- Reduction of the Statutory Minimum Reserves (SMR) requirement.
- Relaxation of agent banking eligibility criteria.
- Limitation of interest rate paid on mobile money trust accounts.
- Introduction of a special loan to banks and other financial institutions.
- Reduction of risk weight on loans.
1.0 Introduction
On 27th July 2021, the Bank of Tanzania (“BOT”) issued a public notice explaining various policy measures that will be implemented by the BOT to promote the increase in credit to the private sector and lower interest rates. According to section 7(2) of the Bank of Tanzania Act, 2006, the BOT is expected and obliged to ensure the integrity of the financial system and support the general economic policy of the Government and promote sound monetary, credit, and banking conditions conducive to the development of the national economy.
The measures are aimed at increasing credit to the private sector and lowering interest rates which will, in turn, lessen the impacts of COVID 19 on economic activities and promote growth. It should be remembered that a similar stance was made in March 2020 whereby the BOT implemented various policy measures to mitigate the adverse effects of COVID 19 on the economy.
Such measures included reduction of the Statutory Minimum Reserves (SMR) requirement to 6 percent, reduction of the discount rate to 5 percent, reduction of haircuts on Government securities, increasing of daily transaction and wallet size limits for mobile money operators, and other measures. Read our analysis on BOT’s policy measures to remedy and cushion the economic impacts of covid-19 in Tanzania.
Despite the measures, we have witnessed a stunted growth of the economy compared to previous years. According to the World Bank, Tanzania’s real gross domestic product (GDP) growth rate fell from 5.8% in 2019 to an estimated 2.0% in 2020, and per capita growth turned negative for the first time in more than 25 years. Our Corporate Commercial Department at Breakthrough Attorneys has prepared this article for purposes of informing the interested stakeholders and the general public first about the rollout of the 2021 policy measure as well as their implications.
2.0 The sanctioned measures and their implication
The BOT approved five policy measures demonstrated and explained below;
- Reduction of the Statutory Minimum Reserves (SMR) requirement.
In the 2020 policy measures, the BOT lowered the SMR from the pre-existing seven percent (7%) to six percent (6%) aimed at providing additional liquidity to banks. The SMR is a percentage of deposit liabilities of banks collected from the public.
According to section 44(1) of the Bank of Tanzania Act, 2006 and sections 4 and 71 of the Banking and Financial Institutions Act, 2006, banks and financial institutions are required to maintain minimum cash balances with the BOT as reserves against the deposit and other liabilities of banks and financial institutions. For this year the BOT has undertaken to reduce SMR amount to banks that extend credit to agriculture. This measure, however, shall apply only to banks that extend credit to agriculture at an interest not exceeding ten percent (10%) per annum. The amount of reduction shall be equivalent to the loan extended. We believe that this policy measure will increase the circulation of money and therefore credit and capital loans to stakeholders in the agricultural sector, whether farmers or agricultural inputs dealers.
This accommodative policy stance of the BOT will contribute to a significant increase of credit in agriculture and in turn the improve agriculture, a backbone of eighty percent of Tanzanians.
- Relaxation of agent banking eligibility criteria.
Agent banking means the business of providing banking services to the customers of a bank or financial institution on behalf of that particular bank or a financial institution under an agency agreement. According to Guideline 8 of the Guidelines on Agent Banking for Banks and Financial Institutions, 2017, the requirement for a person to be appointed as an agent of a bank, he must have experience of not less than eighteen months of operating a commercial activity.
The BOT through these measures has removed this requirement and instead, a person shall be eligible to be appointed as an agent if he has a National ID Card or National ID Number.
At Breakthrough Attorneys we believe that this measure will stimulate the growth of agent banking and contribute to financial inclusion especially to rural areas and small towns where banks are not easily accessible. This measure will also work to provide employment to many youths in both urban and rural areas. Also, having an extended banking agent network will help banks to extend their coverage to such areas at a lower cost than would be required to establish bank branches.
- Limitation of interest rate paid on mobile money trust accounts.
All licensed mobile money (electronic money) issuers who are non-bank or non-financial institutions are required to open and maintain a trust account with any bank. This is in accordance with section 32 of the National Payment Systems, No. 4 of 2015. According to the latest BOT policy measures, mobile money trust account balances shall be eligible to interest rate not exceeding the rate offered on savings deposit account by the respective bank.
This limitation is expected to contribute to lowering the cost of funds to banks and reducing lending rates. It is our view that this measure will increase credit to banks considering that the law does not regulate the amount of interest eligible for Trust accounts.
- Introduction of special loan amounting to TZS 1.0 trillion to banks and other financial institutions for on-lending to private sector.
In an attempt to increase liquidity to the Banking sector BOT has undertaken to provide loans to Banks and other financial institutions, which will provide loans to the private sector at an interest rate not exceeding ten percent (10%).
The BOT has allocated TZS 1.0 trillion for that purpose whereby the same shall be given to banks and financial institutions at the rate of three percent (3%) per annum. This special loan shall be for both pre-financing and re-financing of new loans to the private sector. Again we commend this measure as it will directly increase liquidity, encourage lowering of lending interests, and ensure the availability of loans to the private sector. We expect that this measure will also save banks that undergo existential crisis and banks whose lending portfolios are waning.
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Reduction of risk weight on loans.
Under Section 17 of the Banking and Financial Institutions, Act No. 5 of 2006, read together with Regulations 9, and 10 of The Banking and Financial Institutions (Capital Adequacy) Regulations, 2014, banks and financial institutions are required to maintain the prescribed capital adequacy ratios. Currently, banks and financial institutions are required to maintain a total capital of not less than 14.5 percent of their total risk-weighted assets and off-balance sheet exposure.A risk-weighted asset is an asset classification system that is used to determine the minimum capital that banks should keep as a reserve to reduce the risk of insolvency. Assets such as loans and debentures carry a higher risk due to the possibility of defaults unlike assets such as government bonds. Capital requirements are thus designed to ensure that banks hold enough capital, proportionate to the level of risk of the assets they hold.
This means classifying loans as higher-risk asset entails that banks will have to set aside a higher amount for loan provisioning in order to maintain capital ratio requirements. This makes banks adverse and reluctant to give loans to some sectors.
The BOT undertook to reduce risk weight on different categories of loans in the computation of regulatory capital requirements of banks. Breakthrough Attorneys believe this measure will enthuse banks to give out loans to the private sector.
3.0 Our Take and Call for Further Economic Strengthening
Our Firm is of the view the fore-mentioned measures will contribute to the increase in credit to the private sector, and mitigate adverse impacts of the COVID-19 to the economy and more importantly to the private sector. We expect that the policy measures will boost liquidity in the market as well as support commercial banks with cash flow which in turn will be available for lending. The measures directed towards agriculture will boost the sector considering the number of Tanzanians currently dependent on the value chain of agriculture. Also, the BOT special loan will is an incentive to banks to avoid increasing loan interests. The implication is that money will flow from the BOT to individual banks leading to increased borrowing; hence there will be increased money circulation in the economy. It will also rescue banks with weakening portfolios from existential crisis.