BoT upbeat on Dar es Salaam’s financial stability strategies

The lessons from the global financial crisis of 2007 - 2008 highlighted the need to gauge stability of the financial system in several economies using international standard benchmarks.

In case of the Tanzania, the stress test conducted late last year reveals that the country banking sector was safe and sound, while other financial platforms as per last week were unassailable. 

This is attributed to the fact that financial authorities including banks, insurance, pension, markets and market infrastructures, have indicated that the system is capable of withstanding current and future shocks.

The global financial crisis of 2007-2008, is considered by many economists to be the worst since the Great Depression of the 1930s. 

It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world.

In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. 

The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008-2012 global recession and contributing to the European sovereign-debt crisis.

In Tanzania, it was largely accepted that the world financial crisis and economic downturn affected various sectors of the economy, leading to the revision of projected GDP growth rates in 2008/2009. 

As observed by the President Jakaya Kikwete, the GDP growth rate for 2009 had heen reversed from expected 7.5 to 5-6 per cent.

According to the economists, the growth rate was projected at 4 per cent while the International Monetary Fund (IMF) projects at only 3.5 per cent. 

The sectors adversely affected included tourism, textile and leather, mining, horticulture, agricultural exports, foreign direct investment and decline in domestic revenue including various tax revenues like customs duty. VAT and excise duty.

The President announced a financial stimulus of 1.7tri/-, which was not intended to replace the annual budget or other development programmes, but to address transitional problems and emergencies, especially liquidity problems caused by the global financial crisis.

It was perceived to be a comprehensive plan to revive all the sectors affected by the global recession. 

The financial rescue programme targeted to protect jobs and income generating opportunities and enhance food security as well as sustain investment in the key sectors of the economy. 

Due to the decrease in demand for commodities such as cotton, buyers including cooperatives and 24 private buyers in the cotton industry suffered losses because of a fall in prices from 82 cents per kilo in 2008 to 40 cents per kilogramme in 2009.

These buyers have fatten loans from commercial banks, which have not been repaid. This means the banks would be unwilling to extend loans for crop purchasing in the coming cotton buying season and farmers would not be able to sell their crops. 

The measures taken included the commitment by the government to compensate the companies for losses incurred, amounting to 21.9bn/-.

It also involved to guarantee some banks. Some of the other measures taken was to guarantee outstanding loans at a ratio of 1:5, meaning in case of possible default the government will pay 20 pc of the bad and doubtful debts owed to banks by cooperatives and other enterprises.

The mining sector was, in the two years’ period of the rescue package, scheduled to get a tax holiday in repayment of royalties and this amounted to a loss of 500, 000 in lost royalties and the goal is to prevent them from closing their operations. 

As a result of the global economic down turn to all sectors of the economy, 48,000 jobs were lost, especially in tourism, horticulture and mining industries as well as leather and textile sectors.

The Bank of Tanzania (BoT) Governor, Prof Benno Ndulu, said in Dar es Salaam when launching the Tanzania Financial Stability Forum (TFSF) last week, that the country is financially stable and is by far well above the international benchmarks average. 

He said the banking system overall capital ratio at the moment stands at 17 per cent compared to international level of 12 per cent.

“This is a big buffer, which acknowledge the level of stability,” Governor Ndulu said, adding that: “While the liquidity ratio (the ability of banks to meet financial obligations) is double the benchmark at 40 per cent.” 

He said the banks overall profitability levels was good last year while accumulated assets were also sound and good. “The last September’s stress test was itself a manifestation of the stability of the banking system,”Prof Ndulu said.

The Deposit Insurance Board (DIB) Director, Mr Abraham Rasmini, said at the moment the board has the ability to pay fully any bank’s client who has deposited up to 1.5m/-. 

 “Deposits are safe, so to speak,” Mr Rasmini said, “the last time the banking sector experienced a shock was in 2003, when Delphis Bank went under, before that was Green Bank in 1999.”

Social Securities Regulatory Authority (SSRA) Director General, Ms Irene Isaka said the pension funds are also stable as based on the accrual valuation of 2010 and 2012. 

“At the moment the funds’ total assets are 5.3tr/- while investments are 4.2tr/- against the current total 65,000 pensioners countrywide,” Ms Isaka said.

“You can see how liquid pension funds are against the assets and investments-they are indeed very stable,” she said, attributing the trend to the youthful workforce in the country. 

She said at present the funds have registered a total of 1.6 million pensioners that include members of the National Insurance Health Fund (NIHF).

The Insurance sector is also sound and kicking, according to the Tanzanian Insurance Regulatory Authority (TIRA) Chief Executive Officer, Mr Israel Kamuzora. He said insurers are required to put aside half of the paid up capital as cushion money.

“In every cent added up as paid capital, half of it goes to the fund to safeguard the premium holder,” Mr Kamuzora, who also doubles as Commissioner of Insurance, said. 

The initial paid up capital is 1.0bn/-. The insurance firms have no access to the fund as the commissioner of insurance is the only signatory in case something goes wrong, he said.

At the moment there are 27 insurance companies, about 50 commercial and non-commercial banks, five pension funds and about 10 health insurance firms. While the Dar es Salaam Stock Exchange has listed 17 firms, of which only NICO has been delisted.

To limit the shocks, which are not severe enough to significantly impair the allocation of savings to profitable investment opportunities and spillover to the entire financial system, the government has formulate TFSF. 

The goal is to avert the crisis of one sector of the economy to overlap other sectors thus disrupting the entire financial system. Therefore it allows for an effective monitoring of interactions between financial institutions, markets, financial infrastructure and the real economy.

BoT’s with a view to identifying potential threats to financial stability devising regulatory tools for mitigating risks and putting in place crisis management and resolution mechanism. 

“It is with this in mind that our institutions worked together to create a framework for cooperation in coordinating macro-prudential oversight through the Tanzania Financial Stability Forum,” Prof Ndulu said.

The Financial Stability Forum’s work will be supported by a Secretariat to be housed at the Central Bank and will meet twice a year to review the soundness of the country’s financial system.
Source: The Daily News,, reported by Abduel Elinaza in Dar es Salaam
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