directorate of banking supervision - bot · 2008. 12. 29. · directorate of banking...

DIRECTORATE OF BANKING SUPERVISION

DIRECTORATE OF BANKING SUPERVISION

Annual Report 2006Annual Report 2006

2006 Banking Supervision Annual Report i

TABLE OF CONTENTS

Contents Pages

Message from the Director ............................................................................. 1

Chapter OneOverview of the Banking Sector and Bureaux De Change in Tanzania .................................................................... 4

Chapter TwoBanking Sector and Bureau De Change Perfomance ...................................... 11

Chapter ThreeMajor Activities of the Directorate ................................................................... 18

Chapter FourDevelopments in Banking Supervision ............................................................ 22

Chapter FiveCo-operation Issues ...................................................................................... 28

Appendix ...................................................................................................... 31

FOREWORD FROM THE DIRECTOR OF BANKING SUPERVISION

Directorate of Banking Supervision’s Annual Report 2006 is the tenth in the seriesof Annual Reports aimed at highlighting and informing the public developmentsin the banking industry in Tanzania. The Directorate of Banking Supervisioncontinued to rank high on its agenda the objective of ensuring that the countryhas safe, stable and sound banking system. The Directorate carried out varioussupervisory and regulatory activities aimed at enhancing and strengthening thestability, soundness and safety of the banking system. During 2006 the bankingindustry registered significant growth and developments while continuing to bestable.

During the year 2006, Tanzanian banks remained, on overall basis, adequatelycapitalized, with paid-up capital recording an increase of 15% from year 2005.The banking sector’s assets increased by 26% with the ratio of earning assets tototal assets remaining steady at 83% as recorded in 2005. Total funding of thebanking sector recorded an increase of 26% with the funding structure beingmainly composed of deposits which accounted for 83% of total funding. Totalafter tax income increased by 36% when compared to that of year 2005. Thebanking sector liquidity was generally considered satisfactory, with the ratio ofliquid assets to deposit liabilities of 59%, and overall management performancewas satisfactory as banks and non-bank f inancial institutions achievedsatisfactory financial condition and improved results of operations.

Generally during the year 2006, Bureaux de change compliance with laws andregulations/circulars was satisfactory and the volume of their activities decreasedby 2.85% compared to that of year 2005.

In year 2006, the Directorate of Banking Supervision was engaged in varioussupervisory and regulatory activities. Licensing, on-site examinations and off-sitesurveillance on banks, non-banks financial institutions and foreign exchangebureaux were carried out in accordance with the provisions of the Bank ofTanzania Act, 1995, Banking and Financial Institutions Act, 1991, ForeignExchange Act, 1992 and various regulations and circulars governing bankingbusiness and bureaux operations in Tanzania.

2006 Banking Supervision Annual Report 1

One of the major developments during 2006 was in the legal and regulatory envi-ronment whereby, Bank of Tanzania Act, 1995 and Banking and FinancialInstitutions Act, 1991 were repealed and replaced by Bank of Tanzania Act, 2006and Banking and Financial Institutions Act, 2006 which became effective in July2006. All regulations in use were reviewed to incorporate changes brought by thenew legislations and market developments. New regulations/guidelinesgoverning Business Continuity Management, Responsibilities of Directors andSenior Management, Outsourcing and Physical Security Measures were initiated.Bank of Tanzania continued with its preparation of migrating from traditionaltransaction based supervision of banks and non banks financial institutions torisk based supervision. Key stakeholders continued to be sensitised and pilotexaminations were undertaken. Bank of Tanzania in collaboration with otherstakeholders developed regulations for microfinance institutions and efforts toestablish a microfinance supervisory function at the Bank of Tanzania wereinitiated.

The Directorate continued to be actively involved in assisting, supporting andmonitoring restructuring and privatisation of government owned banks andnon-bank financial institutions. The privatization and restructuring processinvolved Tanzania Postal Bank (TPB) and People’s Bank of Zanzibar Limited. TheTanzania Investment Bank (TIB) will now be restructured and strengthened tobecome a development finance institution.

Bank of Tanzania in keeping abreast with supervisory challenges posed by thedevelopments in the banking business continued to upgrade skills of its staff andenhance cooperation with various institutions in the world. Bank of Tanzaniacontinued with sensitization of stakeholders on Basel II, working closely withcentral banks in the region on harmonization of banking supervision laws,methodology and practices on the basis of both the East African and the East andSouthern African Sub-regional cooperation arrangements. The Bank is alsoworking closely with the Government and various institutions in the world inanti-money laundering and combating terrorism financing efforts.

Despite the various challenges, the Tanzanian banking system remained safe,sound and stable during 2006, thanks to cooperation accorded by variousstakeholders in the banking and financial system. Year 2006 was, on the overall


basis, a successful year for banks, non-bank financial institutions and bureaux dechange.

I thank all stakeholders for making year 2006 a success and wish them the verybest for year 2007.

L. H. MkilaDirector, Banking SupervisionBank of TanzaniaP. O. Box 2939Dar es Salaam, TanzaniaFax: +255 22 2113941Tel: +255 22 2118021E-mail:[email protected]


OVERVIEW OF THEBANKING SECTORAND BUREAUX DECHANGE IN TANZANIA

1.1 COMPOSITION

As at 31st December 2006, thebanking sector had 22 banks,three (3) non-bank financialinstitutions, five (5) regionalcommunity banks and two (2)regional financial institutions.Azania Bancorp Limitedchanged its name to AzaniaBank Limited.

The sector recorded growth inmost of the Balance Sheet andIncome Statement items.Five big banks representedabout 66 per cent of thetotal banking sector assetscompared to 67 per cent in2005. The market shareof non-bank f inancialinstitutions in the totalbanking sector assets stood at3 percent while communitybanks continued to hold shareof less than 1 percent, as wasthe case in 2005.

As at 31st December 2006there were 149 bureaux dechange operating in Tanzania,of which 27 were in Tanzania

Zanzibar. Majority of thebureaux in Tanzania Mainlandwere based in Dar es salaam(81) and Arusha (30). Tourismhas been the main factorinfluencing the geographicaldistribution of bureaux dechange

During the year, 25 newforeign exchange bureaus werelicensed to start operations inboth Tanzania Mainland andZanzibar and 11 were closed.

1.2 BALANCE SHEET STRUCTURE OF THE BANKING SECTOR

The aggregate balance sheet ofthe banking sector(excluding bureau de change)in Tanzania, as at 31stDecember 2006, was TZS5,396 billion as compared toTZS 4,286 billion as at 31stDecember 2005. Deposits werethe major source of fundingaccounting for the increase inthe aggregate balancesheet. Figures of aggregatebalance sheet from 2002 to2006 are as indicated in Table1 below:


CHAPTER ONE

TABLE 1: AGGREGATE BALANCE SHEET (Total Assets)

Period Figures TZS billion Percentage changes

December 2002 2,269 -December 2003 2,775 22%December 2004 3,238 17%December 2005 4,286 32%December 2006 5,396 26%

CHART 1: AGGREGATE BALANCE SHEET TREND


1.2.1 ASSETS STRUCTURE

The banking sector’s assets increasedby TZS 1,110 billion from TZS 4,287billion at the end of December 2005 toTZS 5,396 billion at 31st December2006. This represented an increase of26%.

Major components of total bankingsector assets were Loans, Advancesand Overdraft, which accounted for37% of total assets followed by Cash,balances with banks and items forclearing which were 34% andInvestments in Debt Securities whichwas 22%. Table 2 and Chart 2 indicateassets composition and growth as at

31st

December 2006.

TABLE 2: ASSETS COMPOSITION (Figures in TZS billions)

Assets December % Total December % Total

2005 Assets 2006 Assets

Cash, balances with banks and items for clearing 1,372 32% 1,827 34%

Investments in debt securities 1,160 27% 1,180 22%

Inter-bank loans and advances 53 1% 70 1%

Loan advances and overdrafts 1,446 34% 2,013 37%

Commercial bills, customers’ liabilities and other claims 56 1% 62 1%

Plant, Property and Equipment 64 1% 79 2%

Other assets 136 3% 165 3%

Total Assets 4,287 100% 5,396 100%

CHART 2: ASSETS COMPOSITION AS AT END OF DECEMBER 2006


The earning assets to total assets ratioremained stable at 83% whencompared to the end of year 2005. Theearning assets consisted of loans andadvances (37.31%), balances with

other banks (21.79%), investment indebt securities (21.87%), inter-bankloans (1.30%), bills purchased and dis-counted (1.13%) and equityinvestments (0.11%).


TABLE 3 (a): EARNING ASSETS TRENDS

[TZS billions] Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 CHANGE

2001- 2002- 2003- 2004- 2005-2002 2003 2004 2005 2006

Balances with banks 638 771 751 844 1,176 16% 21% -3% 12% 39%

Investment Debt securities 603 600 671 1,160 1,180 44% 0% 12% 73% 2%

Interbank loans and advances 32 38 33 53 70 -16% 19% -13% 61% 32%

Loans, advances and overdrafts 576 839 1,092 1,446 2,013 42% 46% 30% 32% 39%

Bills purchased and discounted 13 16 61 56 61 333% 23% 282% -8% 9%

Equity investments 1 1 2 5 6 0% 0% 100% 150% 20%

Total Earning Assets (TEA) 1,864 2,265 2,610 3,564 4,506 31% 22% 15% 37% 26%

Total Assets (TA) 2,269 2,775 3,238 4,287 5,396 27% 22 17% 32% 26%

% of TEA to TA 82% 82% 81% 83% 83%

TABLE 3 (b): EARNING ASSETS STRUCTURE Percentage of Total Assets

Item Dec 02 Dec 03 Dec 04 Dec 05 Dec 06

Balances with banks 34.23% 34.04% 28.77% 23.68% 21.79%

Investment in Debt Securities 32.35% 26.49% 25.71% 32.55% 21.87%

Interbank loans receivable 1.72% 1.68% 1.26% 1.49% 1.30%

Loans, advances and overdrafts 30.90% 37.04% 41.84% 40.57% 37.31%

Bills purchased and discounted 0.70% 0.71% 2.34% 1.57% 1.13%

Equity investments 0.05% 0.04% 0.08% 0.14% 0.11%

CHART 3: EARNING ASSETS STRUCTURE

KEY:EI - Equity InvestmentsBPD - Bills Purchased and DiscountedLAO - Loans, Advances & OverdraftsILR - Inter-bank Loans ReceivableDS - Debt SecuritiesBWB - Balances with Banks


1.2.2 FUNDING STRUCTURE

As at 31st December 2006total funding of the bankingsector was TZS 5,396 billion ascompared to TZS 4,287 billionas at 31st December 2005,indicating an increase of 26%.The funding structure wasmade up of deposits (83.04%),other liabilities (6.15%), sharecapital (4.43%) and other

capital (6.38%).

The proportion of fundingsources from deposits andother capital increasedsubstantially during the yearwhile funding from sharecapital and other liabilitiesincreased slightly. Fundingtrend and composition from2002 to 2006 was as indicatedin Table 4 (a) and 4 (b) below:


TABLE 4 (a): FUNDING TREND

((FFiigguurreess iinn DDeecc-- DDeecc-- DDeecc-- DDeecc-- DDeecc--((TTZZSS bbiilllliioonnss)) 0022 0033 0044 0055 0066 %% CCHHAANNGGEE

22000011-- 22000022-- 22000033-- 22000044-- 22000055--22000022 22000033 22000044 22000055 22000066

Deposits 1,928 2,329 2,665 3,599 4,481 28% 21% 14% 35% 24%

Other liabilities 146 171 243 261 332 26% 17% 42% 7% 28%

Share capital 108 159 189 207 239 11% 47% 19% 10% 15%

Other capital 87 116 141 220 344 12% 33% 21% 56% 53%

Total Funding 2,269 2,775 3,238 4,287 5,396 27% 22% 17% 32% 26%

TABLE 4(b): FUNDING COMPOSITION

Dec-02 Dec-03 Dec-04 Dec - 05 Dec - 06

Deposits 85% 84% 82% 84% 83%

Other liabilities 6% 6% 8% 6% 6%

Share capital 5% 6% 6% 5% 5%

Other capital 4% 4% 4% 4% 6%

Total Funding 100% 100% 100% 100% 100%


CHART 4: FUNDING STRUCTURE 2002-2006

BANKING SECTORAND BUREAU DECHANGE PERFORMANCE

2.1 CAPITAL ADEQUACY

For the period under review,the banking sector recordedtotal capital of TZS 582.35billion which was mainlyattributed by paid up sharecapital. This was an increaseof 37.08% compared toTZS 424.82 billion recorded in2005. The total capital inrelation to risk weightedassets and off balance sheetexposure held by banksand non-bank f inancialinstitutions stood at 23%compared to 22% recorded inthe previous year. Paid upshare capital of the bankingsector as at the end of year2006 amounted to TZS 238.51billion, an increase of 15.03%from TZS 207.34 billion in year2005. The increase was dueto injection of additionalcapital and capitalization ofreserves by some of the banksand non-bank f inancialinstitutions.

As of December 2006 thebanking sector recorded off

balance sheet itemsamounting to TZS 784 billionwhile in year 2005, the samestood at TZS 482 billion. Thisrepresents an increase of62.66%.

2.2 ASSETS QUALITY

As at 31st

December 2006,earning assets consisted ofloans and advances (37.31%),balances with other banks(21.79%), investment in debtsecurities (21.87%), inter-bankloans (1.30%), bills purchasedand discounted (1.13%) andequity investments (0.11%).The earning assets to totalassets ratio remained at thesame level of 83% as 2005.

Gross loan portfolio as 31st

December 2006 stood at TZS2,112.9 billion compared toTZS 1,487.17 billion recordedin year 2005, this representan increase of 42.08%.Non-performing loans to totalloans was 7.6% at the end of2006 as compared to 4.9%at the end of year 2005.Allowances for probablelosses increased to TZS 81billion from TZS 32 billionrecorded in the year 2005, thisrepresent 3.08% and 2.15% of


CHAPTER TWO

the gross loans, advances andoverdraft for 2006 and 2005,respectively.

The banking industry extendedcredits to various sectorsof the economy including,Trade (19%), Mining andManufacturing (23%),Agricultural Production (14%),Building and Construction(7%), Transport (10%) andOthers (27%).

2.3 MANAGEMENT ASSESSMENT

Management of banks andnon-bank financial institutionswas satisfactory on account ofthe level of capital adequacy,low level of non performingassets and the level ofprofitability attained duringthe year 2006. The year 2006experienced no failure off inancial institutions or anyunder statutory management.

Generally, compliance issueswere satisfactory as mostof the f inancial institutionscomplied with therequirements of the bankinglaws, regulations and BOTcirculars and directives.However, any f inancialinstitution which was found to

be non compliant wassubjected to appropriatesupervisory action.

2.4 EARNINGS ANALYSIS

Aggregate net income beforetax for the year ended 2006was TZS 186.44 billion equalto an increase of 28.84%compared to TZS 144.71billion recorded in year 2005.Interest income accounted for71% of the total incomecompared to 66% in year 2005.Total expenses of the sectorwere TZS 423 billion, whichcomprised interest expenses(26%), provisions for probablelosses and write-offs (11%) andnon-interest expenses (63%).Return on total equity andreturn on total assets stood at23% and 2.5% respectively.These and other earning ratioshave been indicated in table5(b).

Interest income andnon-interest income exhibitedan increasing trend over theyears. Total income grew fromTZS 191 billion in year 2002 toTZS 606 billion in year 2006.This growth trend is illustratedin Table 5 below:


TABLE 5 (a): EARNINGS TREND (TZS billions)

S/N CATEGORY 2002 2003 2004 2005 2006

1 Interest Income 105 135 195 286 431

2 Non Interest Income 86 99 125 145 176

3 Total 191 234 320 431 607

CHART 5: INTEREST INCOME VS NON-INTEREST INCOME2002-2006


TABLE 5 (b): EARNINGS RATIOS

S/N Ratio Dec-02 Dec-03 Dec-04 Dec-05 Dec-06

1. Net interest income to Earning Assets 4% 5% 6% 6% 7%

2. Non interest expenses to net interest income 152% 130% 112% 93% 82%

3. Return on total assets 1.76% 2.05% 2.90% 3.31% 2.5%

4. Return on equity 14% 15% 28% 33% 23%

5. Interest Margin to Gross Income 48.0% 51.5% 54.8% 60.9% 53.1%

6. Non-interest expenses to Gross income 70.1% 67.1% 61.6% 56.9% 43.5%

7. Personnel expenses to non-interest expenses 41.3% 39.9% 39.0% 39.6% 39.6%

8. Trading and fee income to total income 45.2% 42.3% 39.1% 33.6% 28.9%

9. Interest Rate Earned on Loans and Advances 15.7% 13.8% 14.8% 15.0% 10.6%

10. Interest Rate Paid on non-bank deposits 3.1% 3.2% 3.5% 3.9% 2.0%

11. Spread (lending vs deposits rates) 12.6% 10.6% 11.3% 11.1% 8.6%

2.5 LIQUIDITY ANALYSIS

As at 31st December 2006, the liquidity position of the banking sector wasconsidered satisfactory. The ratio of liquid assets to demand liabilitiesdeclined slightly to 59%, from 62% as at the end of year 2005. Loans todeposit ratio increased slightly to 47% from 40% which was recorded atthe end of 2005.

The deposits structure of the banking industry consisted of currentaccount deposits (46%), savings deposits (22%), time deposits (24%),dormant accounts (1%), special deposits (2%) and Deposits from banksand financial institutions (5%). Proportion of foreign currency liabilitiesto total liabilities increased to 39% from 35% as at the end of year 2005.


TABLE 6: LIQUID ASSETS (TZS billions)

Item Dec- Dec- Dec- Dec- Dec-02 03 04 05 06 CHANGE

2001- 2002- 2003- 2004- 20052002 2003 2004 2005 2006

Cash 73 84 92 121 168 24% 15% 10% 32% 39%

Balances with BOT 158 202 279 331 382 3% 28% 38% 19% 15%

Balances with banks 638 771 751 844 1176 16% 21% -3% 12% 39%

Cheques and items for clearing 49 82 65 76 101 63% 67% -21% 17% 33%

Treasury Bills 398 424 454 872 822 83% 7% 7% 92% -6%

Total liquid assets 1,316 1,563 1,641 2,244 2649 30% 19% 5% 37% 18%

Deposits - public 1,689 2,038 2,435 3,403 4216 25% 21% 19% 40% 24%

Deposits - special 121 142 81 79 68 33% 17% -43% -29% -14%

Deposits - banks 118 149 149 116 197 90% 26% 0% -22% 70%

Total Deposits 1,928 2,329 2,665 3,598 4481 28% 21% 14% 35% 25%

Liquid assets to Demand Liabilities 68% 67% 62% 62% 59% 1% -1% -7% 0% -3%

CHART NO 6: LIQUID ASSETS TO DEMAND LIABILITIESRATIO 2002-2006


2.6 PERFORMANCE OF BUREAUX DE CHANGE

Purchases of foreign currencyby bureaux de change for theyear 2006 amounted to USD425.35 million while salesof the same amounted toUSD 423.51 million therebyrecording a net inflow of USD3.84 million. Purchases andSales for bureaux de changeoperated in Zanzibar amountedto USD 23.04 million and USD22.86 million respectively,which is 5.72% of total volumeof bureaux business. For theyear 2005 purchases offoreign currency by thebureaux de change amountedto USD 435.75 million whilesales was USD 437.98 millionthereby recording a netoutflow of USD 2.23 million.The volume of activities ofbureaux de change forthe year 2006 indicated adecrease of 2.85% comparedto 2005. During the periodunder review nineteen bureauxwere licensed.

Most of bureaux de changecomplied with ForeignExchange (Bureaux deChange) Regulations, 1999and BOT circulars. This wasdue to enhanced annualon-site examinations andtraining provided to bureauxde change operators. Further,incidences of non-compliancewere sternly dealt with by way

of strong warnings and wherenecessary penalties wereimposed. During 2006, 11bureaux de change operatorsdecided voluntarily to closetheir businesses.

2.7 FINANCIAL SOUNDNESS INDICATORS

One of the primary objectivesof the Bank of Tanzania is toensure a sound and stablebanking system. TheDirectorate of BankingSupervision carries outBOT’s responsibility for thesoundness and stability ofthe banking industry bysupervising and regulatingbanks, non-banks f inancialinstitutions and foreignexchange bureaux. As at 31

st

December 2006, the bankingindustry was adequatelycapitalized relative to theinvestment in risk assets. Asignif icant growth of loanportfolio of 39% was recordedduring the year. Loans andadvances accounted for 37% ofthe sector’s total assets. Thequality of loan portfolio wasfair as depicted by the level ofnon-performing loans relativeto gross loans. The bankingsector was fairly liquid partlydue to reliance on investmentin treasury instruments. Table8 below contains the financialsoundness indicators (FSI’s)for the banking sector as at 31

st

December 2006.


TABLE NO 7: SUMMARY OF FINANCIAL SOUNDNESS INDICATORS

Ratios Dec-03 Dec-04 Dec-05 Dec-06

Total Capital to Risk Weighted Assets 21.0% 21.2% 22.0% 23.0%

Total Capital to Total Assets 9.9% 10.2% 10.0% 10.7%

Total loans and advances to total assets 30.2% 33.7% 33.7% 37%

Sectoral distribution of loans to total loans:Trade 23.8% 22.4% 31.5% 18.79%

Mining and Manufacturing 27.3% 22.2% 26.7% 22.5%

Agricultural Production 14.1% 12.8% 15.4% 14.1%

Building and Construction 5.5% 3.8% 6.9% 6.6%

Transport 10.3% 8.3% 9.0% 9.5%

Foreign Exchange loans to total loans 27.2% 28.9% 32.7% 33.8%

Non-performing loans to gross loans 4.5% 4.4% 5.0% 7.3%

NPL’s net of provisions to total capital 9.3% 11.4% 14.8% 21.6%

Large Exposures to total capital (5 largest exposures in the industry) 59.3% 64.1% 53.3% 282.95%

Return on assets 2.1% 2.9% 3.3% 2.4%

Return on equity 20.7% 28.4% 33.1% 26.0%

Interest Margin to Gross Income 51.5% 54.8% 60.9% 53.1%

Non-interest expenses to Gross income 67.1% 61.6% 56.9% 43.5%

Personnel expenses to non-interest expenses 39.9% 39.0% 39.6% 39.6%

Trading and fee income to total income 42.3% 39.1% 33.6% 28.9%

Interest Rate Earned on Loans and Advances 13.8% 14.8% 15.0% 10.6%

Interest Rate Paid on non-bank deposits 3.2% 3.5% 3.9% 2.0%

Spread (lending vs deposits rates) 10.7% 11.3% 11.0% 8.5%

Liquid Assets to Total Assets 56.3% 53.6% 55.0% 49.1%

Liquid Assets to Total Short Term Liabilities 62.8% 62.0% 62.4% 59.1%

Total loans to customer deposits 41.2% 44.4% 42.4% 50.0%

Foreign Exchange Liabilities to Total Liabilities 36.5% 34.7% 34.9% 39.0%

Net Open Positions in FX to total capital -55.6% -38.8% -49.9% -35.2%


CapitalAdequacy

AssetsCompositionand Quality

Earnings andProfitability

Liquidity

SENSITIVITYTO MARKETRISK

MAJOR ACTIVITIESOF THE DIRECTORATE

3.1 OVERVIEW

The objective of theDirectorate of BankingSupervision is to ensure safety,stability and soundness of thebanking system in Tanzania. Inachieving this objective, theDirectorate is responsiblefor licensing of all banks,non-banks financial institutions,and bureaux de change andsupervising all bankingactivities conducted by suchinstitutions and monitoringcompliance with laws,regulations, circulars andstandards issued by BOT andother bodies.

3.2 SUPERVISORY PRACTICES

The main supervisory activitiesundertaken by the directorateare on-site examinations, off-site surveillance and regularbilateral/trilateral meetingswith supervised banks andfinancial institutions and theirrespective external auditors.


CHAPTER THREE

3.2.1 OFF SITE SURVEILLANCE

The off site surveillancefocused on the following areas:

Analysis of Statutory ReturnsThe Directorate continued touse off-site surveillancemethodology to reviewquantitative factors thatprovide indicators of theoverall performance of specificbank and/or f inancialinstitution. Each bank andfinancial institution submittedregulatory reports as required,the Directorate uses theinformation submitted tomonitor compliance andfor other supervisory andregulatory purposes. In orderto improve off-site surveillance,the Directorate enhancedquality of Banking SupervisionInformation Systems (BSIS) byautomating BOT Form 16schedules and hence producingmore accurate, consistent andreliable information.

LicensingDuring the year 2006 onenon-bank financial institutionnamely TandahimbaCommunity Bank was licensed.Also nineteen (19) foreign

exchange bureaux werelicensed to start operations inboth Tanzania mainland andZanzibar.

The Directorate also approvedopening of new branches andrelocation to new premises ofheadquarters and branches ofbanks and non-bank financialinstitutions. During the periodunder review the Directorateapproved establishment of 15new branches of banks andnon-bank financial institutionsin various places withinthe country, in additionthe Directorate approvedestablishment of one foreignsubsidiary of a local bank.

3.2.2 ON SITE EXAMINATION

During the period underreview the Directoratecontinued to conduct bothtraditional full scope on-siteexaminations and pilot riskbased examinations to banksand non-banks f inancialinstitutions.

During the period 33institutions were examined.Seven (7) banks wereexamined using risk basedapproach. The objective isto shift from the traditionalsupervision approach to risk

based supervision (RBS)approach. This move is aproduct of a number of factorsincluding increased risks andincreased number of banksand non-bank f inancialinstitutions in the country.

The objectives of theseexaminations are to establishthe f inancial soundness ofbanks, non-bank f inancialinstitutions and foreignexchange bureaux to ensurecompliance with the provisionsof the Bank of Tanzania Act2006, Banking and FinancialInstitutions Act, 2006 andwith banking regulations,guidelines, circulars anddirectives.

3.2.3 BILATERAL/TRILATERAL MEETINGS

Bilateral /trilateral meetingsbetween the Bank of Tanzania,Supervised institutions andexternal auditors were held asplanned to discuss auditedf inancial statement andmanagement letters issuedby external auditors,implementation status ofexternal auditor’s f indings,compliance with examinationreports and introduction ofnew products and strategies.


3.3 REVIEW OF BANKING LEGISLATION

The Bank of Tanzania Act,2006 and Banking andFinancial Institutions Act 2006became effective in July 2006following enactment of thenew laws and repeal ofthe old legislations. Thenew legislations incorporatecurrent changes /challenges inthe banking and f inancialsector, including recommenda-tions in the Financial SectorAssessment Programme(FSAP) Report of 2003.

In view of the new banking leg-islations, the Directorate ofBanking Supervision is in theprocess of introducing newguidelines as well as reviewingexisting regulations to be inline with the new Bank ofTanzania Act 2006 and theBanking and FinancialInstitutions Act 2006. Newguidelines which are still indraft form are guidelines forDirectors and Outsourcing.New regulations which are indraft form include; ThePrompt Corrective Action, ThePhysical Security Measures forbanks, f inancial institutionsand bureaux de change.

3.4 FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (FIDP II)

The Directorate coordinatedprocurement of consultants foractivities f inanced by WorldBank under FIDP II. During thisperiod, the project (FIDP II)participated in funding ofvarious activities/projects thatare geared towards, restructuringof the state owned banks likePeoples Bank of Zanzibar,Tanzania Postal Bank andTanzania Investment Bank.In addition FIDP providedfunds for strengthening banksupervision, improving theDeposit Insurance Board andNational Payment System,strengthening of CapitalMarkets and Security Authority(CMSA), improving InsuranceSupervisory Department (ISD),establishment of CreditInformation Bureau, reform ofthe Pension Sector andprivatization of the NationalInsurance Corporation.

FIDP II was closed in December2006 and replaced by TheFinancial Sector SupportProgram (FSP). FSP is a five


year project designed toimplement Second GenerationFinancial Sector Reforms inkey priority areas of thebanking sector, developingthe f inancial markets,reforming the pension sector,strengthening the insuranceindustry, facilitating theprovision of long-termdevelopment f inance andstrengthening Microfinanceand rural finance.


CHAPTER 4

DEVELOPMENTS IN BANKING SUPERVISION

4.0 OVERVIEW

During the year under reviewthe Directorate continued towork on various contemporaryissues in banking supervisionso as to ensure soundness andstability of the banking system.

4.1 RISK BASED SUPERVISION PROJECT

The process of migratingfrom traditional supervisionapproach to Risk BasedSupervision (RBS) has reachedan advanced stage. During theyear under review theDirectorate finalized the RiskBased Supervision Framework.This provides a detaileddescription of the Risk BasedSupervision framework to beadopted by the Bank ofTanzania for supervisionof banks and f inancialinstitutions.

During the year 2006 theDirectorate reviewed Risk

Management Programmes(RMPs) submitted by banksand financial Institutions.

The Directorate continuedconducting pilot RBSexaminations on selective basisto some banks and financialinstitutions. In the year 2007the Directorate plans to final-ize RBS examination manualand improvement of off sitesurveillance ready for fullimplementation of Risk BasedSupervision approach.

4.2 BASEL II AND WAY FORWARD FOR TANZANIA

The Bank of Tanzania is inthe process of creating anenvironment which will besupportive at the point ofadoption of Basel II.

During the year under reviewthe Bank of Tanzania has beenworking on the prerequisitesfor the full implementation ofBasel II so as to lay down astrong foundation for the fullimplementation of Basel II inTanzania. These pre-requisitesinclude:


1. Full implementation ofBasel I

Tanzania had partiallyimplemented Basel I. Anelement that was missingunder Basel I was CapitalCharge for Market Risk.Review of the CapitalAdequacy Regulations hastaken into considerationamong others, capital chargefor Market Risk. This is nowincorporated in the draftregulations.

2. Full compliance with Basel Core Principles for Effective Banking Supervision

The legislations governingbanking business in Tanzaniahave been reviewed and thenew Banking and FinancialInstitutions Act 2006 and theBank of Tanzania Act 2006have been amended. Theserevised legislations have takeninto considerations somelapses in compliance withBasel Core Principles.

3. Implementation ofRisk Based Supervision

Risk Based Supervision isanother prerequisite foreffective implementation of

Basel II. Update of the RiskBased Supervision Project is asprovided in section 4.1.

4. Continuing Studying Basel II

Bank of Tanzania will continuewith the process of studyingBasel II framework andimparting the knowledge tothe industry. This process willalso involve assessment ofcapacity and adequacy tobanks, f inancial Institutionsand the supervisory authorityin terms of infrastructureboth legal and regulatoryframework, informationcommunication technologyand people in orderto formulate appropriatestrategies.

4.3 ANTI-MONEY LAUNDERING AND COMBATING FINANCING OF TERRORISM ISSUES.

The Anti-Money LaunderingAct 2006 was passed byParliament in November 2006.The same was enacted to com-plement the Prevention ofTerrorism Act, 2002 with aview of achieving internationalstandards on money launderingand prevention of terroristfinancing. The act also provides


for establishment of aFinancial Intelligence Unit(FIU). The FIU will beresponsible for receiving,analyzing and disseminatingsuspicious transaction reportsand other information regardingpotential money laundering orterrorist f inancing receivedfrom the reporting personsand other sources from withinand outside the country.

During the year underreview the Bank of Tanzaniacontinued to chairthe National Anti-MoneyLaundering Committee, anadvisory agency to theGovernment on various issuesand challenges in combatingmoney laundering andfinancing of terrorism. TheTanzanian Government iscommitted to the war againstmoney laundering andfinancing of terrorism and isstriving to put in place a robustand modern anti-moneylaundering regime andinstitutional framework thatwill ensure the problem iscontrolled and prevented.

Tanzania takes cognizance ofefforts made so far and hasplans/strategies for the future,which include;

i. Continue, carrying outvigorous sensitization and AML awareness campaignsto various stakeholders;

ii. Cooperating with bilateral,regional and international agencies and institutions inexchange and sharing of AML information;

iii. Establishment of Financial Intelligence Unit by 2007;

iv. Strengthening networking and coordination forumsfor national authorities tocooperate in exchangingand sharing information;

v. Training and capacitybuilding of all keystakeholders in the waragainst money launderingincluding Police, BankExaminers, Bankers,Investigators, Judges, andProsecutors.

The country is fully aware ofthe magnitude and negativeeffects money laundering andfinancing of terrorism can haveeconomically, politically andsocially. So will continue to becommitted to internationalcooperation in all efforts tocombat and contain effectsposed by money launderingand terrorism financing.


4.6 PREPARATION FOR REGULATORY AND OPERATIONAL FRAMEWORK FOR THEPENSION SECTOR IN TANZANIA

The pension system has existedin Tanzania since beforeindependence, whereby anumber of policies were madeand acts passed in regardto the protection of thepopulation against contingencieslike employment injuries,death and old age.

Efforts by the Government toprovide social securityprotection in the country havebrought about signif icantdevelopments. Currently thereare about seven formalinstitutions that provide socialsecurity protection inTanzania. These are theNational Social Security Fund,PPF Fund, Public ServicePensions Fund, LocalAuthority Provident Fund,Zanzibar Social Security Fund,Government EmployeesProvident Fund and NationalHealth Insurance Fund.

There is increased publicawareness in respect ofbenef its offered and

investments by the socialsecurity and Pension Funds.Major setbacks have been lackof regulatory framework, lowcoverage, fragmentation oflegislation and inadequatecontribution of investments ofsocial security funds to thedevelopment of the economy.

In addressing those majorsetbacks the Government hashired a consultant in August2006 to work with the Bank ofTanzania to carry out a reviewof pension sector in Tanzaniaand come up with thefollowing:

I. Appropriate legal,regulatory and operationalframework for public andprivate sector pensionfunds.

II. Rational order and logicalmix or otherwise of theexisting pension funds, thelaws and regulations togovern their operations,and the appropriatebody to enforce theregulations.

Some groundwork has alreadybeen done on pension sectorreform during the FSAPmission and other f inancial


sector reports and during thepreparation of the NationalSocial Security Policy. The finalreport of this assignment ofdeveloping a legal andregulatory framework for thepension sector will assist theGovernment to decide on thebest way of reforming thepension sector.

4.7 LEGAL AND REGULATORY FRAMEWORK FOR CREDIT INFORMATIONSHARING

The initial process forestablishment of legal andregulatory environment forcredit information sharing inTanzania was in progress.During the year under review aconsultant has been engagedto assist the process that willlead to the creation of a legaland regulatory frameworkfor establishing, licensing,regulating, and supervisingcredit information bureaux.

Bank of Tanzania Act 2006mandates the Bank ofTanzania to create a creditreference system designed tocollect and provide informationon the payment record of allclients of all banks and

f inancial institutions in theUnited Republic of Tanzania aswell as those of savings andcredit schemes and otherentities engaged on a regularbasis in extension of credits.Establishment of CreditInformation Bureau and CreditInformation Databank willfacilitate informed creditdecisions which will contributein reducing the level of nonperforming credits.

4.8 RESTRUCTURING OF STATE OWNED BANKS

Restructuring process of theremaining state owned bankscontinued with cooperation ofvarious key stakeholders.During the year under reviewthe Government has made adecision to transform TanzaniaInvestment Bank (TIB) intodevelopment bank forprovision of medium and longterm credit. The process oftransforming the TanzaniaInvestment Bank (TIB) into adevelopment bank will involveincreasing its capital baseand enhancing training ondevelopment banking tothe staff of the f inancialinstitution.


4.9 INTERNATIONAL FINANCIAL REPORTING STANDARDS

Following the adoption ofthe International FinancialReporting Standards inJuly 2004 the Directoratecontinued to study thestandards and encouragebanks and f inancialinstitutions to comply withthe IFRS while ensuringadequate provisions for badand doubtful debts fordetermining capital adequacy.During the year under reviewexaminers were trainedon IFRS issues so as to impartto them, necessary knowledgeto face various challengesimposed by the standards.

4.10 FSI CONNECT

The Directorate continued toput more emphasis on its staffcareer developments tosharpen their knowledge so asto keep pace with thedynamism in the bankingsector and the financial mar-ket in general. During the yearunder review the Directoraterenewed the subscriptions tothe FSI connect to enable itsstaff benefit with this onlineinformation and learningresource developed by theFinancial Stability Institute(FSI) of the Bank forInternational Settlements(BIS) in Switzerland.


COOPERATION ISSUES

5.1 REGIONAL AND INTERNATIONAL COOPERATION

Bank of Tanzania throughthe Directorate of BankingSupervision continued tocollaborate with otherregional institutions likethe East Africa RegionalTechnical Assistance Centre(East- AFRITAC) thatorganizes and co-ordinatestechnical assistance providedby International MonetaryFund (IMF) to the region.

East AFRITAC offeredtechnical assistance to theDirectorate of BankingSupervision by reviewingexisting BOT Regulations toalign them with the new Bankof Tanzania Act 2006 andBanking and FinancialInstitution Act 2006.

The Directorate continued toco-operate with other centralbanks in East Africa byconducting joint on siteexaminations and participation

in meetings and deliberationsof Monetary AffairsCommittee (MAC) of the EastAfrican Community. Joint onsite examinations wereconducted to gain exposure, aswell as harmonize supervisorypractices in the region. Duringthe year, the Directoratereceived examiners fromUganda who joined Bank ofTanzania team in examinationof banks and f inancialinstitutions.

5.2 COMPLIANCE WITH THE BASEL CORE PRINCIPLES.

Enactment of Bank of TanzaniaACT, 2006 and Banking andFinancial Institutions Act,2006 among other issueswere meant to incorporateFSAP recommendations oncompliance with Basel CorePrinciples. Further, in an effortto ensure compliance withBasel Core Principles thedirectorate also reviewed theBOT form 16 schedules andPeer group analysis as wellas stress testing to determineearly warning signals.


CHAPTER FIVE

5.3 CAPACITY BUILDING

The Directorate continued totrain Bank examiners to matchthe increasing supervisorychallenges and complexities inthe banking industry.Directorate’s staff weretrained on Risk BasedSupervision methodology toequip them with necessaryskills for implementationof RBS approach. Selectedstaff members attended RBStraining and attachmentprograms in India, Canada,Zimbabwe and Uganda.Directorate staff alsoparticipated in other local andinternational programs suchas money laundering, RiskManagement, new capitalaccord and operations ofcredit reference bureaus.

The Directorate continued tobenefit from the internationaland regional trainingworkshops/courses/seminarssponsored by the FederalReserve System, Bank forInternational Settlements(BIS), and TheMacroeconomic andFinancial ManagementInstitute of Eastern andSouthern Africa (MEFMI).

5.4 COMMITTEE OF CENTRAL BANK GOVERNORS (CCBG) AND COMMITTEE OF CENTRAL BANK OFFICIALS (CCBO) IN SADC.

During the year, the Bankof Tanzania through theDirectorate of BankingSupervision continued tocooperate with andparticipated in forumsorganized by SADC countriesunder the CCBG and CCBO.

During the year the BOTparticipated in the SADCSub committee on BankingSupervision (SSBS) meetingheld in Pretoria, South Africa.In addition, during this period,the Committee of CentralBanks Governors (CCBG) inSADC countries met in SouthAfrica, among other things,Memorandum Understanding(MoU) on Cooperation andCoordination in the area ofBanking Regulatory andSupervisory matters wastabled for approval.

The said Memorandum ofUnderstanding establishes aframework for Cooperationand Coordination betweenSADC Central Banks onBanking Regulatory and


Supervisory matters. Theapplication of this MoU willculminate in harmonizedbanking regulatory andsupervisory features, policy,practice, rules and proceduresacross the SADC Region.

The Bank of Tanzaniacontinued to co-operate withthe SADC Subcommittee ofBank Supervisors (SBSS) onissues related to promotionand enhancement ofbank supervision through

adherence to and promotionof international supervisorystandards; harmonization ofbanking legislation, supervisionsystems and practices;implementation of the CorePrinciples for Effective BankingSupervision; anti-money-launder-ing compliance and combatingof terrorist f inancing andformulation of trainingprogrammes in conjunctionwith regional and internationalbodies.


Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 31AP

PE

ND

IX I

:D

IRE

CT

OR

AT

E O

F B

AN

KIN

G S

UP

ER

VIS

ION

OR

GA

NIZ

AT

ION

CH

AR

T

AP

PE

ND

IX I

I:D

IRE

CT

OR

Y O

F B

AN

KS

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 32

AP

PE

ND

IX I

I C

on

t’d

:D

IRE

CT

OR

Y O

F B

AN

KS

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 33

AP

PE

ND

IX I

I C

on

t’d

:D

IRE

CT

OR

Y O

F B

AN

KS

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 34

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 35

AP

PE

ND

IX I

II:

DIR

EC

TO

RY

OF

FIN

AN

CIA

L I

NS

TIT

UT

ION

S O

PE

RA

TIN

G I

N T

AN

ZA

NIA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 36

AP

PE

ND

IX I

V:

DIR

EC

TO

RY

OF

RE

GIO

NA

L C

OM

MU

NIT

Y B

AN

KS

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 37

AP

PE

ND

IX V

:D

IRE

CT

OR

Y O

F R

EG

ION

AL

IN

ST

ITU

TIO

NS

OP

ER

AT

ING

IN

TA

NZ

AN

IA

AP

PE

ND

IX V

I:L

IST

OF

BU

RE

AU

DE

CH

AN

GE

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 38

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 39

AP

PE

ND

IX V

I C

on

t’d

:L

IST

OF

BU

RE

AU

DE

CH

AN

GE

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 40

AP

PE

ND

IX V

I C

on

t’d

:L

IST

OF

BU

RE

AU

DE

CH

AN

GE

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 41

AP

PE

ND

IX V

I C

on

t’d

:L

IST

OF

BU

RE

AU

DE

CH

AN

GE

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 42

AP

PE

ND

IX:

VI

Co

nt’

d:

LIS

T O

F B

UR

EA

U D

E C

HA

NG

E O

PE

RA

TIN

G I

N T

AN

ZA

NIA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 43

AP

PE

ND

IX V

I C

on

t’d

:L

IST

OF

BU

RE

AU

DE

CH

AN

GE

OP

ER

AT

ING

IN

TA

NZ

AN

IA

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 44

AP

PE

ND

IX V

II:

AU

DIT

FIR

MS

RE

GIS

TE

RE

D B

Y B

AN

K O

F T

AN

ZA

NIA

TO

AU

DIT

BA

NK

S A

ND

FIN

AN

CIA

L I

NS

TIT

UT

ION

S

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 45

AP

PE

ND

IX V

II C

on

t’d

:A

UD

IT F

IRM

S R

EG

IST

ER

ED

BY

BA

NK

OF

TA

NZ

AN

IA T

O A

UD

ITB

AN

KS

AN

D F

INA

NC

IAL

IN

ST

ITU

TIO

NS

Ban

king

Sup

ervi

sion

Ann

ual R

epor

t 46

AP

PE

ND

IX V

II C

on

t’d

:A

UD

IT F

IRM

S R

EG

IST

ER

ED

BY

BA

NK

OF

TA

NZ

AN

IA T

O A

UD

ITB

AN

KS

AN

D F

INA

NC

IAL

IN

ST

ITU

TIO

NS

Printed by Colour Print (T) Ltd

directorate of banking supervision - bot · 2008. 12. 29. · directorate of banking...

Documents