Regulatory intervention by the central bank which culminated in liquidation of five financial institutions with three others put on a watch list for six months will boost confidence in the banking sector, among depositors and other players in the industry, according to experts.
They are of the view that such regulatory measures were crucial for creating trust in the delicate banking industry to assure customers that their deposits are always in safe hands. The experts were however quick to add that such actions by the Bank of Tanzania (BoT) may cause panic in the short-run, leading to what they described as “runon- the-bank” situation; this is when customers panic and rush to withdraw their deposits in times of uncertainty.
The comments were made yesterday in the wake of the decision by the central bank to put five banks on compulsory liquidation for undercapitalisation, namely Covenant Bank for Women (Tanzania) Limited, Efatha Bank Limited, Njombe Community Bank and Meru Community Bank Limited.
Also on the wrath of the BoT are Kagera Farmers’ Co-operative Bank Limited whilst Tanzania Women Bank (TWB), Tandahimba Community Bank and Kilimanjaro Co-operative Bank have been put on a six-month watch list to boost their capital.
“There is a need to conduct public awareness that the closed banks were those which were underperforming but the industry remains strong with other sound financial institutions,” a senior lecturer at Mzumbe University (Dar es Salaam Campus), Prof Honest Ngowi, explained, adding: “For informed customers, the intervention is healthy since they understand that their deposits are in safer hands under close watch of the regulator.”
The economist showered praises on the central bank for the bold decision, noting that the move will prevent financial institutions from going bankrupt and put depositors in limbo. “Underperforming financial institutions should not be tolerated since they put the banking industry in risks; let us remain with a few banks that perform soundly,” Prof Ngowi remarked.
The Head of Research at Orbit Securities Company Limited, Mr Fortius Rutabingwa, shared the sentiments.“Customers will now be assured that if anything goes wrong in financial institutions, responsible authorities will act immediately to protect their deposits,” Mr Rutabingwa, whose firm is among stock brokers at the Dar es Salaam Stock Exchange (DSE), explained.
The expert attributed the undercapitalisation that faced the five banks and the three on the watch to nonperforming loans which have been haunting many financial institutions in the country.
Last year, in an interview with International Banker magazine, the Chairman of Tanzania Bankers Association (TBA), Dr Charles Kimei, advised smaller financial institutions, particularly community and co-operative banks, to go into acquisitions or mergers to be able to survive in the market.
“Given the difficulty of obtaining working capital and because they are (the smaller banks) not very profitable, only the large ones can raise capital internationally or domestically. “The smaller banks will be forced somehow to go into acquisitions or mergers. Otherwise they will not be able to survive,” Dr Kimei, who is also the Managing Director of CRDB Bank Plc, was quoted as saying.
After news of the liquidation was made public yesterday, customers with deposits in the affected banks were panic-struck and rushed to withdraw cash, only to find the doors closed. From Kagera, MEDDY MULISA reports that one Nathan Rutashubanyuma (43), a farmer from Kilimilire village, in Misenyi District, could not believe the news. He arrived at the Kagera Farmers’ Cooperative Bank (KFCB) offices in the morning with an intention of withdrawing some money to pay school fees for his two children, only to find the doors of the bank closed.
According to KFCB former Board Chairman, Mr Gozbert Rugumira, the bank was established in 2002 with paid-up capital of 218,180,000/-, adding that the amount had shot up to 1.6bn/- by December 2013.
Speaking during the launch of the CRDB Bank branch at LAPF Building in Dodoma last month, President John Magufuli directed the central bank to close all non-performing banks. Dr Magufuli said it was better to have a few effectively performing financial institutions than having many under-performing ones.
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