COMPETITION IN BANKING

Following the publication of the Arusha Declaration on 29th January 1967 the foreign banks hitherto operating in Tanzania were nationalised and responsibility for commercial banking vested in the National Bank of Commerce on the mainland and the People’s Bank of Zanzibar on the islands of Unguja and Pemba. In June 9967 the National Bank of Commerce operated from 35 branches and total deposits amounted to TShs. 763 million. By June 1991 there was a network of 198 branches and 239 mobile offices accepting three times the volume of deposits in real terns. Growth of this dimension was in itself a remarkable achievement, but it was accompanied by serious and growing defects, which considerably reduced the bank8s ability to meet the demands made upon it for the purposes of economic recovery and development.

The first problem was in part a result of the bank’s own phenomenal growth. While lending in the private sector (14% of the total loan portfolio) was well managed, private deposit banking procedures developed in the days of small scale banking proved unable to meet the needs of a rapidly growing and increasingly moneterised population. The result has been growing delays, poor customer performance, inadequate internal controls and an increased resort by the public to cash transactions. There are in addition special problems arising from the parlous state of the telephone system, which affects communications with branches using telex or fax, and postal delays caused by the unreliability of the overstretched air services, It is clear that there is in the immediate future no perfect answer to the problem of organisation. Nevertheless, it is believed that the introduction of computerisation combined with measures to improve staff skills and attitudes could greatly improve standards of performance.

The tribulations of the commercial banks have, however, been compounded by circumstances beyond their control. Their role as an engine of development by financing economic enterprises has always been acknowledged, but the autonomy of the banks in deciding on the commercial justification for loans has been seriously restricted by the Government and the Party, who from time to time have insisted on loan facilities in loss making circumstances. The result has been the accumulation of bad debts which, in the case of the National Bank of Commerce, amounted in December 1989 to TShs 68,500 million. This access to loan finance for loss making parastatals, crop marketing boards and cooperative unions has acted upon these bodies as a disincentive to putting their own houses in order. Ss far as the National Bank of Commerce was concerned it has had the result that the bank was only saved from insolvency by the intervention of the Bank of Tanzania. Money creation for such purposes is a serious cause of inflation. Moreover, since the parastatals, cooperative unions and crop marketing bards accounted for 86% of outstanding bank credit, the bank’s ability to meet the needs of growth in the private sector was severely limited.

In July 1988 President Mwinyi established a Presidential Commission of Enquiry into the Monetary and Banking System of Tanzania. The Commission, working under the chairmanship of Mr. C.N. Nyirabu, a former Governor of the Bank of Tanzania, submitted its final report on 19th July 1990. The report, which, unhappily, has not yet been published, was wide-ranging and covered the entire financial sector. Since the future performance of the banks depended on Government policy with respect to the crop marketing boards among other changes external to .the banks themselves, the Commission did not hesitate to offer advice in these areas also. Above all, the Commission called for a reconsideration of the role of Government in economic affairs. It recognised the Government’s overriding responsibility by the passage of laws and the provision of the institutional framework to determine the general character and direction of economic activity, but having set up the machinery and decided on the broad lines of policy it was the duty of Government to leave commercial decisions to the banks and other financial institutions each in their own allotted spheres of activity.

The Commission recognised that the commercial banks could not operate effectively as engines of development so long as their loan portfolios remained encumbered by a very large volume of non-performing credits. Following the Commission’s advice, a Loans and Advances Realisation Trust (LART) endowed with powers as receiver and liquidator has been set up and all such loans, including assets lodged with the hanks as collateral, have been transferred to it.

Outstanding among the numerous recommendations of the Commission was their belief in the benign influence that competition could have on the standards of performance of the commercial banks and other financial institutions. This opinion was shared by the Government and resulted in the enactment of the Banking and Financial Institutions Act 1991. This Act empowered the Bank of Tanzania to license any bank, including a foreign or joint venture bank, subject to the fulfilment of certain conditions, to operate in Tanzania. So far, only the Standard Chartered Bank has been thus licensed, though other applications are believed to be in the pipeline, It is understood that Standard Chartered was intending to begin operations in 1993 and that its operations for the time being would be confined to Dar es Salaam. Provision has also been made in the 1991 Act for foreign banks not intending to transact business with Tanzania to open representative offices, Hitherto only the Equator Bank has been authorised by the Bank of Tanzania under this provision. A decision on the recommendation of the Commission to divide the National Bank of Commerce into three separate banks is understood to be in abeyance.

Owing to the overriding importance to Tanzania of the export drive, the Commission looks to the competing commercial banks to improve their procedures and to be innovative in their response to the needs of exporters. To this end they advise that the commercial banks should be allowed to hold portfolios of foreign exchange and be recognised dealers on behalf of exporters.

It is hardly surprising that far-reaching changes of the kind recommended by the Commission are taking some time to implement. They are, however, of critical importance to the country as it struggles to surmount the daunting difficulties of economic regeneration, While it is unlikely that the recommendations of the Commission will be carried out in every detail, it has certainly performed a great service in its analysis of the serious problems affecting the financial institutions of Tanzania, The changes now in train are being supported by a World Bank Financial Sector Adjustment Credit.
J. Roger Carter

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