IMF stresses on need to promote financial sector stability

TANZANIA: Upgrading the financial supervision and regulatory frameworks will promote financial sector stability and deepening, the International Monetary Fund (IMF) said in its recent Country Report.

Advancing financial sector deepening, while buttressing financial stability requires upgrading the supervisory framework and strengthening the prudential policy toolkit.

This includes the crisis resolution and the emergency liquidity assistance frameworks, the guidelines and limits for large exposures and the statutory minimum reserve ratio requirements.

The authorities are making efforts to enhance capabilities for monitoring and enforcement of prudential guidelines, risk-based supervision, solvency stress testing, and macro-financial analysis.

For example in its Tanzania Financial Stability Report 2022, the Bank of Tanzania (BoT) said in recognition of the global economic and financial developments, it intensified its oversight of domestic financial institutions.

Also, implemented an accommodative monetary policy during the first half of 2022 to facilitate recovery of economic activities from adverse effects of Covid-19 pandemic before shifting to a less accommodative monetary policy during the second half of 2022, in response to the spillover effects of the global economic shocks caused by the war in Ukraine.

Together with other Tanzania Financial Stability Forum members, the Bank is closely monitoring any adverse effects on the broader financial system.

Financial institutions must continue to invest in their capacity to absorb shocks by maintaining strong capital and liquidity buffers and increasing their operational resilience, including external threats like cyber-attacks.

The amendment of the Banking and Financial Institutions Act in June and issuance of capital adequacy, liquidity management, and prompt corrective action regulations in line with Basel II/III in last October are key steps towards migration to Basel II/III risk-based supervision standards.

The BoT commits to enhance the risk-based supervision (RBS) framework by creating a single RBS rating system by December this year.

Furthermore, the IMF report said the continued implementation of the Financial Sector Assessment Programme (FSAP) recommendations and close monitoring of financial sector developments are needed to contain emerging risks and vulnerabilities.

The FSAP provides a comprehensive, in-depth analysis of the resilience of a country’s financial sector.

A crucial part of the IMF’s financial surveillance, it includes ‘stress tests’ of financial institutions, an evaluation of the quality of supervision and regulation of the sector, and an assessment of the crisis management framework.

To date, more than three-quarters of IMF’s member countries have undergone assessments.

The BoT should continue to enforce regulatory actions and supervision to ensure compliance with both solvency and liquidity requirements.

It is important to continue monitoring of credit and operational risks particularly in light of the recent rapid credit growth and restructured loans and implementation of FSAP recommendations.

Key priorities include enhancing risk-based supervision and stress-test capabilities, reducing non-performing loans (NPLs) and increasing provisioning and enhancing buffers to manage liquidity, credit, and concentration risks.

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