Behaviour of Banks Financial Development in Tanzania: Challenges - - PowerPoint PPT Presentation

Behaviour of Banks

Financial Development in Tanzania:

Challenges for industrial development and job creation

Susan Newman (Univ. of the West of England & Univ. of Johannesburg)& Blandina Kilama (REPOA Tanzania)

A JOINT REPOA/ UNUWIDER CONFERENCE Transformation for Growth, Employment and Poverty Reduction Hyatt Dar es Salaam, Tanzania 28 November, 2016

Outline Outline

• Introduction and Background
• The Study: Dynamics of Real

Sector vs Financing

• Empirical observations
• Historical Evolution
• Results -Key informants interviews
• Conclusion

Introduction

The Share of Agriculture in GDP has been falling in real and relative terms

• The share of agriculture - ↑from 26.8% in 2007 to 31.2% in 2013 (at basic prices),
• The share of agriculture - ↓ from 26.8% in 2007 to 23.8% in 2013 (at constant prices)

The Share of Industry and Service has been rising

• The share of industry - ↑ from 20.2% in 2007 to 22.7% in 2013 (at basic prices),
• The share of industry - ↑ from 20.2% in 2007 to 21.5% in 2013 (at constant prices),
• The share of services - ↑ from 47.4% in 2007 to 41% (at basic prices) and 48.7 (at constant

prices) in 2013,

Employment:

Agriculture employs the majority- increase employment in informal sector - secondary activities dominated by construction and mining

• The share of employment in agriculture ↓ from 84% in 1990/91 to 74.6% in 2010 (note the

change in definition) to 65.6% in 2014

• The share of employment in industry observes little change while service experience a small

rise in employed persons.

• Of those engaged in informal sector, service accounts for most of the employed persons, with

doubling from 12.4% in 2006 to 26.4 in 2014.

• A view of secondary activities offers a different perspective, where construction takes a lead

while on the informal secondary activities mining takes a lead.

Dynamic Dynamics s of

• f Finan

Finance an ce and d the R the Real eal Economy Economy

Financial development a crucial determinant of high economic growth rates.

• Tanzania has seen expansion of providers of finance

from registered banks of non-bank depository

• rganisations, micro lenders and other financial

institutions

• Financial intermediation itself, based on its

measured contribution to GDP, has been growing at an average rate of 10.6% per annum between 2005 and 2010 compared 7.5% for the five years between 1999 and 2004

The study broadly aims to provide knowledge on types of financial institutions, financial regulation and industrial policy that are more likely to support rapid sustainable accumulation, job creation under improved labour conditions and relations

Main Questions

• How are finance allocated across economic

activities?

• What intermediary institutions make up the

Tanzanian Financial Sector and what are their

• peration modalities?
• What is the relationship between operation

modalities and credit extension? Dyna Dynamics mics of

• f Fina

Financ nce e an and th d the e Rea eal l Econ Economy

• my-2

Data source: BOT 2013

0.2 0.4 0.6 0.8 1 1.2 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Deposit Money Bank Assets/ (Deposit Money + Central) Bank Assets

Low income median Tanzania lower middle income median 0.1 0.2 0.3 0.4 0.5 0.6 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Liquid Liabilities/GDP

Low income median Tanzania lower middle income median 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Central Bank Assets / GDP

Low income median Tanzania lower middle income median 0.2 0.4 0.6 0.8 1 1.2 1.4 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Bank Credit/ Bank Deposit

Tanzania Low income median lower middle income median

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

0.5 1 1.5 2 2.5 2000 4000 6000 8000 10000 12000 14000 16000 Jun-94 Aug-95 Oct-96 Dec-97 Feb-99 Apr-00 Jun-01 Aug-02 Oct-03 Dec-04 Feb-06 Apr-07 Jun-08 Aug-09 Oct-10 Dec-11 Feb-13 Billions TSh (current) Deposits Domestic credit Ratio of credit to deposits (right axis)

Data source: BOT 2013

Deposits into and credit extended by all depository corporations in Tanzania

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

Data source: BOT 2013

50 55 60 65 70 75 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 2007 2008 2009 2010 2011 2012

Percentage TSh millions Total domestic lending by commerical banks Securities held by commercial banks (asset???) Deposits in commercial banks Lending to deposit ratio (right axis)

Commercial Banks and the Allocation of Capital in the Tanzanian Economy

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

Data source: BOT 2013

Liabilities

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 TSh millions 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 18,000,000 20,000,000 2007 2008 2009 2010 2011 2012 TSh millions

Liabilities of Commercial Banks

Deposits Bank of Tanzania Due to other domestic banks Other domestic Foreign banks Foreign Other Capital and reserves

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

Data source: BOT 2013

Deposits

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 2007 2008 2009 2010 2011 2012

Commercial bank deposits by depositor type

Central Government Other Financial Corporations State and Local Government Public Nationalfinancial Corporations Other Nonfinancial Corporations Other Resident Sectors Other Depository Corporations Non-resident 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

Data source: BOT 2013

Domestic Lending

0.00 1,000,000.00 2,000,000.00 3,000,000.00 4,000,000.00 5,000,000.00 6,000,000.00 7,000,000.00 8,000,000.00 9,000,000.00 10,000,000.00 2007 2008 2009 2010 2011 2012 Millions TSh

Composition of domestic lending by commercial banks 2007-2012

Loans to the Central Bank Loans to Other Depository Corporations Loans to Other Financial Corporations Loans to Central Government Loans to State and Local Government Loans to Public Nonfinancial Corporations Loans to Other Nonfinancial Corporations Loans to Other Resident Sectors Loans to Non-residents 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 Millions TSh

Som Some e Obser Observa vations tions at the t the Na National tional Le Level el

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % of total credit extension by commercial banks

Lending by Commercial Banks

Loans to Nonresidents Loans to Other Resident Sectors Loans Other Nonfinancial Corporations Loans Public Nonfinancial Corporations Loans State and Local Government

Data source: BOT 2013

Some Some Obs Obser erva vations tions at the t the Na National Le tional Level el

Data source: BOT 2013

• 20%

0% 20% 40% 60% 80% 100% 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 % total credit extended by commercial banks)

Commercial bank domestic lending by borrowing sector

Personal and other services Tourism, hotels and restaurants Trade Transportation and communication Building, construction, real estate and leasing Mining and manufacturing Financial intermediaries Agriculture, forestry, fishing and hunting

From Nyerere to Magufuli

• During the reign of Julius Nyerere: (1961 to 1985): Tanzania

was under the plan economy where the government was the major allocator of resource.

• Thus the banking system went hand in hand with the implementation of

the plans envisioned

• Industry was the highest priority – supported by the funding provided by all

banks towards agricultural and industrial development - manufacturing and mining.

• During Liberalisation - the reigns of 2nd to 4th President we
• bserve that –
• The financial sector have increased domestic savings, this has largely not

translated to commensurate increases in productive investment.

• Credit expansion has favoured personal services, re-estate and

construction.

• The 5th President – Dr. J. P. Magufuli reign calls for Industrialisation

Lend Lending by ing by comm commer ercial cial bank banks

Data source: BOT 2013

Agriculture, Hunting and Forestry 11% Fishing 0% Financial Intermediaries 3% Mining and Quarrying 1% Manufacturing** 11% Building and Construction 5% Real Estate and Leasing 5% Transport and Communication 7% Trade 21% Tourism 1% Hotels and Restaurants 4% Warehousing and Storage 0% Electricity 4% Gas 1% Water 0% Education 2% Health 0% Personal and Other Services 24%

2012

Agriculture, Hunting and Forestry 12% Fishing 1% Financial Intermediaries 2% Mining and Quarrying 1% Manufacturing** 14% Building and Construction 3% Real Estate and Leasing 3% Transport and Communication 9% Trade 17% Tourism 1% Hotels and Restaurants 5% Warehousing and Storage 0% Electricity 3% Gas 2% Water 0% Education 1% Health 0% Personal and Other Services 26%

2010

Str Structu ucture of e of TZ f TZ financia inancial l sec sector tor

Total Assets held by bank-financial institutions in Tanzania on 31 December 2013 Data source: BOT 2013

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 1 3 5 7 9 11131517192123252729313335373941434547495153

(% total assets)

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53

Str Structu ucture of e of TZ f TZ financia inancial l sec sector tor

Data source: BOT 2013

1 2 3 4 5 6 7 8

Asset to deposit ratio for bank institutions in Tanzania (in order of bank size - largest on the left)

Se Segmen gmenta tation tion comm commer ercial cial bank banks

Data source: World Bank Financial Development Database 2013

0.2 0.4 0.6 0.8 1 1.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Concentration: ratio of three largest banks' asstes to total banking sector assets

Low income median Tanzania lower middle income median 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Return on Assets

Allocation of credit to SME

• With liberalisation we see the segmented market

that is not wholly supportive of industrial development and real investment.

Evidence from 20 interviews and secondary data

• The top 7 banks support the multinationals institutions
• The remaining of the banks, medium and small - provide

short-term and small loans.

• Leaving a huge gap between what the top banks provide

and the other 40 banks

SME example :

• There are only a handful of financial institutions (FI)

supporting informal SMEs.

• Mainly due to informality nature of operations of most SMEs
• FI create their own ways of tracking their lenders given gaps

in registrations (civil, property) and labour statistics.

Lending assessment for (informal) SME

First of all you come here we see you, number two you open account, the account you open you sign background check at reception file then the next morning I call and I tell you if we want to deal with you

• r we don’t want, so you get something like in 24 hours. So we do work with people they want to work

with us. [Thus], if you did false declaration or if anything is wrong with your file will call you back the next

• morning. We are unlike the banks where one or 3 months waiting is a norm. You come here 24 hours you

know if you have a deal or you don’t have a deal. Now if you have a deal we will dispatch to you a team, and team will go meet you and see your business, take pictures, see where you are living take pictures, collects documents, collect your story and prepare a loan application form. This takes about 4 days if you are available, if you are here available within 4 days your file is ready. Once file comes to BANK W it will go to a team of credit analysis so those credit analysis will look and see if your history makes sense. If it doesn’t make sense, we will call back the prospective client and find explanations. This is what we are doing here and it takes 24 hours, within 24 hours if the business is making sense goes to the credit committee and the end of 24 hours so the next day we call client and we say you request for 40 million and unfortunately your repay capacity or so what whatever we cannot go more than 25 million, yes we give to you and you still agreeable yes so we go to lend out. CASH FLOW

Con Conclusion lusion

1. Financial development alone does not necessarily result in an allocation of capital that is conducive to high real investment, accumulation and employment generation. 2. A developmental financial system needs to be closely related to industry and industrial policy. 3. In particular, medium and smaller banks that serve domestic enterprises lack long-term funding that would allow for long-term lending for innovation and industrial development.

• from our interview, long-term funding was an issue esp. issue of

maturity mismatch.

‘A credit regime [could entail] micro-banks, more democratic control over national banks and credit allocation to enforce planning…qualitative capital controls; and restructured international agencies that regulate credit repayment and long term capital flows’.” Albo 1997, p32

Thank hank You

• u

REPOA 157 Mgombani Street, Regent Estate P.O. Box 33223, Dar es Salaam, Tanzania Tel: +255(0)(22) 270 00 83 / 277 57 76 Fax: +255(0)(22) 277 57 38 Email: bkilama@repoa.or.tz OR repoa@repoa.or.tz www.repoa.or.tz Twitter: @REPOA