Banks ride credit boom as deposits surge

DAR ES SALAAM: THE banking sector has undergone a profound transformation since 2020, with both credit and deposits expanding at double-digit rates, underscoring robust financial deepening but also raising questions about liquidity management.

According to the Bank of Tanzania’s Depository Corporations Survey, extended broad money supply (M3) nearly doubled in five years, rising from 29.9tri/- in December 2020 to 55.5tri/- this June.

Analysts say the growth has been underpinned by a surge in deposits, reflecting increased public confidence in the formal financial system as well as broader economic recovery from the pandemic.

Despite the strong growth, liquidity indicators are tightening.

Kelvin Msangi, a researcher and finance and economics analyst, told ‘Daily News’ yesterday that liquidity is a concern, with the ratio at 29.3 per cent in March, which has not kept pace with lending.

“In the short term,” Mr Msangi said, “banks can keep lending because deposits are rising, but with the loan-to-deposit ratio moving into the mid-80s per cent, sustaining this pace will be difficult without longer-term funding.”

He further said that a tightening of monetary policy or a foreign-exchange shock “would pressure smaller banks more than the large ones.”

Capital, however, remains strong, with adequacy ratios at 20.4 per cent and 21.0 per cent — well above regulatory minimums.

“So, solvency is not the issue; the real vulnerability is liquidity,” Mr Msangi added.

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Broad money (M2) expanded from 23tri/- in 2020 to 41.7tri/- by mid-this year, driven by household and corporate deposits. Narrow money (M1)—essentially liquid deposits—more than doubled from 14.3tri/- in 2020 to 25.7tri/- in June, showing an accelerated preference for easily accessible funds.

“That is why I would argue for stricter liquidity coverage enforcement and stress testing by the central bank, while banks themselves should lengthen funding, retain earnings and price credit more carefully,” Mr Msangi said.

The fastest expansion has been in credit to the private sector, with bank lending climbing from about 9.8tri/- in 2020 to 17.8tri/- in June. The momentum intensified after 2023 as infrastructure spending, agriculture financing and corporate borrowing picked up.

Dr Hildebrand Shayo, an economist-cum-investment banker, said that the growth of liquidity buffers has lagged behind credit expansion.

He noted that the relationship between lending and liquidity is reflected in the Loan-to-Deposit Ratio (LDR), which rose from 74.6 per cent in January 2015 to a peak of 96.6 per cent last September before stabilising at 94.6 per cent in March this year.

“This suggests that financial institutions are utilising most of their deposits for lending, leaving fewer liquid reserves,” Dr Shayo said.

Similarly, the economist added, the ratio of liquid assets to total assets decreased from 34.0 per cent in 2015 to 23.2 per cent by last June, indicating increasingly constrained liquidity conditions despite ongoing aggressive lending.

Notably, by mid-2024, the ratio of liquid assets to short-term liabilities was 26.9 per cent, slightly above the central bank’s minimum requirement of 20 per cent.

Data also indicate tightening liquidity. Bank reserves at the central bank rose modestly from 2.7trn/- in 2020 to 4.6trn/- in June, lagging deposit and lending growth. This suggests banks are stretching their balance sheets, using deposits to fund loan expansion.

Some analysts say the trends are mixed: rising deposits signal greater financial inclusion, while surging credit reflects stronger private sector confidence in construction, trade and agriculture. However, liquidity buffers lag, leaving banks more vulnerable to shocks.

“The narrowing gap between deposit growth and reserve accumulation could challenge short-term stability if economic conditions tighten,” Dr Shayo said.

He said under such conditions, financial institutions might be compelled to engage in costly emergency borrowing or utilise central bank resources, potentially reducing profit margins and threatening overall economic stability.