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Bank lending challenges, prospects—Part 1

2018-08-17 22:58:45

By Paul Kibuuka

In this first article of our series on secured transactions, corporate recovery and insolvency and banking litigation, we provide the general context to the series and examine the challenges and prospects of bank lending in Tanzania.

Many businesses in the country depend on banks for short-term credit that is collateralized by illiquid assets. But tighter liquidity conditions have subdued credit growth.

Credit granted by banks contracted by 7.3 percent compared with a decline of 2.5 percent in the year ending April 2017, according to the Bank of Tanzania (BoT)’s June 2018 Monthly Economic Review.

For most banks, earnings results published indicate a decline in bank profitability for the past two years, pointing to a need for further balance sheet adjustment.

Earlier this month, the BoT took over the administration of Bank M due to “critical liquidity problems” and “inability to meet maturing obligations” in an epic crackdown that had hitherto brought under six banks, including Twiga Bancorp—now merged with TPB Bank Plc.

Weak profitability, along with non-performing loans (NPLs), is inhibiting the issuance of new credit with some banks shifting their focus on lending to individuals (See, Kamndaya, Samuel. “Tanzanian banks now banking on personal loans for profit.” The Citizen. 29 May 2018).

How do we address these structural challenges to bank lending? The government needs to stimulate investment and growth. As for the banks, they need to develop and implement strategies that strengthen loan monitoring and recovery measures. But these are not the only solutions.     

Radical forces and, in particular, disruptive fintech are also impacting on banks’ retail payments business in these times of tight liquidity.

Fintech, together with market consumer choice, is set to profoundly alter the retail payments market and eclipse bank supremacy in this market. With profits already taking a dive on lending activities, can banks ignore fintech?

How should the BoT respond to fintech? In promoting the smooth functioning of payment systems, the BoT should ensure regulatory fairness by not stifling innovation or hurting incumbent banks (See, Kibuuka, Paul. “Why simple, unified regulation for fintech is important.” The Citizen. March 22, 2018).   

Fintech firms have meteorically entered the retail payments and lending businesses, and they have increased competition and weakened the market power of banks as financing options broaden to include crowdfunding.

A drop in bank lending due to fintech disruption might inspire bank consolidation, which would be beneficial for the Tanzanian economy.

However, for the foreseeable future, it is improbable that fintech firms will displace banks in the lending business. Banks have the backbone of the Tanzanian economy since their inception, and they are also very ingrained with SMEs to be displaced from the business.  

But the work of the Capital Markets and Securities Authority (CMSA) to develop a highly securitized capital market in the long-term means that banks should identify opportunities within the local embryonic market for new financial products.

Securitization offers huge potential for banks to improve risk-sharing. Consider, for example, a local bank originating loans while an international bank securitises and markets them to foreign investors seeking exposure with Tanzanian SMEs.  

Securitisation also could help banks to resolve NPLs swiftly, thereby strengthening the banking sector.

Fruition of all this pivots on the CMSA, but it will take years to develop a highly securitized capital market.

Banks will, therefore, continue to be the major source of financing; and the BoT needs to ensure that there are no superfluous regulatory impediments in their way.

At times, new regulations come with complexity and heightened compliance costs, which could lead to banks diverting resources from lending.  

The BoT should be fully conscious of (a) the regulatory burden on banks and the latent ramifications for bank lending; and (b) the impact of ineffective banking and financial laws and regulations.

To the extent that some of the above challenges lead to intensified competition and drive innovation in financial services, they are good for a robust Tanzanian market.

Banking remains a key source of financing for businesses; therefore, we need a strong Tanzanian banking sector for a strong Tanzanian economy. Banks need to refresh their business methods and models.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. Email: paul.kibuuka@isidoralaw.co.tz. This article was published in The Citizen on Saturday, 18 August 2018.

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