IMF Assesses Financial Stability of the United Republic of Tanzania

The FSSA report highlights that the country's bank-dominated financial sector is small, concentrated, and at a relatively nascent stage of development. Financial services provision is dominated by commercial banks, with the ten largest institutions being preeminent in terms of mobilizing savings and "intermediating" credit. Medium-to-small banks rely systematically more on costlier, short-term, interbank financing and institutional deposits and have markedly higher operating costs. Stability analysis suggests that even under a benign baseline economic outlook, solvency positions of government-owned and smaller private banks could come under pressure while the number of under-capitalized institutions may increase. Although the largest banks appear relatively resilient in the face of shocks confidence spillovers under stressed times could increase the adverse impact of shocks on these systemic institutions.

These vulnerabilities underscore the importance of a strong financial system oversight and policy framework to preserve financial stability. Consideration of additional policy action to lower risks and raise the resilience of the banking system and non-financial firms is recommended. Key priorities include measures to reduce nonperforming loans (NPLs), increase provisioning, increase institutional and systemic buffers to manage domestic and foreign currency liquidity risks, and prompt payment on government-guaranteed loans and resolution of government arrears. The report further notes that assessment against international standards spotlighted areas requiring enhancements to banking supervision. Building on the broadly adequate regulatory framework, priorities to enhance supervisory processes include revising the risk-based supervision framework to introduce a single, non-formulaic risk rating system; implementing the consolidated supervision regulation; and adequately and consistently enforcing prompt corrective action regulations. Directors encouraged further efforts to align the prudential framework with international standards and best practices. They welcomed the authorities’ plans for Basel II/III implementation in line with the East African Community harmonization commitments and encouraged the authorities to advance the framework for identification of domestic systemically important banks (D-SIBs).

The February 2018 circular of the Bank of Tanzania for loan classification and restructuring could present financial stability challenges down the road and should be followed up with further guidance on the criteria for restructuring and upgrading the problem loans. The circular also weakens the framework and policies of the Bank of Tanzania on overseeing problem loan management by providing banks the ability to upgrade the classification of NPLs. It is recommended that the Bank of Tanzania follow up on the circular with further guidance on criteria for such credits to qualify for restructuring and upgrade. Additionally, the report states that financial crises management can be significantly enhanced by operationalizing the existing framework. Development of agency-specific contingency plans by members of the Tanzania Financial Stability Forum and of plans for the use of extraordinary powers to maintain financial stability during a systemic crisis by the Ministry of Finance and Bank of Tanzania is paramount. Operational independence and effectiveness of the Deposit Insurance Board (DIB) would be enhanced by appointing its Board and increasing advanced planning for payouts and liquidation. Bank of Tanzania should require recovery plans from banks and should prepare resolution plans for D-SIBs, once identified.

Related Link: FSSA Report

Keywords: Middle East and Africa, Tanzania, Banking, Insurance, Macro-prudential Policy, FSAP, FSSA, NPL, D-SIBs, Stress Testing, Bank of Tanzania, IMF