DAR-ES-SALAAM, Tanzania's banking sector is bracing itself to face new challenges as the New Year looms after navigating waves of challenges which have impacted their profitability levels and lending capacity in the last two years, according to the Weekly Financial Markets Synopsis from securities firm Orbit Securities.
An Orbit Securities analyst says the banking landscape is poised for change when banks start to use new account procedures under International Financial Reporting Standard (IFRS) 9. Adoption of IFRS 9, starting in January 2018, is another area that could affect the banks' bottom-line, the analyst says.
IFSR 9 requires banks, among other things, to recognize in their books loan impairment before the loss event occurs. This means banks have to set aside funds out of their revenue, reducing their profitability margins.
President John Magufuli last week told the Bank of Tanzania (BoT) not to bail out banks which fail to perform well but rather to let them go under. Thus, the sector is going through a rapidly changing operational environment which is likely to affect their profitability.
The other change, Orbit Securities says, is that BoT plans to start using an interest rate targeting policy from March, in a shift from targeting the monetary aggregate framework. [This also] is one of such changing landscape, Orbit Securities says.
BoT Deputy Governor for Financial Stability and Deepening Dr Bernard Kibesse says the policy is ready to come into use next March. The interest rate to be targeted in the new framework will be the inter-bank cash market rate, which is the rate at which banks lend to one another, Kibesse said in a statement recently.
Under the new framework, the BoT will set and announce a policy rate and take actions in the inter-bank cash market to keep the inter-bank cash market rate as close as possible to the policy rate. All policy actions will be taken in the market to keep the inter-bank cash market rate close to policy rate, the Deputy Governor said.
An interest rate based framework is a best practice across the world and its adoption by BoT was part of the monetary policy modernization process currently being implemented by the central bank. In quarter three of this year the rate of non-performing loans (NPLs) for most small and medium-size banks went up compared with the same quarter last year.
Source: NAM NEWS NETWORK