DETERMINANTS OF LENDING BEHAVIOUR IN NEW NORMS:

EXPERIENCE AND WAY FORWARD

PRESENTATION TO COFI – NOV 2019

PRESENTER: MWANAHIBA MZEE

CONTENTS

I BACKGROUND

II THE NEW NORMS

III DETERMINANTS OF LENDING IN THE NEW NORMS

IV WAY FORWARD

BACKGROUND: DETERMINANTS OF LENDING BEHAVIOURS

INTERNAL:

1. FINANCIAL INSTITUTION SIZE & OWNERSHIP

2. COST OF CAPITAL & PROFITABILITY

3. INVESTMENT PORTFOLIO

4. LIQUIDITY & DEPOSIT/CAPITAL RATIO

5. CASH RESERVE RATIO

6. BRANCHES SPREAD

7. PEOPLE KNOWLEDGE & SKILLS

8. MACRO-ECONOMIC INDICATORS

……...DETERMINANTS OF LENDING BEHAVIOURS …..Continued

EXTERNAL:

1. LAWS & REGULATIONS

2. GOVERNMENT POLICIES

3. TECHNOLOGY ADVANCEMENT.

4. CONSUMER DEMOGRAPHICS.

5. CAPITAL MARKET ADVANCEMENT.

6. AVAILABILITY OF OTHER SOURCES OF FINANCING:

- Personal Savings - Families & Friends;

- Angel Investors - Venture Capitalists.

THE NEW NORMS - DEMOGRAPHICS

66% of Tanzanians live in rural areas, with seasonal income.

26% of Tanzanians are between 25 and 34 years while 26% are below 25 years. i.e. Gen Z

66% are economically active.

41% of adults are engaged in farming and fishing.

20% of adults are engaged in casual labour while 18% are dependent.

14% of adults are business owners.

Only 6% of adults are salaried (both formal and informal sector).

64% of adult Tanzanians have completed Primary education.

15% of Tanzanians have no formal education while only 3% have attained higher education.

While 72% of Adults Tanzanians can read and write Kiswahili; only 27% can read and write English.

Source: FinScope Tanzania 2017

THE NEW NORMS – CONSUMER CHARACTERMost of them own / use a phone.

Most of them prefers digital/online contacts; only 38% might visit a branch.

Need alignment to their lifestyle, need to be connected all the time.

Prefers personalised services.

Convenience and first time right contact is key.

Used to share their personal space and experiences; confidentiality & secrecy needs adjusting for Gen Z.

In developed world, Gen Z are found to be more savers than borrowers.

Tanzania adults – 44% borrowed in the past 12 months; 74% borrowed for personal expenditures, 19% for investments and only 7% borrow to acquire assets.

Tanzanian Adults borrowed more from their friends/relatives (69%). Banks only lent to 3% of the adults population. Savings Groups & SACCOs lent to 20% of the adults.

Source: Globalbankingandfinance.com; FinScope Tanzania 2017.

THE NEW NORMS - CAPITAL

Due to lower habit of investing and assets acquisition, the level of capital is low.

With the new Generation of “i” , the physical capital as we know it will be no more. Intelligence, Trade Marks and ideas are becoming the capital of many businesses.

Re-capitalisation will be more frequent as technologies are replaced with more efficient and productive modern technologies.

Traditional equipment / means will be rapidly replaced by modern means, rendering assets obsolete.

THE NEW NORMS– CAPACITY

Unreliability of Financial Statements to ascertain capacity.

The informal lending make it difficult to ascertain true capacity of the borrowers.

Cash based economy make it difficult to verify capacity of borrowers.

Use of Credit Reference Bureaus – only negative check currently; need to move to Positive check soonest.

THE NEW NORMS– COLLATERAL

According to FinScope Report 2017, 42% of Adult Tanzanians own landed properties; with only 3% having Title Deeds. This need to improve significantly.

Ease of perfection and holding the collateral is still questionable.

IFRS / Regulatory recognition of some type of collateral is still a challenge.

Realisation of collateral is costly and consume time.

THE NEW NORMS – CONDITIONS

Financial covenants difficult to impose / satisfy as 89% of Tanzania still receive their payments through cash.

Regular payments / instalments risky as 59% of revenue is seasonal; 34% is daily/weekly or seasonal; only 7% of revenue is monthly.

Terms and Conditions mostly written in English while 66% of Tanzanians can neither read nor write English.

Intervention of Authorities on conditions such as Domiciliations, etc.

DETERMINANTS OF LENDING IN THE NEW NORMS

1. CONDUCIVE LAWS & REGULATIONS.

2. FINANCIAL INSTITUTIONS SIZE, OWNERSHIP & PROFITABILITY.

3. POSITIVE CHECKS FROM CREDIT REFERENCE BUREAU, BANKS & UTILITY COMPANIES.

4. TRANSPARENT & SUPPORTIVE JUDICIAL SYSTEMS.

5. CASHLESS ECONOMY.

6. GOVERNMENT INTERVENTIONS TO ENHANCE LENDING ACTIVITIES.

7. SKILLED AND HONEST FINANCIAL INSTITUTIONS EMPLOYEES.

WAY FORWARD - WHAT NEED TO CHANGE

The Lending Principles

5 C’s are no longer applicable the way they were 30 years ago.

Re-define the principles of lending with consideration to:

Demography

Business environment

Technology advancement

WAY FORWARD - ………. WHAT NEED TO CHANGE………Continued

Laws & Regulations

Efficient Court process for settling lending matters.

Non interference on registered collaterals.

Enforcement of Bankruptcy laws.

Recognition of Intelligent Properties.

Friendly International Standards & Laws.

Easily understood laws.

WAY FORWARD - ………. WHAT NEED TO CHANGE………Continued

Focus on selective sectors

Financial Institutions need to come out of their comfort zones and increase lending in attractive sectors / economic activities:

Agriculture – currently 8.7% of credit advanced.

Mining & Quarrying – currently receiving 5.8% of Bank’s credits.

Technology – currently below 1%.

Building & Construction – at 4.5% currently.

Water & Electricity – currently below 2% of Bank’s credit.

Hotels & Restaurants – at 3% currently.

Education – currently below 1% of Bank’s credit.Source: BoT EBQ June 2019

WAY FORWARD - ………. WHAT NEED TO CHANGE………Continued

Communication with customers

Mode of communication – digital, digital and digital – paper & pen are

phasing out.

Language – For Tanzania and East Africa, Kiswahili must be introduced as legal

language.

Audio & Video communication must be introduced to align with the

current and coming Generation.

Chatboxes will be official communication.

WAY FORWARD - ………. WHAT NEED TO CHANGE………Continued

Sustainability

Financial Institutions need to get more involved in:

Environment financing.

Women & Youth Empowerment Financing.

Education Financing & Scholarships.

Financial Literacy Sponsorships.

THANK YOU ALL