The Central Bank of Tanzania takes a direct approach amid tightening liquidity

The government’s process of economic reform is having far-reaching effects on various entries on banks’ balance sheets. Many reform measures, such as the more rigorous implementation of the tax code, are being felt indirectly by the banking sector in the form of rising non-performing loans and slower loan growth. However, a recent decision regarding the finances of parastatal organisations has had a direct and instant effect on sector performance. In January 2017 the government requested that all ministries, public corporations and local government authorities transfer their funds from commercial banks to the Bank of Tanzania (BoT). The move brings some advantages at the macro level. It will enable the government to manage its revenue more efficiently, and with greater oversight. Moreover, state revenue is likely to be boosted by the extra interest income made by the BoT on loans to commercial banks with a smaller deposit base to lend from.

Liquidity Squeeze

However, the removal of deposits from commercial banks in favour of a centralised system poses a significant challenge to the sector in terms of liquidity. Tanzania’s banks entered 2017 on the back of a challenging year from a liquidity perspective. In 2016 even the larger institutions faced difficulties in growing their deposits. In 2016 aggregate deposits of the big five banks decreased by 5% from TSh11.4trn ($5.2bn) to TSh10.8trn ($4.9bn).

With deposits shrinking, banks opted to incur greater interest rate expenses to attract depositors: according to the BoT, the overall time deposit rate increased to 9.25% in FY 2015/16, compared to 8.43% in FY 2014/15. During this period, banks continued to expand their exposure to the private sector. While private sector credit growth began to slow after January 2016, Tanzania’s top-five banks nonetheless increased their aggregate loans and advances by 6% over the year, from TSh7.9trn ($3.6bn) to TSh8.3trn ($3.8bn). If deposits contract and lending increases, liquidity concerns are inevitable. The January 2017 directive regarding government-related deposits therefore contributed to an already existing liquidity squeeze. While estimates vary, it is thought that approximately TSh600bn ($272.9m) belonging to different government entities was held by commercial banks under the old system. Under the revised arrangement, this sum rests with the BoT. This loss of funds has resulted in soft deposit growth across the sector in 2017, and threatens to push up interest rates further on commercial bank loans.

Policy Response

The BoT has moved quickly to counter the developing liquidity challenge. In mid-2015 it injected liquidity into the market through foreign currency swaps with a number of domestic commercial banks, amounting to $152m. This intervention succeeded in lowering a volatile interbank rate, which briefly crossed the 35% threshold in the summer.

The tightening liquidity scenario, however, has resulted in the bank taking a more direct monetary policy approach. In March 2017 it cut the discount rate (the rate it charges lenders to borrow from it) from 16% to 12%, lowering the cost of funds for commercial banks, before cutting it further to 9% in August (see Economy chapter). The move came after the IMF voiced concerns that a tight monetary policy threatened economic growth in FY 2016/17. The BoT also lowered the statutory minimum reserve requirement (the cash banks must hold as reserves for prudential reasons) from 10% to 8%, freeing up funds for lending purposes and enhancing the overall liquidity of the sector.

The impact of these measures – amid broader headwinds – is currently unclear, but there are other silver linings. The sector is receiving relief from the growth of mobile money, according to Benno Ndulu, former governor of the BoT. “There is one thing that I think may be important, and that is the sharp rise in the circulation of money based on mobile money payments,” he told OBG. “You need much less cash now to support the same amount of transactions as before. This has partly helped us to ameliorate the impact of the liquidity squeeze.”