Introduction of 14.5pct capital adequacy ratio to benefit nation

Capital adequacy ratio (CAR) is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.

Also known as capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world.

However, National Microfinance Bank Plc (NMB) Managing Director Ineke Bussemaker, said only profitable banks will be able to comply with this.

“Interest rates would come down across the board as a result of more liquidity and the economy would benefit from it,” Bussemaker told The Banker in Dar es Salaam last week.

NMB boss noted that more liquidity will lead to lower deposit rates, especially on institutional deposits, and gradually lead to lower interest rates on loans, which then again would lead to more ability and incentives to companies to invest, create jobs and grow business.

According to her, more liquidity would come when the government starts the many infrastructure projects announced in the 2016/2017 national budget and when foreign investors are coming into the country.

CAR is a critical indicator of the capabilities of the banks to safeguard its capital and continue activities in difficult situation, without the support of the central banks or state-run organisations. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Following the international banking crisis during 2007-2008, the Basel Committee on Banking Supervision of the Bank for International Settlements designed a set of new obligations titled ‘Basel III’ to increase the strength and endurance of banking systems in different countries against similar future crises. The BIS member countries initiated the plan immediately.

The regulations stipulated in Basel I, II and III are binding for all banks in developed, developing and under-developed countries. If domestic banks are interested in expanding cooperation with international banks and monetary institutions, they have to execute ‘Basel III’ laws at the earliest.

Currently, the minimum CAR level is 12.5 percent but, as stipulated in Basel III, to get prepared for tackling probable crises, banks are also required to save a portion of their interests to equip themselves with their total capital. The ratio of core capital to total risk weighted assets was at 16.7 percent.

Experts worry that a recent rise of capital adequacy ratio, shifting of government funds from commercial banks to the central bank and austerity measures have added salt to the wound of already uncertainty of non-payment margins.

The central bank shows the minimum core capital requirement for commercial banks and cooperative banks (national wide network) is 15bn/-, microfinance banks (5bn/-), community banks (2bn/-) and cooperative banks (regional) (5bn/-).

Whilst core capital requirement for specialised institutions such as development finance institutions (50bn/-), finance lease companies (1bn/-), housing finance companies (7.150bn/-), Tanzania Mortgage Refinance Company (TMRC) (6bn/-), Merchant Banks (25bn/-) and Islamic Banks (15bn/-).

Head of finance at KCB Tanzania, Godfrey Ndalahwa said they do not see scope of a significant increase in leverage over the coming quarters, as tighter monetary conditions and economic uncertainty cause lenders to remain relatively risk averse.

But efforts to improve banking sector supervision are likely to ensure that banks average capital ratios remain strong in the coming years, he explained.

According to him, the quality of assets, funding structure, and capital adequacy of the banking sector in the country were relatively good and have been improving of late.

The BoT’s decision to leave interest rates unchanged will help to ease pressure on commercial lenders, though they still face the challenge of a depreciating shilling which has driven up international borrowing costs.

The banking sector dominates the financial system accounting for 70.8 percent of total assets as at end September 2015, according to data from the Bank of Tanzania, followed by pension funds and insurance companies at 26.7 per cent and 1.9 per cent respectively. Collective investment schemes accounted for 0.6 percent.

An economist, Prof Honest Ngowi said banks can reduce deposit rates in order to widen the spread between lending and deposit rates that are now narrowed by capped low lending rates, adding that if this happens, it will be a raw deal to bank customers.

However, Prof Ngowi stated that in the absence of well functioning credit reference bureau, rates are bound to be rather high as a measure to reduce risk.

According to him, credit reference bureaus in the financial landscape are an effort to encourage the sharing of information by credit institutions so as to reduce the incidence of serial defaults by bank customers as well as to minimise the incidence of non-performing loans (NPLs).

“Credit reference bureaus are meant to complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions,” he told this paper

Most banks have maintained NPL levels below 5.0 per cent and those with levels above this have been required to bring NPLs to below 5.0 per cent, BoT said.

According to an auditing firm, KPMG, bank’s bad debts in the economy currently stand at 8.3 percent on average as of last year, hence elevating risks for default.

“And it takes a painful three to five years to settle a case,” said KPGM, Head of Debt Advisory and Restructuring in East Africa, Nigel Smith.

Smith said turnaround companies have farfetched benefits to banks, companies, government, employers and economy as more tax are expected to be collected unlike if they would go into receivership.