Financial Sector Overview
In recent years, Tanzania has achieved good economic performance supported by prudent macro-economic policies, socio-political stability, and a vibrant services sector (41.3% of GDP in 2017). Average GDP growth was 6.1% between 2012 and 2018, well above the sub-Saharan average (3.2%), while per capita income more than doubled between 2000 and 2018, from USD 411 to USD 1,050. The country has vast natural resources, accounting for more than 57% of goods exports. It is also home to about 20% of Africa's large mammal species, with about 38% of the land area set aside as reserves, protected areas, and national parks. The Tanzanian economy also benefits from a privileged geographical position (access to six landlocked countries), making it a regional transport hub.
Although declining, the poverty level remains high at 28.2%, due to rapid population growth, which averaged 3.5% between 2012 and 2018. About 9.7% of the population lives in extreme poverty. The informal sector accounts for a significant share of economic activities. As for the agricultural sector which accounts for about 66.9% of employment, it remains under-developed and accounts for about 23% of GDP, 30% of exports and 65% of industrial sector inputs. The country has a persistent energy infrastructure deficit: only 24% of households have access to electricity. Regarding multilateral development aid, under the 11th European Development Fund (EDF), the country is benefiting from an envelope of EUR 626 million covering the period 2014-2020 and focusing on energy, sustainable agriculture and good governance. The business environment continues to deteriorate. According to the World Bank's Doing Business ranking, the country is among the worst performing economies, ranking 141st in 2019 (134th in 2012) out of 190 economies. Tanzania has a development strategy till to 2025 which should enable the country to transition from a middle-income to a semi-industrialised country by 2025.
Overview of the Financial Sector
Tanzania's financial landscape includes 61 banking institutions, 31 insurance companies, 2 pension funds and a stock exchange. The financial sector's overall assets at end-September 2018 stood at TZS 43,894.8 billion (Tanzanian shillings) or USD 19.1 billion. The financial system is dominated by the banking sector which accounts for 68.2% of total assets.
Banking Market Structure – There are 61 institutions under the central bank’s supervision (previously 67), including 39 commercial banks, 7 community banks, 2 development finance institutions, 5 microfinance banks, 1 mortgage refinancing company, 3 leasing companies and 2 representative offices of foreign banks. The number of bank branches rose to 838 in June 2018 from 530 in June 2012. The number of bank intermediaries continues to grow, almost doubling from 7,841 to 13,679 between 2017 and 2018. The sector's total assets stood at TZS 29 921.1 billion (USD 13 billion) at end-September 2018, with commercial banks holding 92.5% of these assets. The 5 largest banks accounted for 61.3% of assets in 2017.
Structure of loans and deposits in the banking sector – Loans, advances and overdrafts account for more than half of the banking sector's assets (53.3% in September 2018). Credit to the private sector increased by 4% between June 2017 and June 2018 to TZS 17,533.3 billion (USD 7.6 billion), or about 15.1% of GDP. This increase is the result of the Central Bank's flexible policy to stimulate credit growth. The increased mobilisation of public resources (tax revenue and external grants) and the subsequent decline in advances to the government led to an 8.2% reduction in bank credits to the government between June 2017 and June 2018 which reached TZS 3,829.4 billion (about USD 361 million) in June 2018.
Deposit and credit interest rates – The Central Bank adopted a flexible monetary policy aimed at increasing bank liquidity and stimulating the growth of credit to the private sector. The measures taken include lowering the reserve base rate from 10% to 8% in April 2017 and reducing the discount rate from 16% to 12% in March 2017 and to 9% in August 2017. On the other hand, banks have eased credit conditions by slightly lowering the average lending rate from 17.62% in 2017 to 17.42% in 2018. The average lending rate fell from 11.2% to 8.2%.
Banking sector's financial strength – In June 2018, the minimum core capital and overall solvency ratios stood at 18.2% and 20.2% respectively, well above the regulatory minima of 10% and 12%. The ratio of liquid assets reached 37.6%, meeting the regulatory minimum limit of 20%. Asset quality improved significantly. Progress in the transmission of information to the credit reference system database reduced information asymmetries and reduced the proportion of non-performing loans from 10.6% in June 2017 to 10.3% in June 2018. As at June 2018, 54 banks (out of a total of 57) had provided information to the database. However, the ratio of non-performing loans remains above the 5% ceiling. The sector's profitability contracted slightly following the implementation of the International Financial Reporting Standard (IFRS 9) which requires increased provisioning. In September 2018, the return on assets stood at 1.6% while the return on equity stood at 6.6%, compared to 2% and 8.7% respectively in September 2017.
The country has a second National Financial Inclusion Framework launched in December 2017 for the period 2018-2022. The framework's objective is to provide financial products and services that meet the needs of people and businesses, thereby improving living standards and promoting job creation. According to the World Bank's Global Findex, financial inclusion has made significant progress in recent years. 46.8% of adults had an account in 2017, a level above the sub-Saharan average (42.6%), reflecting a 17.6% increase compared to 2014. This progress is partly the result of the rapid adoption and use of electronic platforms offering financial services, mainly mobile money services, and partly the result of significant private sector investment in this area, especially regarding distribution and sales promotion.
However, the estimated 28% of the population over 16 years of age still experiences a high level of financial exclusion. The majority of those excluded are those living in rural areas, small farmers, young people and women. Financial products and services targeting low-income people are poorly adapted. The payments eco-system remains fragmented, resulting in high transaction costs which makes it inaccessible to low-income households. The lack of a comprehensive legal framework to protect consumers of financial products also leads to mistrust of financial consumers. Low literacy is a barrier to financial education for the population in general and entrepreneurs in particular and almost 8 out of 10 adults have an educational level that does not go beyond primary school (Finscope 2017). The opening of bank accounts is hampered by difficulties in verifying the identity of applicants. According to Finscope, only 9% of adults have a national identity card. Lastly, the use of informal finance mechanisms (money-lenders and community groups) remains significant, although it has fallen from 44% in 2013 to 30% in 2017. On the other hand, the proportion of adults using informal savings groups has increased from 12% in 2013 to 16% in 2017.
The Microfinance Sector
A national microfinance policy was adopted in 2000. Its implementation has led to an increase in the number of microfinance service providers and improved products and services. The microfinance sector has several formal institutions: 5 deposit banks specialising in microfinance, community banks, some commercial banks offering microfinance products, and more than 5,800 Savings and Credit Cooperatives Societies (SACCOS). The Cooperative Development Commission is responsible for the supervision of SACCOs in accordance with the Cooperative Societies Act of 2013, while the Central Bank is the regulatory body for banks and other formal institutions specialising in microfinance and others in the sector. In addition to these institutions, there are some government programmes (such as the Small Entrepreneurs Loan Facility (SELF) and those related to the development of youth and women's projects. Informal financial service providers are mostly community-based organisations, Rotating Savings and Credit Associations (ROSCAs), money-lenders and other financial service providers. In 2015, there were about 23,000 informal providers (VICOBA, VSLA, ROSCA, ASCA, and money-lenders) serving 700,000 members, with an estimated capital of TZS 86 billion (USD 37.3 million).
The inadequacy of the legal and regulatory framework of the microfinance sector is an obstacle to its development. Apart from the institutions supervised by the Cooperative Development Commission and the Central Bank, other institutions in the sector and community financial groups are not licensed, regulated or supervised. This results in poor lending conditions, high interest rates and inadequate collection procedures. Several institutions in the sector also suffer from inadequate administrative management, with administrative costs of up to two-thirds of the interest paid by clients. In addition, most unregulated MFIs do not have sufficient information collection and management capacity, and several have inadequate working capital levels. This is due to the lack of a savings culture and the absence of long-term and affordable funding. Lastly, institutional capacity, especially that of governance bodies, remains weak and consumer protection mechanisms are virtually absent. A second national microfinance policy framework was launched in 2017 to address these shortcomings.
The country has a modernised infrastructure and regulations framework. Payment, clearing and settlement systems operate smoothly and efficiently with increasing use of digital channels in the provision of financial services. The processing of almost all government payments (including salaries) through the Tanzania Automated Clearing House (TACH) and Tanzania Interbank Settlement Systems (TISS) resulted in a 55.1% increase in the value of electronic funds transfers between September 2017 and September 2018. The increased use of electronic funds transfers has improved the efficiency of government services while minimising the costs associated with the use of cheques. The National Payment System Act of 2015 establishes a unified regulatory framework for mobile money operators and the financial institutions involved, while specifying the respective roles of the main regulators, including the central bank and the Tanzania Communications Regulatory Authority (TCRA). The regulation requires issuers of mobile money to hold a minimum amount of TZS 500 million (about USD 218,000) in capital to be held in an escrow account with a commercial bank. However, a mobile money operator may not hold more than TZS 500 million with a single bank. The regulation of mobile money transfers and withdrawals also contains provisions on combating money laundering. These include limiting the maximum amount of transfers to TZS 1 million (USD 435) per day with a maximum daily balance of TZS 2 million (USD 870) for customers who only register electronically. These amounts are TZS 3 million (USD 1,306) and TZS 5 million (USD 2,176) respectively for customers who were present at the time of registration.
Tanzania presents itself as one of Africa's mobile money leaders. Mobile money transactions have grown rapidly in Tanzania, providing better access to basic financial services. They accounted for about 52% of GDP in 2015, compared to only 0.2% in 2010. According to the Finscope 2017 survey, 60% of adults (16.6 million subscribers) subscribed to mobile money services. The value of mobile payments reached TZS 40,242.2 billion (USD 17.5 billion) in September 2018, an increase of 19% year-on-year. In volume, mobile payments grew by 35.6%. In March 2018, there were 6 mobile money service providers in the sector. However, the economy is still dominated by the use of cash for transactions. About 90% of adults receive and make payments in cash.
SMEs play a major role in the creation of jobs and generation of income in Tanzania. The country has over 3 million businesses employing more than 5.2 million people and accounting for 27% of GDP. Most SMEs are in the agricultural sector. Limited access to finance and inefficient use of financial products and services constitute one of the major obstacles to SME growth. According to the World Bank, about 44% of Tanzanian businesses reported that they had difficulties in obtaining financing. This is the East African Community's worst performance. Moreover, only 16.6% of businesses have access to a bank loan (or line of credit) compared to 23.6% for sub-Saharan Africa. This level is even lower for small businesses (13.3%). Operating mainly in the informal sector, SMEs also face rigid requirements from financial service providers, especially in terms of Know Your Customer (KYC), formal registration and guarantees. Lastly, interest rates remain high and the financial services offered are not adapted to small businesses which are generally very unproductive and mostly owned by sole proprietors.
The sector is regulated by the 2009 Insurance Act and supervised by the Tanzania Insurance Regulatory Authority. In 2017, the sector comprised 31 companies, including 4 life insurance companies, 25 non-life insurance companies, 1 composite insurance company and 1 reinsurance company. The sector also had 115 insurance brokers and 596 insurance agents. Health insurance dominates the sector, followed by car insurance which is compulsory. Total assets reached TZS 908.9 billion (USD 395.6 million) at end-September 2018, an increase of 3.7% year-on-year, mainly due to an increase in investments in bank deposits and government securities. The latter resulted in a 15.3% increase in investments which reached TZS 633.7 billion (USD 275.8 million). As for gross premiums, they amounted to TZS 525.7 billion (USD 228.8 million), a 7.4% increase compared to September 2017.
Overall, the sector remains capitalised, liquid and profitable. The solvency ratio of non-life insurance companies reached 56.3%, well above the prudential minimum of 25%. Asset quality improved slightly, and investment returns improved from 5.5% in September 2017 to 6.3% in September 2018. Investments in government deposits and securities (Class I assets) accounted for 82.8% of investments, a level that was in line with regulatory requirements that set the minimum share of this asset class at 40%. The liquidity ratio increased from 120.8% in September 2017 to 121.7% in September 2018, a level above the minimum prudential limit of 95%. The increase in the liquidity ratio is due to improved debt collection following amendments to the 2009 Insurance Act, especially the obligation requiring policy-holders to make premium payments directly to insurers and the prohibition on using insurance services provided by non-resident insurance companies. The industry's return on equity was 8.1% in September 2018. Regarding life insurance companies, the solvency ratio stood at 26.5%, an upper prudential minimum level of 8%. The liquidity ratio stood at 65.3% at end-September 2018, above the 50% prudential minimum threshold. The sector's development is hampered by several barriers, including high costs, lack of knowledge on how insurance services work and the conditions on accessing them, as well as the inability of low-income households to access insurance products. The insurance penetration rate remains low and it accounted for 0.55% of GDP in 2017.
Activity in the government bond market is mainly in primary market auctions, while there is little trading in the secondary market. The participation of banks and other investors is mainly concentrated on shorter maturity treasury bills (initially between 35 and 364 days), while Treasury bonds, with initial maturities between 2 and 15 years, form a smaller pool of government securities generating few transactions. The African Bond Market Development Index’s annual ranking published by the African Financial Markets Initiative (AFMI) ranked Tanzania 14th (16th in 2016).
The capital market is governed by the 2002 Capital Markets and Securities Act and regulated by the Capital Markets and Securities Authority (CMSA). It comprises 28 listed companies. In addition, the sector includes a commodity exchange established in August 2014 based on a public-private partnership which started operations only in 2018. The stock market continues to be dominated by the participation of foreign investors who account for 84.4% of purchases and 79.6% of sales. Foreign investors can participate in this market, although their participation is subject to certain restrictions. A 2003 regulation on capital markets and securities sets the proportion of securities that can be held by foreign investors at a limit of 60%, with 40% reserved for Tanzanians. However, Tanzanians can participate in the 60% allocated to foreigners. The volume of transactions on the stock market declined between April and September 2018 due to a tightening of liquidity on the market. This trend is partly due to a decrease in foreign investors' participation in the equity market and a lower participation of pension funds and banks in the bond market. Between 2014 and 2017, the stock exchange recorded only 7 initial public offerings (IPOs) for a cumulative amount of USD 240 million. Total market capitalisation reached 17.5% of GDP in September 2018.
The level of liquidity on the stock exchange is still low, due to the narrow domestic investor base. In addition, the slow pace of price adjustment in response to new information affects market efficiency. The number of participants is still small, with only 25 companies listed on the stock exchange. The dominance of foreign investors is due to the lack of collective investment instruments that can act as market makers. The lack of knowledge of the stock market also results in a low participation level by private individuals. According to the Finscope 2017 survey, less than 1% of adults use capital market products. Lastly, there is no dispute settlement mechanism, however there are plans for the creation of the Capital Market Tribunal.
Social protection programmes accounted for 2.35% of GDP in 2016. Tanzania has two statutory social security schemes regulated by the Social Security Regulatory Authority (SSRA): the Public Service Social Security Fund (PSSSF) and the National Social Security Fund (NSSF) for the public and private sectors respectively. The PSSSF was established in August 2018, following the merger of four other public funds. It accounts for 56% of total assets and 72% of members, mainly civil servants. Assets stood at TZS 12,042 billion (USD 5.2 billion) in September 2018, down 1.2% year-on-year. This decrease is attributable to the increase in outstanding benefit payments relating to the former funds prior to the merger. Investment returns improved from 6.7% in September 2017 to 6.8% in September 2018, with interest on government securities, term deposits and loans contributing mainly to the increase. Government securities accounted for the largest share of investments (33.8% of total assets), followed by real estate investments (19.8%). The ratio of contribution revenues to benefit payments increased from 1.8% in September 2017 to 1.3% in September 2018, reflecting an increase in benefit payments relative to contributions. The dependency ratio, measured as the number of active members of the pension system supporting a pensioner, decreased from 12.3% to 8.8%. This decrease is mainly due to the relatively large number of early retirements over the observation period. In addition, the sector continues to maintain its administrative expenses within the regulatory limit of 10% set by the guidelines on social security schemes.
However, social security covers less than 1% of the total population and about 6.5% of the labour force in a context of high unemployment. Almost the entire informal sector is not covered by any form of social security system, implying the use of informal social security systems based on family or community support. Lastly, the low level of public awareness leaves a significant part of the population outside the scope of social security issues. About 25% of adults aged 55 and under have no pension plan (Finscope 2017).
 Based on the national poverty line
 Community banks are small institutions generally created to serve specific regions. They accounted for 2% of total assets in September 2018.
 A national financial inclusion framework had been developed. It covered the period 2014-2016.
 VICOBA: Village Community Banks
 VSLA: Village Saving and Loans Association
 ROSCA : Rotating, Savings and Credit Associations
 ASCA : Accumulated Savings and Credit Associations
 ASCA : Accumulated Savings and Credit Associations
 TACH: Tanzania Automated Clearing House
 TISS: Tanzania Interbank Settlement System
 TCRA : Tanzania Communications Regulatory Authority
 Only about 4% of small businesses are registered with the Business Registration and Licensing Agency and few of them have a tax identification number.
 Capital Markets and Securities Authority
 Tanzania Mercantile Exchange (TMX)
 SSRA: Social Security Regulatory Authority
 PSSSF: Public Service Social Security Fund
 NSSF: National Social Security Fund
 The four other public social security funds that have merged are: The Parastatal Pension Fund (FPP), the Public Service Pension Fund (PSPF), the Local Authorities Pension Fund (LAPF) and the Government Employees Provident Fund (GEPF).