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Implications of banks merger, consolidation key to economy

PROFITABLE growth and maximisation of the wealth of shareholders are the prime objective of every business enterprise. To maximise shareholders wealth and achieve profitability growth of business, it is a prerequisite for any corporation to limit competition to gain economics of large scale and increase its income with proportionally less investment.

In business, corporate restructuring has helped many businesses to re-establish their competitive advantage and respond quickly and effectively to emerging opportunities and unforeseen challenges.

In my opinion, there are two ways a business can grow: organic growth which relates to the turnover of a business and inorganic growth with also involves skipping few steps of the business ladder, corporate restructuring and business combination.

For financial sector in particular, a profitable growth of business in my opinion can be achieved successfully if merger is adopted as a strategic tool.

Recently, BOT Governor Prof Florens Luoga, at the event to mark the merger of China Commercial Bank Ltd with NMB Bank PLc in Dar es Salaam, indicated that, in Tanzania, at least eight banks are in the process of merging so as to meet liquidity and other laid down sector requirements.

Without going into the detail on banks names, the governor hinted that his august office has received merger request and amongst these banks, amongst them had reached certain stages to complete merging process before an approval can be granted.

Much as merging could be viewed as a positive trend towards strengthening the actors in the sector on pretence that strong banks attract more confidence amongst depositors and investors.

One is left to wonder why at the beginning knowing there could be liquidity challenges some of these banks were given license? Could this signal proper work wasn’t done by the supervisory body? Sources from the industry indicate that by end of third quarter 2020, Tanzania had 49 banks among which 38 are commercial banks, 5 community banks, 4 microfinance and 2 are development banks.

Looking at the banking sector in their totality, NMB Bank that is merging with China Commercial Bank Ltd, when compared to its peers generated the utmost profit in the history of the Banking sector in Tanzania. While banking sector recorded profit before tax of 590bn/- in 2019 from 313bn/- in 2018 in the year ended 31st December 2020, the Bank recorded a Profit after Tax (PAT) of TZS 205.5bn, 45 per cent more than in the previous year attributed the Bank’s inspiring recital to execution of the bank’s strategic plans, which centre on rising income and refining operational efficiency by leveraging on technology to drive customer experience and cost efficiency.

Certainly, in my opinion, taking over China Commercial Bank Ltd setup, not only timely, but is a sensible undertaking. Pushing ahead with efforts to strengthen banks by inspiring the consolidation and merging their operations into the new established consolidated banks or merged and take over subsequent concerns over the liquidity of the individual lenders after being judged not to have met operational requirements relating to capitalisation increases and liquidity is good thing that could see the number of local lenders being reduced from more than 49 to fewer banks.

I am of the view that few and strong banks with quality facilities is what Tanzania need to help maintain middle economic income status the country attained recently.

Maintaining the status made will help to retain wealth in Tanzania if the dominant banks in the country are, not only strong in terms of assets but are local owned. It is very prosperous for our future. Much as eight banks to merge are aimed at meeting liquidity threshold, merging could lead to medium-term benefits with shortterm challenges as well.

While the merge are expected to offer a boost to the broader economy by bolstering the Tanzania financial sector, there are concerns there could be some short-term costs involved.

In its most recent review of Tanzania’s economy, the World Bank and economic experts have outlined how Tanzania can recover from the covid-19 crisis and sustain its middle-income status while attaining other development targets.

The Bretton Woods institution projects Tanzania to have largest economy in East Africa and will grow between 3 and 5.3 per cent in 2021. This is even as the government expected 5.5 per cent growth in 2020 and projected growth of over 6 per cent this year.

In realising the goals of the vision 2025 will require strong financial sector with capacity to grease financial need from industrialists and businesses.

Thus, the strengthening of the financial sector as a key factor that would improve medium-term prospects for economic growth is significant While thinking behind business merging could be viewed as a solution to strengthen financial sector, mirroring on Tanzanian case and the manner in which these banks are sanctioned to operate and now a move to merge is emerging leaves a lot of questions unanswered.

Much as there could be many concerns out there at least in my view have few issues that need reflection as far as bank merger and consolidation move means to the economy, financial sector, government and customers or consumers of the banks services.

As eight banks lined up to merge, is it an indication of failure or strengths of Tanzanian banking sector? Or could one have the opinion that banks in Tanzania are unstable that is why regulator keeps intervening, and importantly why now?

Is it because of bank’s regulatory regime in Tanzania is signalling behaviour and ground to expound why banks are failing or the regulator is effective in ensuring that even with bank closure and merger customers haven’t lost their deposits.

Seeing at merger in a different way, will merger improve financial inclusion as medium and small banks are now going to be swallowed?

I am made to understand that competence for these banks lied on serving small, medium and micro businesses. Will big bank swallowing these small and medium banks fill the gap?

To site a case at hand, is NMB going to be friendly in terms of access and cost effective to Manzese or Temeke or Mwenge or Njia panda Himo petty traders as is the case with relatively small banks such as DCB or Finca?

IMF e-library sources (seewww. elibrary.imf.org) on banks soundness and macroeconomic policy report dated 1996, looking into 10 challenges confronting regulators and supervision on banks stated that all too often regulators, legislators or supervisors fail to come out with robust solution and meet acknowledged challenges adequately facing banking operation.

The article further nodded that poorly designed incentive structure may encourage banks supervisors to pursue business interest that detract from bank soundness concluding it is not appropriate, however, to adjust prudential regulations in an attempt to use them as macroeconomic instruments.

Regulations, which in my view are key, according to the report illustrate that banks may fail by regulator being too lax, too intrusive, poorly premeditated, or ineffectively executed. Analysing deficiencies in regulation and supervision from selected banks regulator from 34 countries i.e. Argentina, Bangladesh, Bolivia, Brazil, Chile, Czech Republic, Egypt , Estonia, Finland, France, Ghana, Hungary, Indonesia, Japan, Kazakhstan, Kuwait, Latvia, Lithuania, Malaysia, Mexico, Norway, Pakistan, Paraguay, Philippines, Poland, Russia, Spain, Sweden, Tanzania, Thailand, Turkey United States, Venezuela and Zambia identified deficiencies in regulation and supervisions that in my onion could provide a lesson learning.

In detail on Tanzania, the study noted that practical regulations were frail; supervision was lax and concerted on compliance with credit allocation plans rather than financial condition and above all, there was insufficient loan classification and provisioning.

Could findings for such assessment explain why keeping the banking system sound and robust is right and timely to growth of the economy?

TANZANIA Mortgage Refinance Company (TMRC) has issued ...

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Author: HILDERBRAND SHAYO

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