AfricaPress-Tanzania: BANK of Tanzania (BoT) wants to create a resilient and lossless banking sector in the next two years if its new circular proves a success.
The central bank, a week ago, issued a circular directing all banks and financial institutions to maintain a cost to income ratio (CIR) of less than 55 per cent and get the non-performing loans(NPLs) to the minimum target of less than or equal to 5.0 per cent.
Also, the circular granted a period of up to 31st December 2022 to regularize the CIR or “risk regulatory sanctions”.
“Banks and financial institutions with cost-to-income ratios above the acceptable level of 55 per cent are granted a period of up to 31st December 2022 to regularize the ratios,” the circular said.
The directive, similarly, wants banks and financial institutions to submit by end of March a comprehensive plan with timelines, clearly indicating how they will attain the acceptable level within the granted time period.
Orbit Securities said the central bank intended outcome is more stable, liquid, and profitable banks and a healthier credit system.
“If the target is successful,” Orbit said when analyzing the BoT directive, “it means by the end of 2022 [next year] there shall be no loss making bank in Tanzania”.
Moreover, banks and financial institutions have been directed to report the CIR and NPLs ratios on a monthly basis, within seven days after the end of the reference month.
“This is for the [central] bank to closely monitor developments of lending institutions,” Orbit said.
The leading stock brokerage firm in the country said further that lowering the CIR ratio, which is the hurdle to most listed banks, seems more challenging than dealing with NPLs.
“…But banks may postpone dividend announcement to Q2 and/or Q3 to provide enough room to clear houses,” the report said.
However, compliance with both requirements may lead to job layouts and have an effect on national credit growth.
More than 50 per cent of the non-interest expenses in most banks originate from the salaries and benefits costs.
“This can be mitigated through [the] adoption of technology in service delivery, as well as increased use of agency banking. “The outcome, [however], is likely to be redundancies and retrenchments,” Orbit report said.
The report showed that to meet the threshold ratios, even thriving businesses may need to undercut expenses.
“[And] It would be understandable and non-surprising to see as such even in the major banks like CRDB and NMB and this shall not be a reflection to business performance but a containment of underlying operational costs,” Orbit said.
A spot analysis of the top ten banks using 2019 financial statement showed that most have CIR above 55 per cent.
Going by last year financial statement, for listed banks, so far only NMB met the central bank directive after cutting its CIR to 50 per cent from 56 per cent in 2019 and managed to maintain NPLs at 5.0 per cent.
On other hand, CRDB maintained an NPL of 4.2 per cent, but its CIR was well above the threshold at 61.6 per cent though down from 63 per cent.
