HAVING a large number of banks in the country has failed to achieve the desired policy objectives and could instead be exposing the sector to undue risk due to regulatory overstretch, so argues banking expert
QUESTION: What is your quick assessment of the current state of the banking industry in
ANSWER: I think the macro picture is one of rapid growth and development, but a closer examination reveals a slightly more complicated and nuanced picture - with big banks outperforming small ones; technological change being both an opportunity and a threat and some banks being seemingly ill-prepared to handle the shifting dynamics.
Q: Do you think the mobile phone may ultimately compete with banks in
A: I think the answer to this question is that it depends. Mobile phones have clearly shown that they can be an effective channel through which basic financial services can be provided - whether it be remittances, savings or even loans. So, banks have an opportunity to utilise mobile phones to reach out to their customers.
A number of local banks are already offering mobile/SIM banking services.
But there's no reason why one of the telcos cannot establish a separate entity of their own with a banking licence. The multinational telcos can afford a banking licence and they can acquire the management expertise to run the operation.
They have strong, established brand recognition; a dispersed agent network to utilise and a large existing customer base which they can tap into.
Tigo, for instance, has close to 6 million mobile subscribers; if it launched a bank tomorrow and only 25 per cent of its mobile customers joined
That would place the bank in the top 3 in the country by number of customers. Local banks would be wise not to dismiss that as a possibility. Interestingly,
Q: How do you think current trends could shape the future of
A: I think 3 forces will shape the future of Tanzanian banking sector in the medium term: - Technology Mobile technology developments will increase competition for customers, particularly on the retail side.
Mobile technology is lowering the cost for banks to reach customers, which means the big local banks which used to enjoy the advantages of having a wider branch network and greater brand recognition may find themselves competing on a more level playing field now, where several banks having as much a reach as they used to have.
Hence, there will be more competition between banks to capture retail deposits and to provide retail loans.
- Regulations 2. Minimum initial capital New capital requirements introduced by the BoT in 2010 will force consolidation in the market. The new minimum capital requirement for commercial banks is now Sh 15 billion (up from Sh 6 billion previously). Commercial banks have until 2015 to comply.
Not all banks are likely to meet these new requirements by the stated deadline, so it's likely that there will be some forced consolidation of the market and some banks may cease to exist.
- Regional competition Finally, I think regional competition will have an influence on the shape of the market. We already see several new entrants into the local banking market from neighbouring countries and from farther afield. They are bringing with them new operating techniques and new technology.
Local Tanzanian banks will have to compete for customers and talent and they'll have to conform to these new regional standards. Some banks may not survive.
Q: Over half of
A: As mentioned already, mobile phones provide a convenient way through which basic banking services can be distributed quickly and relatively cheaply. This is certainly a boon for banks.
However, what we see in the 2013 FinScope survey released a few months ago is that almost all this increase in financial inclusion is driven by the telcos and the increased penetration of services such as M-Pesa, Tigo Pesa and Airtel Money - socalled non-traditional financial services.
If you exclude this category of financial services and focus squarely on traditional banking, you see that banking penetration in the country has barely changed in the last 5 years. Banks have done very little to grow the market.
Local banks, particularly the big ones, are still feeling secure, taking comfort in the fact that the vast pools of money that the likes of M-Pesa and Tigo Pesa hold are obligated to be held in trust accounts in their banks.
However, that could change relatively quickly. There is value in owning the customer relationship which telcos do now at present. Telcos may decide to set up banks of their own. If that happened (and it's not a farfetched scenario) how would traditional banks respond?
Q: There is still a challenge of access to financial services across the country for entrepreneurs and common people. What should be the remedy?
A: Some of the policies being implemented by Prof. Ndulu and his team at BoT are encouraging and will likely do a lot to improve financial inclusion.
The introduction of agency banking is one thing that will make access to basic banking services easier. The establishment of a credit reference bureau and licensing of credit reference bureaus to record loan data will help greatly to reduce loan default risk in the banking sector, but this will take a few years for the impact to be fully felt.
Lastly, technology is helping a lot - mobile money, mobile/SIM banking and internet banking are all helping to improve access to financial services in
Q: Do you view the idea of agency banking as one that could take banking to more people across the country?
A: Agency banking, if implemented properly, could have a very positive impact on financial inclusion in
This has traditionally been one of the biggest impediments for banks to expand their networks. CRDB, for instance, recently entered into an agency banking agreement with
So, now CRDB customers can access banking services through their nearest postal office. Agent banking has worked very well in
Q: With 53 banks, you have argued in your past writings,
A: The argument I made in the 2013
My prior concern is whether regulators currently have the capacity to effectively supervise all the 53 banks to ensure that all banking regulations are adhered to and that depositors' funds are safe.
Secondly, in our 2013 survey we presented evidence that the degree of competitiveness in the local banking sector has actually remained the same over the last 4 years despite several new banks entering the market. The same is true about the level of financial inclusion in the country.
The 2013 FinScope survey shows that without the growth of the telcos (through M-Pesa, Tigo Pesa, etc.) the penetration of traditional banking has barely changed in last four years.
Furthermore, many of these 53 banks are small, while the country needs big banks with the financial muscle to finance some of the large-scale projects we need to develop
How can many small poorperforming banks help in that regard? So, the question becomes how sustainable and how desirable is it to have 53 banks operating in this market?
Q: Analysis conducted in Serengeti Advisers recently published 'Tanzania Banking Survey 2013' shows that smaller banks, defined as those with total assets amounting to less than Sh100 billion, have collectively been generating negative returns for the past four years. Since you authored the report, what was the factor behind the poor performance of the small banks?
A: As you point out, one of the insights to come out of the 2013
They had extremely high cost-income ratios, suggesting that they were operationally inefficient and high nonperforming loan (NPL) ratios.
The underlying reasons for this could be related to the customer segment which they are targeting (lower value per customer, higher risk). Perhaps this is a result of how these small local banking institutions are being run.
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