Dar es Salaam. After some months of deliberation on how to recapitalize Twiga Bancorp, Tanzania’s central bank and the national banking regulator, the Bank of Tanzania, announced in a press statement issued last week that it is taking over the management of the bank.
Belonging to, funded by, and controlled by the government of Tanzania, Twiga Bancorp came into existence in 1992 as a wholly-owned subsidiary of the formerly state-owned National Bank of Commerce (NBC) and transformed into a non-bank financial institution in 1998 mandated to handle all banking transactions except the taking or accepting of current account deposits from the public.
Now, 24 years later, in 2016, Twiga Bancorp has been placed under statutory management by the Bank of Tanzania (BoT). But what is the BoT’s move, described as seemingly abrupt in certain quarters, all about? And what implications does it have for Twiga Bancorp and its customers, vendors and employees as well as potential equity investors or other banks looking to acquire or merge with the bank?
That the BoT has placed the bank under statutory management does not imply it was closed down, although the BoT said the bank will not conduct normal banking business for one week to allow for crafting arrangements for its future operations.
In reality, what has happened is that pursuant to the powers under sections56(1) (g) (i) and 56(2) (a)-(d) of the Banking and Financial Institutions Act No. 5 of 2006 (“the BFIA 2006”), the BoT has taken possession of Twiga Bancorp and now has “full and exclusive power of management and control of the affairs” of the bank.
It is these powers that have mandated the BoT to appoint a statutory manager to take charge of the bank’s affairs, both managerial and operational.
To understand why the BoT has placed Twiga Bancorp under statutory management, note that central banks in various countries have provided guidelines specifying mandatory prudential standards that banks have to meet.
The key requirements of these standards in Tanzania are that banks must manage risks inherent in their entire portfolio and hold adequate capital for the risks that they face.
But liquidity of Twiga Bancorp has been below prudential standards and the bank has been struggling to make a return. It has taken too long to face up to its problems. And the Tanzanian market it operates in has 55 banks and financial institutions.
The press statement issued by the BoT acknowledges the bank was “significantly undercapitalized” and notes that continuation of its operations “posed a systematic risk to the stability of the financial system.”
The statement further notes that with Twiga Bancorp’s capital position in the negative (-Shs21 billion), the furtherance of its operations is detrimental to the interests of its depositors.
That’s why the BoT swung the axe, taking control of the bank’s affairs and disbanding and locking out the board and management from running the bank.
Not long ago the Banking and Financial Institutions (Capital Adequacy) Regulations, 2014 (“the Regulations”) increased the minimum core capital for commercial banks to Sh15 billion, with the main objective of helping these banks hedge against the range of risks that they run nowadays.
Yet, up until its takeover by the BoT on October 28, 2016, Twiga Bancorp had no capital, but a staggering debt burden of Sh21 billion.
Fingers also point to non-performing loans (NPLs), which clog the balance sheets of banks. In its monthly economic review (MER) report for August 2016, the BoT notes that the soundness of the country’s banking sector faces risk stemming from declining quality of assets and that NPLs were 8.3 percent of the total loans as at end March 2016, compared with 6.8 per cent in September 2015.
For Twiga Bancorp, its NPL ratio had reached 34 per cent in early 2015, according to a media interview given by the bank’s former managing director, Mr. Cosmas Kimario. But the acceptable level of NPLs relative to total loans is 5.0 per cent.
This partly explains why the bank has been under heavy scrutiny by the BoT, especially in the period after President Dr John Magufuli, in a speech delivered during the central bank’s 50th anniversary celebrations in June this year, demanded that action be taken against the loss-making bank.
Thus, when efforts of the now disbanded board and management aimed at recapitalizing the bank failed, the BoT’s action to place the bank under statutory management–in order to safeguard the public from losses–became inevitable.
Remarkably, the action comes hot on the heels of a government-commissioned study on options for equity investment in the bank; a new five-year strategic plan (adopted in January this year) aimed at putting the bank’s business back on its feet; and a plan to raise capital through an Initial Public Offering (IPO) at the Dar es Salaam Stock Exchange.
Be that as it may, come end of January 2017, the BoT, represented by the statutory manager, will have to decide whether to restructure, reorganize or liquidate Twiga Bancorp–and establish a plan of resolution informed by any combination of these options, in line with section 59 (4) of the BFIA 2006 which sets a 90 days’ period within which to make any such decision after the BoT takes possession of a bank.
The manager, who’s given some terms of reference (ToR) which stipulate the working arrangements for statutory management of the bank, can exercise the powers, and perform the functions, of the bank’s board of directors–collectively and individually–until when the BoT finds it necessary to appoint new directors to constitute the board.
Supplementary powers include tracing and preserving the bank’s property and assets; recovering all debts due to and owing to the bank; and obtaining from officers of the bank any document and information, including books and accounts apropos of the bank. Officers of the bank will not be discharged from complying with this requirement on the ground that doing so would seem to implicate them or make the officers liable to a penalty.
The statutory manager can also execute contracts on behalf of, and engage in capital raising activities for, the bank; and even sell or otherwise dispose of the whole or any part of the bank’s business.
Further, if amending Twiga Bancorp’s memorandum and articles of association (memarts) will be necessary or expedient for supporting the mandate given to the manager or for safeguarding the bank’s depositors and encouraging financial system stability, then the manager may amend the memarts.
However, in carrying out his mandate, the statutory manager can take such standard precautions as: stopping or limiting payment obligations, discontinuing employment of any employee, or freezing all premature withdrawal of fixed deposits maintained at the bank.
Enter some curiosity. What can happen if the period for statutory management has elapsed and Twiga Bancorp is still unable to adhere to the minimum prudential standards and/or its continued operation is found to be no longer in the best interest of depositors, the public, and the financial sector?
The BoT will liquidate the bank or sell it–if a buyer can be identified.
On the other hand, if a turnaround effort can be made to reverse the declined fortune, the BoT will ask the government of Tanzania–the sole shareholder in the bank–to appoint a provisional board of directors. And if the board’s performance is found to be satisfactory, it will be allowed to take over responsibility for the ultimate direction of the management of the bank’s affairs.
As the BoT is currently focused on returning the bank to health, it will most likely welcome a merger or acquisition of the bank if either of these options is the most appropriate means to achieving the financial soundness of the bank.
A prospective acquirer or merging party should, however, note that in merging or selling Twiga Bancorp, redundancies are more likely to occur and trigger the provisions of the Employment and Labour Relations Act 2004 governing the entitlement of employees, who must be notified even though they cannot stop a merger or sell of the bank.
Moreover, taxation will be another key component of the merger or acquisition deal structuring; and therefore, the Income Tax Act 2004 will have an impact depending, of course, on the precise structure of the transaction.
In relation to the competition regime, the merger or acquisition of the bank will most likely also get the nod of the Fair Competition Commission (FCC).
In the face of tightening liquidity conditions and the NPLs squeeze, it is hoped that the crisis which has been exposed in Twiga Bancorp so far will give other unprofitable banks in Tanzania the impetus to merge or be acquired.
And before there is in some quarters doubt about this optimism, recall that in 1995 BoT placed Meridien BIAO Bank Tanzania under statutory management, before the Standard Bank Group of South Africa officially acquired and renamed it Stanbic Bank Tanzania.
Finally, as the banking sector is the ‘engine’ of growth of any economy, bank failures should not be allowed due to their transmissible character. Some audacious solutions are needed.