 2012 exceeding the 5% sector benchmark and pointing to a fall in asset quality. Yet, the profitability of the top 10 or so banks that dominate the market has been good, with a return on average equity (ROAE) of 18% to 20% between 2009 and 2012.

GROWTH DRIVERS

Over the past decade, the sector has been growing at about 20% annually. Total banking sector assets in December 2001 were TZS1,782 billion ($1.1 billion); by December 2012 they were TZS21,031 billion ($12.8 billion). With GDP growth of around 7% for the last several years, and that growth forecast to be maintained for the next several years, the banking sector is expected to continue growing at a similar pace, barring any significant negative shocks.

According to a study by FinScope in 2010, only 17% of the Tanzanian population have formal access to financial services and 27% have informal access. That means that about 56% are currently excluded entirely from accessing financial services. This has attracted several micro finance-orientated organizations that target the so-called “bottom of the pyramid." Access Bank, a German-funded international microfinance group, and Equity Bank Group of Kenya are two institutions that have entered the market to solve the micro finance challenge.

AGENCY BANKING

The BoT recently published guidelines on agency banking in the country. It defines agency banking as “the business of providing banking services to the customers of a banking institution on behalf of the banking institution under a valid agency agreement." Agency banking has been shown to help banks reduce their cost base by enabling them to avoid investing in brick and mortar branches or expanding their staff levels. It is hoped that Tanzanian banks will be able to reduce their operating costs and as a result it will allow them to extend their services into rural areas, reaching a greater segment of the national population and ultimately increasing financial inclusion.

In February 2013, NMB and Vodacom Tanzania, one of the largest domestic banks and the largest mobile network operator respectively, signed an agreement to allow the provision of deposit and transfer services through Vodacom's M-Pesa agent network. The extension of the deposit channel will enable NMB customers to utilize over 40,000 M-Pesa agents to make deposits directly into their bank accounts. NMB customers are now also able to transfer money from their bank account directly into a Vodacom M-Pesa wallet. While it is early days yet in Tanzania, the experience of other countries employing the agency-banking framework has been very positive, so it bodes well for Tanzania.

SME ACCESS

SMEs play an important role in a country's economy and development. Studies indicate that in developing countries SMEs contribute on average 60% of total formal employment in the manufacturing sector. The same holds for Tanzania; according to the Tanzania Investment Centre (TIC), SMEs contribute around 30% of Tanzania's GDP and they make up the second largest employer after agriculture. There are an estimated 2.7 million SMEs across the country, and together they employ between 4 million and 5 million people out of Tanzania's total working population of some 25 million.

The revenue potential for banks that this market holds is significant, and many local players have recognized this. Some have established separate units to be more responsive to the needs of their SME clients, in recognition of the inherent differences between the SME and consumer and corporate business. Some are allocating resources to provide training to their SME clients to improve their management skills and financial reporting. Though loan products remain largely standardized, there is an observable trend toward increasing customization, and a few banks are pursuing innovation and differentiation as a part of their SME strategy. Lending remains overall based on collateral. Risk management is becoming increasingly automated even though most banks, with the exception of foreign-owned institutions, have yet to embrace the large-scale use of scoring and risk-rating technologies.

The SME segment in Tanzania is very hungry for credit; it needs this for start-up capital, for working capital, for capital expenditure, and for investments. Servicing this growing segment will be another key growth driver for the banking sector in the years to come.