ALTHOUGH the financial stability setting has become more challenging than it was a few years ago, the banking sector continues to be an integral part of the economy since when it functions efficiently plays a key role in the well-being of the economy.
Otherwise, a weak financial zone, on the other hand, not only risks the long-term sustainability of an economy but can also be a gun trigger for a financial crisis which can lead to economic crises undermining prevailing economic potential and an overall effect can be devastating to the economy that can take time to recover.
The importance of the financial sector of an economy, which includes banks and non-bank financial go-betweens’ institutions, the regulatory framework, and the ever-increasing financial products and instruments, in inspiring economic growth is normally recognised among development economists and thus why the role of the financial sector and especially that of sound banks cannot be ignored when ascertaining how the economy is supposed to perform in line with envisaged national plans.
Through the process of financial intermediation, the financial sector constantly acts as the engine of growth and more so in up-and-coming markets such as Tanzania where it is increasingly being acknowledged that the delivery of sufficient financial resources is a sine qua non for the nation’s industrial take-off, transformation, and eventual overall economic success.
Hence, financial institutions all over the world act only as intermediation agents by mobilizing financial resources from the surplus units in an economy and routing the same to the deficit entities. Many don’t realise but technically, the banking institutions do not own these resources rather to the agency theory, act as the risk managers of the finances in the execution of this financial intermediation and this is what makes banks function as unique agents that combine standard intermediation function with the payment services role.
As a stimulus in the process of economic growth, Tanzanian banking institutions to date have increasingly become deep, broad, and hi-tech in structure and operations a setting that has made some banks make a huge profit according to the analysis of audited publishes accounts.
Over the last few years, conclusively, the banking sector has undergone note-worthy changes in terms of ownership and control of its functional institutions, the depth and breadth of its trading instruments, the number and distribution of established institutions, and the regulatory and statutory framework managing the set-up and transactional relationship amongst the financial and other corporate economic entities within the system.
Amidst this revolution, although the banks are experiencing what could be regarded as high performance, because of the low capital base, the high performance attained has not been able to be translated into serious sustainable economic growth for our nation.
Like any other nation around the world, the Tanzania financial system of which the banking industry forms the dominant sector is used for conveying one or more of those vital variables for our nation’s economic growth and success.
Nonetheless, while bearing resources to national growth, sometimes an economy can encounter a lack of slow development because of inefficient finance rising from burdensome institutional debt, heavy operating expenses, and scarce or low capital among other things, due to adverse fiscal and monetary policies that occasionally could lead to the weak financial sector hence inability to effectively support the economy.
The recent bank merger that has taken place in Tanzania means the process of bank recapitalisation as an alternative means of recapitalising, but how this gentle synergy affects the economy positively or negatively is a subject that needs its chapter altogether.
An evaluation of the last banks audited published accounts of various banks in Tanzania suggests that in line with the level of demands in the economy, banks are pigeon-holed by a low capital base, indebtedness and illiquidity and come with poor asset quality, fragile corporate governance that could have led to high nonperforming loans that all together reduces available credit to boost other businesses.
Since numbers don’t lie, appraisal of the bank’s numbers in my opinion is vital because growth in the banking industry in my view underwrites considerably to the development of the economy of the nation, knowingly aware that every other sector of the economy needs the financial sector in their undertakings to achieve resounding success in the economy.
The basis for today’s discussion is not to question what the banks do nor whether they are doing good or bad deals but to add to the knowledge body of information aimed at informing the public on the impact of banks’ efficacy on economic growth.
My view is that such knowledge will empower the public to judge if the banking industry we have, and the prevailing capital base have a full impact on the economy while assisting to enhance the bank’s performance and instituting the relevance of the banking industry in the Tanzanian economy.
Data used in drawing this assessment and personal views aired here are mainly from the published banks’ audited financials covering the first quarter to the third quarter of 2022.
Gauging performance for the various bank’s years profitability parameters such as return on assets measured by profit after tax to total assets and returns on equity measured by profit after tax to shareholders.
Likewise, liquidity issues such as the current ratio measured by cash and short-term fund to total deposits and other leverage parameters such as the total debt ratio measured by loans and advances to capital adequacy ratio proxy by equity to receivables and deposits.
The aim was simply to ascertain the effect of made public financial operational performance figures on economic growth in Tanzania. Of interest, mounting from the analysis is that sustained economic expansion over the past six years as compared to similar previous other six years focusing on the bank’s published audited financial data suggests that banking sector strength has supported financial stability, but more could have been achieved if the capital base of these banks could have been bigger.
Currently, amidst global geopolitics and recovering from pandemics such as Covid-19, the financial stability mesosphere has become more inspiring than it was a few years ago.
The risks that have been with banks for some times now are a possible unsystematic increase in risk premia, debt sustainability distresses, subdued bank profitability and disparities in the nonbank financial sector that are still present. But they are no longer being mitigated by an improving macroeconomic outlook.
Bank profitability tends to go together with economic activity. Lengthier growth prospects may dip bank profitability through a reduction in lending activity and a possible increase in credit impairments. Against this scenery, I am going to focus my remarks on bank profitability.
Turning banks to maintain sustainable rates of cost-effectiveness is a key step in guaranteeing that the banking sector remains resilient, predominantly in the face of improving from any slowing economic thrust and the potential for any market distress.
Bank profitability matters for financial stability and economic growth and thus why in the banking business profits are the first line of defence against costs from credit impairment. Retained earnings are a vital source of capital, enabling banks to build strong buffers to absorb additional losses.
Those buffers ensure that banks can provide financial services to households and businesses, even in the face of adverse developments, thereby smoothing rather than amplifying the impact of negative shocks on the real economy.
Banks deprived of basic effectiveness can face higher funding costs and may be tempted to take on more risk by offering high rates to attract deposits. Weak banks are more likely to fail to extend credits than healthy banks.
When there is a weak bank with an insufficient capital base, it reduces the flow of lending to what could have been profitable firms that need funding to invest and grow their business and when such a situation happens unproductive businesses weigh on long-run economic growth. Low bank profitability can also matter for monetary policy by impairing the accumulation of bank capital over time.
Thinly capitalised banks stymie the ability of monetary policy to stimulate economic activity. Their capacity to lower the interest rates they charge their customers and increase the volume of lending to the real economy is constrained.
This limits the effectiveness of an important transmission channel of monetary accommodation, which relies on bank lending to support consumption and investment.
Although under Base III, there is a debate about whether an increase in capital requirements benefits the economy as a whole or not, in my view, subsequent analysis of banks’ financials, the higher bank capital requirements may shrink bank lending, especially to the most bank dependent borrowers, such as small businesses and this may decrease economic growth.
Equally, higher capital requirements increase a bank’s cost of equity, although reduce the cost of debt. The after-effect is that a higher cost of equity is spread onto the borrowers in the form of higher lending rates, and this reduces credit demand and slows down economic growth.
This discussion examined in detail audited banks published financials to explore how bank capital requirements and bank performance might affect economic growth.
There is a small analysis of the direct effect of capital requirements, banks’ financial performance on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth.
