The process of building a strong banking sector is in the pipeline with at least eight banks being set to merge, a new report by EY Tanzania showed.
According to the report, the country’s banking sector is oversupplied with banks and thus mergers and acquisitions are unavoidable.
The report, compiled using last year financial results, said the county has over 45 banks and non-bank financial institutions in the country, while 10 large banks were operating about three times more branches than those owned by medium and small lenders combined.
The Tanzania Banking Sector Review, issued last week, quoted the central bank Governor, Prof Florence Luoga, saying during the merger of China Bank and NMB that there are at least eight banks in the process of merging.
"In any market, oversupply triggers a wave of mergers, acquisitions, and bankruptcies," the report said:
"The smaller banks are deficient in extensive branch networks and are unable to compete with the reach larger banks".
Though the country banking sector had 53 registered and licensed banks and non-bank financial institutions at the end of last year, the report analyses 39 banks and non-bank financial institutions.
The report categorised the banks in their areas, larger lenders with over 1.0tri/- assets and controlling 77 per cent of market share per assets which are 10.
The medium-sized banks are 19 commanding 20 per cent and the remaining 3.0per cent share among development, regional and small banks which are 10.
The total banking sector assets were 33.5tri/- at end of last year.
Those banks with over a trillion shillings in assets were Azania, Citibank, CRDB, Diamond Trust, Exim, NBC, NMB, Standard Chartered, Stanbic and Tanzania Commercial Bank (formerly TPB).
Despite the banking industry being oversupplied and Covid-19 shock in the economy, the sector assets grew by 4.1 per cent last year compared to 9.6 per cent in 2019.
"The banking sector performance was generally satisfactory. It remained stable, resilient, adequately capitalized and profitable, with satisfactory level of liquidity," Prof Luoga said recently.
Last year, according to the report, profitability remained strong despite changes in the economy.
The sector portfolio yield remained at 13.4 per cent last year significantly above the average rates paid on funds of 2.7 per cent. Interest margin stood at 75.4 per cent in 2020 from 75.7 per cent in 2019.
However, last year, 12 of the 40 banks and NBFIs recorded a loss before tax while in 2019, 17 banks documented total loss before tax.
The composition of banking sector assets includes loans, advances and overdrafts (54.1%), investment in government and debt securities (17.1%), other assets (12.8%), cash, balance with banks and items for clearing (10.8%) and balance with other banks (5.2%) of total assets.
Loans, advances and overdrafts recorded an increase of 3.9 per cent last year which is in alignment with growth in total assets. This compares to a 12.5 per cent increase recorded in 2019.
On liabilities and shareholders’ funds, customers’ deposits grew 3.4 per cent last year compared to an increase of 8.9 per cent in 2019 while shareholders’ funds grew by 8.7 per cent in 2020 compared to a 10.7 per cent increase in 2019.
In recent years there have been several reasons behind mergers and acquisitions between banks in the country.
"This included the recent changes by regulators in the operating and regulatory environment, expansion or diversification, and synergies," the report said.
Bank mergers in the country dated back to 1967 during the Arusha declaration when all eleven commercial banks were nationalized and merged into the National Bank of Commerce in Tanzania and People’s Bank of Zanzibar (PBZ) in Zanzibar.
However, after nationalisation, the era was plagued by high non-performing loans (NPL) levels and low operating efficiencies.
As a result, the financial sector reform programmes started in 1991, reducing government control in the daily management of banks and allowing privatisation in the banking sector.
This led to an increase in private banks leading to a string of merger and acquisition transactions including Delphis Bank and Trust Bank, Stanbic (T) and Meridian Biao Bank, FBME and Delphis Bank, and African Banking Corporation and ULC Bank.
Despite the reforms and merger and acquisition, the sector experienced several bank failures including Delphis Bank (2003), Karachi Company (2000), First Adili (2000).
In the Financial Sector Assessment Programme (FSAP) report for 2010, IMF recommended that BoT promotes the consolidation of medium-sized banks by judiciously raising minimum capital requirements.
In March 2015 increased the minimum capital requirement conforming with the Base III capital requirement of an additional buffer of 2.5per cent.
Since 2015, the BoT has been working to improve capital adequacy and solvency to protect the public interest and ensure a stable financial sector.