Tanzanian bank regulators address declining credit growth

The slowing growth rate of credit to the private sector has emerged as a key industry issue in 2016 and 2017. After expanding at a rate in excess of 20% throughout most of 2015, central bank data shows that in January 2016 growth began to decline sharply. By October 2016 credit expansion to the private sector had fallen beneath the 10% level, and by April 2017 it had declined to just over 3%. Tightening liquidity is a primary cause of this phenomenon, and one which the Bank of Tanzania (BoT) has attempted to counter by making changes to both the discount rate and the statutory minimum reserve requirement (see analysis). However, the rise in the number of delinquent loans in the system is also acting as a brake on credit growth. The non-performing loan (NPL) ratio in the banking sector increased from 7.5% in May 2016 to 9.1% by September of that year – settling into a range considerably in excess of the BoT’s advisory threshold of 5%. Particularly affected were the agriculture and trade sectors, which both showed NPL ratios of nearly 20% at the end of September 2016. Given the large role that lending to trade plays in the sector’s aggregate loan book, where it accounts for over 20% of the total, this deterioration of asset quality has resulted in a marked tightening of lending conditions.

External Shocks

The problem facing the BoT as it sets about tackling NPL levels is that many of the underlying causes lie beyond its control. The recent uptick in NPLs is a regional trend – both Uganda and Kenya have suffered similar rises – largely driven by external factors. The greatest exogenous shock in Tanzania’s recent economic history was the global financial crisis of 2008, which saw NPLs rise and credit contract in 2009 and 2010. Currently, Tanzania is feeling the effects of the commodities crunch of late 2015 and 2016, which saw Brent and West Texas Intermediate crude oil drop below $40 per barrel, and the price of iron ore hit its lowest level since 2005. However, GDP has grown at 7% per year since the 2008 credit crunch, indicating internal stability despite external challenges.

Industrialisation Agenda

Nevertheless, the government has initiated moves to industrialise the country and improve linkages with the agricultural sector. The shift towards an industrial outlook has changed investment perceptions of pension funds, which previously invested largely in real estate, and is expected to have a multiplier effect in income generation, and the creation of jobs and sector linkages. However, for long-term and sustainable industrial development, investment in human capital, research and development, technology, energy for power reliability, mechanisation in agriculture, and an enhanced legal and tax-friendly environment will be needed. Efforts to address fiscal impediments and effective monetary policy will largely address the short-run price volatility, in line with the country’s long-term development objectives, Charles Itembe, managing director of Azania Bank, told OBG.

Looking Ahead

The BoT has started by reaffirming its 5% NPL target and asking banks that have exceeded it – most of which are at the smaller end of the scale in terms of total assets – to submit a strategy of how they intend to bring their ratio within range. By reducing the discount rate from 16% to 12% in March 2017, the BoT has also made it easier for commercial lenders to borrow and boost their lending activity. While accelerating credit growth does not alter the status of existing NPLs, loan growth could see them decrease as a proportion of gross lending, and thereby bring banks with high delinquency rates back towards the prudential norm.

Lastly, there is the question of loan restructuring. The BoT took a proactive stance on the matter in the wake of 2008, assisting with restructuring negotiations and waiving interest payments. The question of restructuring was reportedly raised during a meeting between the Tanzania National Business Council and President John Magufuli in May 2017. Should the NPL rate remain at its elevated level for a sustained period, the BoT may once again choose to adopt the role of mediator between lenders and their clients.