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Tanzania Orders Banks To Slash Expenditure, Reduce Non-performing Loans

Bank of Tanzania gave lenders until the end of 2022 to reduce their cost-to-income ratios to below 55% and to cut non-performing loans to below 5% of their books

Tanzania’s central bank ordered the nation’s lenders to deal with souring loans and slash costs, threatening jobs in the latest industry reforms announced by President John Magufuli’s government.

Bank of Tanzania gave lenders until the end of 2022 to reduce their cost-to-income ratios to below 55% and to cut non-performing loans to below 5% of their books, according to a Jan. 22 circular signed by Bernard Kibesse, the deputy governor in charge of financial stability.

That compares with an average NPL of 11% in April 2020, according to central bank data, after five years of bad debts that hit lenders in the East African country and suppressed the growth of credit to businesses and households. The cost-to-income ratios of the 10 biggest banks range from 57% to 80%, Dar es Salaam-based newspaper Citizen reported, without saying where it got the data.

“It will not be an easy task for most banks and financial institutions,” said Ivan Tarimo, a partner at financial advisory firm Bankable Tanzania. “The potential negative side is that some banks may be forced to reduce their staff numbers or some of their marketing costs and leases may have to go.”

The spike in credit impairments in recent years was driven by a combination of economic developments and prudential action that forced banks to keep bad loans on their books for a longer period before writing them off. The central bank also introduced stricter capital buffer rules that resulted in several industry tie-ups.

In its latest move, the central bank ordered lenders to freeze dividends and bonus payments and warned those that fail to comply with its directives will be “subjected to regulatory sanctions,” according to the directive.

“The government is also championing the consolidation of the industry so that we have fewer but deeper banks and the third agenda is to push banks to digitize faster,” Tarimo said.

Over the past two years, the central bank has approved mergers and acquisitions of at least five local banks and said it wants to see more consolidation.

Since coming to power in 2015, Magufuli’s government has introduced reforms targeting businesses, especially in the mining and telecommunications companies, that critics say have had a chilling effect on foreign investment inflows.