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Regulation on bad debts starts to hurt Tanzanian banks

Banks in Tanzania have started feeling the effects of the new regulation requiring them to write off all loans that have not been cleared in the past 12 months.

The regulation, which came into effect during the first quarter of 2018, is part of a string of measures by the Bank of Tanzania to contain non-performing loans (NPLs), boost credit to the private sector and strengthen the financial system.

Initially, the lenders would only cancel and remove from their books any loans that had been non-performing for three consecutive years.

“Following the discussions held on loan write-off and treatment of additional impairment, the Bank of Tanzania has considered and extended the effective date for writeoff of loans that have remained in the loss category for four consecutive quarters,” said the Bank of Tanzania in Circular No. FA.178/461/01/02 dated February 2018.

The BoT waived certain provisions of the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014 to pave the way for rules that would help reduce the soaring NPLs and clean up lenders’ books.

As part of these measures BoT also directed banks to reduce their NPL ratios to no more than 5 per cent and involve top management in making lending decisions on high-risk borrowers.

According to the circular, top managers should also be included in loan recovery decisions.

Distinct units

The regulator also directed lenders to set up distinct units in their credit departments dealing exclusively with credit processing, sanctioning, monitoring, administration and recovery and enforcement.

Other measures include a requirement that banks establish policies relating to debt recovery, arrears management, collateral valuation and management and early warning policy on NPLs.

A survey of Tanzanian lenders shows that they made more provisions for bad loans and reported reducing earnings for the three months to March 31, even though they did not write off any loans.

National Microfinance Bank and CRDB Bank recorded reduced earnings during the three months to March 2018.

CRDB’s net profit plunged 63 per cent to Tsh9.72 billion ($4.25 million) from Tsh26.33 billion ($11.51 million) in the same period last year, while NMB’s net profit dropped 22 per cent to Tsh31.68 billion ($13.85 million) from Tsh40.91 billion ($17.89 million) in the same period.

NMB’s loan loss provisions increased to Tsh18.12 billion ($7.92 million) from Tsh8.39 billion ($3.67 million) with no bad debts written off.

Mwalimu Commercial Bank made a net loss of Tsh1.26 billion ($551,222) from a loss of Tsh1.25 billion ($546,848) with no loan loss provisioning and bad debts written off.

According to CRDB’s unaudited financial statements non-performing loans and advances increased to Tsh396.17 billion ($173.31 million) from Tsh393.43 billion ($172.11 million).

Risky borrowers

Its loan loss provisions increased to Tsh30.84 billion ($13.49 million) from Tsh24.67 billion ($10.79 million) while the bank did not write off any loan.

While the law on NPLs is aimed at cleaning up the lenders’ books and enhancing the quality of their assets it is likely to hit the profitability of banks.

Analysts say the legislation could see banks divert their funds to government securities while shunning risky borrowers such as small and medium-sized enterprises and individuals.

Commercial Bank of Africa (CBA), a Kenyan bank with operations in Tanzania, saw its net profit for the three months to March 31 drop by more than 50 per cent, which it blamed on the new International Financial Reporting Standards (IFRS9).

The bank said the implementation of the regulation does not take into account the value of the securities held for the non-performing loans being written off in line with the provisions of the IFRS9.

Jeremy Ngunze, CBA’s chief executive in Kenya, said the new law would affect the bank’s operations in the short term adding that the lender has a plan on how to deal with the situation, without giving details.

He added that issues relating to the new law were being handled by the Tanzania Bankers Association.

“The law will only affect business plans in the short term, as banks adjust to comply with the regulation. We have a sound business strategy in place and are on track with our implementation plans,” he said.

“This is an industrywide matter and is being handled through the Tanzania Bankers Association.”


CBA’s profit after tax fell 52 per cent to Ksh701 million ($7.01 million) from Ksh1.47 billion ($14.7 million) in the same period last year with the management being forced to remove from the books Ksh565 million ($5.65 million) of the Ksh1 billion ($10 million) worth of NPLs booked during the period.

Its loan loss provisions increased to Ksh6.67 billion ($66.7 million) from Ksh5.92 billion ($59.2 million) while total NPLs and advances grew to Ksh10.82 billion ($108.2 million) from Ksh6.94 billion ($69.4 million).

The NIC Group, which also has operations in Tanzania, said  the new rule has impacted the profitability of all banks operating in Tanzania and the Kenyan lender will reassess its operations in the country and decide on an appropriate course of action by the end of the year.

“Obviously we are forced to write off loans before fully recovering the loss. We shall report bigger losses sooner rather than later. This rule is going to impact the books of all banks operating in Tanzania,” said John Gachora, NIC Group chief executive officer.

“We will follow the law and due process until the end of the year when we will decide what to do,” Mr Gachora said.

“You know, as a loan goes bad and you try to recover it, but that can take a bit of time and as you recover it, you make some provisions, but the law in Tanzania requires us to book 100 per cent loss even before you have tried to recover the loan,” he added.

Daniel Kuyoh, an analyst at Alpha Africa asset managers, said the new regulation will force Tanzanian banks to reduce lending to more risky clients in favour of corporates with health cashflow positions and risk-free government securities.

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