Tanzania: How JPM Administration Creates Overnight Billionaires

PRESIDENT John Magufuli is on record for having advocated that during his tenure, he would like to see more billionaires in Tanzania and people's economy raised.

When he inaugurated the parliament in November, 2020, President Magufuli stressed that he would be delighted to see more billionaires in the country. And to walk the talk in his first 100 days in office, the Central Bank issued new guidelines for financial institutions to do away with inappropriate lending to the citizens for businesses.

Keenly assessed, building a sound and strong as well as a resilient banking sector that supports various economic activities through financing is a fundamental factor that contribute to the creation of billionaires in the country.

Simply, the Bank of Tanzania (BoT) wants to create a lossless banking society in the next two years, if its new circular proves a success.

The BoT in its new circular, issued early this month, directs all banks and financial institutions to maintain a cost to income ratio (CIR) of less than 55 per cent and get the non-performing loans(NPLs) to the minimum target of less than or equal to 5.0 per cent.

The new guidelines intended outcome is more stable, liquid and profitable banks and a healthier credit system, hence more billionaires.

Also, the circular granted a period of up to 31st December 2022 to regularize the CIR or "risk regulatory sanctions".

"Banks and financial institutions with cost-to-income ratios above the acceptable level of 55 per cent are granted a period of up to 31st December 2022 to regularize the ratios," the circular said.

The directive, similarly, wants banks and financial institutions to submit by end of March a comprehensive plan with timelines, clearly indicating how they will attain the acceptable level within the granted time period.

Orbit Securities said the central bank intended outcome is more stable, liquid and profitable banks and a healthier credit system.

"If the target is successful," Orbit said, when analyzing the BoT directive, "it means by the end of 2022 there shall be no loss-making bank in Tanzania... the principal beneficiary with this outcome is the shareholders' dividends shall grow".

Moreover, banks and financial institutions have been directed to report the CIR and NPLs ratios on a monthly basis, within seven days after the end of the reference month.

"This is for the central bank to closely monitor developments of lending institutions," Orbit said.

The guideline came out at the time when the two largest banks in the country, NMB, and CRDB, had solid books with healthy balance sheets and growing businesses.

"All capital requirements and capital ratios are intact for CRDB and NMB and most banks in the economy," Orbit Securities said.

As reported by the BoT last June, the core capital to risk-weighted assets ratio in the banking sector was 17.4 per cent, above the benchmark of 10 per cent while liquid assets to demand liabilities ratio was 32.7per cent, way above the regulatory minimum requirement of 20 per cent.

The leading stock brokerage firm in the country said further that lowering the CIR ratio, which is the hurdle to most listed banks, seems more challenging than dealing with NPLs. Tanzania has some 39 banks.

"This can be mitigated through the adoption of technology in service delivery, as well as increased use of agency banking.

"The outcome, however, is likely to be redundancies and retrenchments," Orbit report said.

For instance, if everything else remains constant and drops the CIR ratio of CRDB to 55per cent from the current 61 per cent, the dividend for 2020 would have been 23/-per share, 35per cent higher than the paid 17/- per share.

It is the intent of the BoT that lending institutions become more diligent in screening potential borrowers before disbursing out credit.