Banking sector situation raises concerns: report

BoT HQ in Dar.
A recent report on banking issues shows that the ability of banks to service short-term loans decreased last year following reduction in investment in government securities, raising serious concerns.

According to the Tanzania Banking Sector review report by Ernst & Young for the year ended December 2011, the banking sector recorded an overall ratio of liquidity assets to total assets of 45 per cent compared to 50 per cent recorded in 2010.

At the same time there was a decline in liquid assets to deposit liabilities ratio from 59 per cent in 2010 to 54 per cent last year.

The liquidity ratio measures the company’s financial ability – in terms of cash or assets that can quickly be turned into cash -- to pay its short-term debts, whereby a high ratio indicates low risk of default while the opposite indicates high risk. 

The situation was found to be worrisome among the banks.

The situation may be worse this year as already some 13 commercial banks recorded loss for the first half of this year.

The report says the reduction of the liquidity ratio was driven by decrease in investment in government securities – both treasury bills and bonds.

“Investment in government securities as a percentage of total assets was at 14 per cent which was the lowest for the last six years,” says Ernst and Young in this May’s report titled ‘2011 Tanzania Banking Sector Performance Review.’

In the review, some banks emerged with low risk of defaults as they had the highest liquidity ratio. They include Amana with 80 per cent, FNB had 76 per cent, Mkombozi had 62 per cent and ICB had 61 per cent.

The five years of review found that, large banks, Non-Bank Financial Institutions and medium banks accounted to high liquid assets to total assets ratio.

It was the regional and small banks whose liquid assets to the total assets were almost low and only their liquid ratio to the total assents became at least high last year.

A percentage liquid asset to total assets shows the extent of the bank’s liquidity, which means the bank has cash to pay the debts.
Source: The Citizen,http://www.thecitizen.co.tz,  reported by Felix Lazaro
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