Tanzania banks must comply with new minimum capital base

Saturday March 9 2013

Banks in Tanzania have been given three and five years deadline to comply with the new minimum capital requirement. Photo/FILE

Banks in Tanzania have been given three and five years deadline to comply with the new minimum capital requirement. Photo/FILE  

By JOINT REPORT The EastAfrican

Banks in Tanzania are under pressure to raise their minimum capital requirements following new regulations that apply across East Africa’s banking sector.

Bank of Tanzania (BoT) has issued a moratorium of three and five years for existing fully fledged commercial banks and community banks to fully comply with the minimum capital requirements on the back of the lapsing deadlines in Kenya and Uganda.

This was after Tanzania gazetted the new minimum capital requirements on February 23 and June 22 last year for commercial banks and community banks respectively.

“As at December 31, 23 out of 33 commercial banks had complied, while community banks are yet to comply,” said BoT in its latest monetary policy statement.

Last week, BoT warned that it will be forced to take stern action against commercial and community banks that failed to comply with the new directives to increase their capital base though did not disclose which regulatory action it will take.

Analysts said the new requirements could trigger a series of mergers and acquisitions as small lenders seek to boost their capital base.

Benno Ndulu, the BoT governor, said that the regulator was currently working on plans submitted by the commercial and community banks to assess compliance status before the deadline set in 2015 for commercial and 2017 for community banks.

Prof Ndulu said that despite the increase in the number of banks in Tanzania, the sector continues to be highly concentrated, with the top four banks accounting for about 55 per cent of both financial assets and deposits of the banking sector.

BoT wants all commercial banks to increase their minimum capital requirements to Tsh15 billion ($9.24 million) from Tsh5 billion ($3.08 million) and community banks to increase theirs to Tsh2 billion ($1.23 million) from Tsh250 million ($154,036).

“This move is expected to promote the entry of large banks and consolidation of small banking institutions,” said Prof Ndulu adding that the move would also increase the concentration of market share to fewer banks.

Kenya’s set deadline

The Central Bank of Kenya had set a deadline at the end of December last year for all commercial banks to increase their core capital to Ksh1 billion ($11.6 million).

All banks in Kenya should therefore have complied with the new rule and the banks which have issued their full year results are in compliance with the new capital requirement.

Banks in Uganda face the same requirement after Bank of Uganda (BoU) set the deadline for the beginning of March this year requiring a Ush25 billion ($9.43 million) minimum capital requirement up from Ush10 billion ($3.77 million) .

“Six of the existing 23 banks will need to mobilise additional capital to meet the March 2013 deadline,” said Maria Kiwanuka, Uganda’s Minister of Finance, Planning and Economic Development in a letter of intent issued to the International Monetary Fund (IMF) in December last year.

It is not clear how many of the banks in the country had complied with the new requirements following the lapsing of the deadline.

Central banks worldwide started requiring commercial banks to increase their capital to cushion against new risks as they expand following the aftermath of the global financial crisis, which rocked the global economy between 2008 and 2010 and whose effects are still being felt.

“Banks in the region have been growing rapidly and with growth you take in more risk so it is important to match your risks. It will also help with risk-based supervision, which is where the financial sector is moving to. Growth is different in the region so it makes more sense to have higher capital requirements in Kenya,” said Ochieng Oloo, a Nairobi based banking sector analyst with Think Business.

BoT, in its monetary policy statement said that Tanzania’s banking sector remained sound and stable in aggregate terms as reflected by the financial soundness indicators and as at the end of December last year the industry was well capitalised with liquidity levels above the regulatory requirements.

The Bank of Tanzania said that the overall quality of the industry’s loan portfolio improved as reflected by the ratio of non-performing loans to gross loans, which decreased to 7.37 per cent from 8.33 per cent recorded at the end of June 2012.

By Mary John, Hellen Nachilongo and David Mugwe