Published On: Wed, Sep 7th, 2016

‘Mobile phones have shown they can be an effective channel through which basic financial services can be provided’

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With the recent launch of M-Pawa by Vodacom and CBA, the landscape of the Tanzanian banking sector seems like it is going to change rapidly in the coming period with profound impact on the country. To understand how the local banking sector is shaping up, Orton Kiishweko spoke with Mr. Manzi Rwegasira to get this thoughts and analysis on the current state of the sector and how it is likely to develop.
Mr. Rwegasira is a former investment banker. He worked for many years for Bank of America Merrill Lynch and Barclays in New York and London, specialising in the banking sector. Mr. Rwegasira holds a Master’s degree in Finance & Investments from Rotterdam School of Management in The Netherlands.In the past, Mr. Rwegasira authored the “2013 Tanzania Banking Survey” published by Serengeti Advisers Ltd.

1. What is your quick assessment of the current state of the banking industry in Tanzania?
I think the macro picture is one of rapid growth and development but a closer examination reveals a slightly more complicated and nuanced picture with big banks outperforming small banks; technological change being both an opportunity and a threat and some banks being seemingly ill-prepared to handle the shifting dynamics.
2. Do you think the mobile phone may ultimately compete with banks in Tanzania?
I think the answer to this question is that it depends. Mobile phones have clearly shown that they can be an effective channel through which basic financial services can be provided; whether it be remittances, savings or even loans. So banks have an opportunity to utilise mobile phones to reach their customers. A number of local banks are already offering mobile/sim banking services.

Currently BOT regulations prohibit non-banking institutions from holding deposits, which means that the telcos that own the mobile money platforms, MPESA, Tigo Pesa or Airtel Money, cannot offer real banking services without partnering with a traditional bank.
But there’s no reason one of the telcos cannot establish a separate entity of their own with a banking license. The multinational telcos can afford the banking license and they can acquire the management expertise to run the operation. They have strong established brand recognition; a dispersed agent network to utilise and a large existing customer base which they can tap into. Tigo, for instance, has close to 6 million mobile subscribers; if it launched a bank tomorrow and only 25% of its mobile customers joined Tigo Bank; it would still be a bank with 1.5 million customers. That would place the bank in the Top 3 in the country by number of customers. Local banks would be wise not to dismiss that as a possibility.

Interestingly, Equity Bank in Kenya recently acquired a telecoms license in a strategic move against Safaricom’s MPESA service. So it would seem that both shifts are possible.
3. How do you think current trends could shape the future of Tanzania’s banking industry?
I think 3 forces will shape the future of Tanzanian banking sector in the medium term:
1. Technology
a. Mobile technology developments will increase competition for customers, particularly on the retail side. Mobile technology is lowering the cost for banks to reach customers, which means the big local banks which used to enjoy the advantages of having a wider branch network and greater brand recognition may find themselves competing on a more level playing field now, where several banks having as much a reach as they used to have. Hence there will be more competition between banks to capture retail deposits and to provide retail loans.
2. Regulations
a. New capital requirements introduced by the BOT in 2010 will force consolidation in the market. The new minimum capital requirement for commercial banks is now TSH 15 billion (up from TSH 6 billion previously). Commercial banks have until 2015 to comply; as at December 2012, 23 of the 32 or so commercial banks were in compliance. The minimum requirement for community banks was also raised from TSH 250 million to TSH 2 billion and they have until 2017 to meet this requirement. As at December 2012, no community bank was in compliance. Not all banks are likely to meet these new requirements by the stated deadline, so it’s likely that there will be some forced consolidation of the market and some banks may cease to exist.
3. Regional competition
a. Finally, I think regional competition will have an influence on the shape of the market. We already see several new entrants into local banking market from neighbouring countries and from further afield. They are bringing with them new operating techniques and new technology. Local Tanzanian banks will have to compete for customers and talent and they’ll have to conform to these new regional standards; some banks may not survive.
4. Over half of Tanzania’s adult population currently have access to financial services compared to just 27% in the year 2009, thanks to mobile phone money services. Is the coming of mobile money a blessing to banks?
As mentioned already; mobile phones provide a convenient way through which basic banking services be can be distributed quickly and relatively cheaply; this is certainly a boon for banks. However, what we see in the 2013 FinScope survey released a few months ago is that almost all this increase in financial inclusion is driven by the telcos and the increased penetration of services such as MPESA, Tigo Pesa and Airtel Money – so-called non-traditional financial services. If you exclude this category of financial services and focus squarely on traditional banking, you see that banking penetration in the country has barely changed in the last 5 years; banks have done very little to grow the market. Local banks, particularly the big ones, are still feeling secure, taking comfort in the fact that the vast pools of money that the likes of MPESA and Tigo Pesa hold are obligated to be held in trust accounts in their banks. However, that could change relatively quickly. There is value in owning the customer relationship which telcos do now at present. Telcos may decide to setup banks of their own, if that happened (and it’s not far-fetched) how would traditional banks respond?
5. There is still a challenge of access to financial services across the country to entrepreneurs and common people. What should be the remedy?
Some of the policies being implemented by Prof. Ndulu and his team at the Bank of Tanzania are encouraging and will likely do a lot to improve financial inclusion. The introduction of agency banking is one thing that will make access to basic banking services easier. The establishment of a credit reference bank and licensing of credit reference bureaus to recording loan data will help greatly to reduce loan default risk in the banking sector but this will take a few years for the impact to be fully felt. Lastly, technology is helping a lot, mobile money; mobile/sim banking and internet banking are all helping to improve access to financial services in Tanzania.
6. Do you view the idea of agency banking as one that could take banking to more people across the country?
Agency banking, if implemented properly, could have a very positive affect on financial inclusion in Tanzania. The BOT now allows banks to enter into agency agreements with 3rd parties so that these agents can provide basic banking services from their own premises – which means banks don’t have to build expensive bank branches. This has traditionally been one of the biggest impediments for banks to expand their networks. CRDB, for instance, recently entered into an agent banking agreement with Tanzania Posts Corporation (TPC), so now CRDB customer can access banking services with their nearest postal office. Agent banking has worked very well in Kenya and Brazil where it was introduced before; it is hopefully that its excess will be emulated in Tanzania.
7.At 53 banks, you have argued in your past writings that Tanzania could be having so many banks for a relatively small economy that is Tanzania’s. Elaborate.
The argument I make in the 2013 Tanzania Banking Survey, is that having so many banks in the country has failed to achieve the desired policy objectives and could instead be exposing the sector to undue risk to due regulatory overstretch.
My prior concern is whether regulators currently have the capacity to effectively supervise all 53 banks to ensure that all banking regulations are adhered to and that depositors’ funds are safe?
Secondly, in our 2013 survey we present evidence that the degree of competitiveness in the local banking sector has actually remained the same over the last 4 years despite several new banks entering the market. The same is true about the level of financial inclusion in the country. The 2013 FinScope survey shows that without the growth of the telcos (through MPESA, Tigo Pesa etc.), the penetration of traditional banking has barely changed in last 4 years.
Furthermore, many of these 53 banks are small, while the country needs big banks with the financial muscle to finance some of the large scale projects we need to develop Tanzania; how can many small poor performing banks help in that regard?
So the question becomes how sustainable and how desirable is it to have 53 banks operating in this market?
9. Analysis conducted in Serengeti Advisers’ recently published ‘Tanzania Banking Survey 2013’ shows that smaller banks, defined as those with total assets of less than Sh100 billion have, as a collective, been generating negative returns for the past four years. Since you authored the report, what was the factor behind poor performance by the small banks?
As you point out, one of the insights to come out of 2013 Tanzania Banking Survey is that small banks, on average, performed very poorly between 2oo9-12, generating negative returns. They had extremely high cost-income ratios suggesting that they were operationally inefficient and high non-performing loan (NPL) ratios. The underlying reasons for this could be related to the customer segment which they are targeting (lower value per customer, higher risk) over perhaps is this a result of how these small local banking institutions are being run.

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