Bank failures in Tanzania have raised concerns among international bank creditors who fear losing their money. Banking in Tanzania is governed by several legal frameworks, including the Banking and Financial Institutions Resolution Act of 2015, the Bank of Tanzania Act of 2006, and the Companies Act of 2002. These laws provide the regulatory foundation for the establishment, operation, and supervision of banks and financial institutions in the country. They also outline the procedures and authorities responsible for addressing bank failures, including the Bank of Tanzania (BOT), which serves as the primary supervisory and resolution authority.
Several Tanzanian banks and credit institutions have received hefty fines for regulatory violations. Notable examples include five domestic banks that received penalties of up to $450,000 for failing to meet minimum capital requirements. Despite their wrongdoings, these banks were not shut down due to the potential systemic risks and economic disruptions that closures could cause. Instead, the BOT opted for fines and remedial actions to address the issues.
Bank Failure in Tanzania
Bank failure in Tanzania is defined as a situation in which a bank is unable to meet its obligations to its depositors, creditors, or other counterparties. This could result from insolvency, illiquidity, or a combination of both, rendering the bank non-viable and leading to its potential collapse. Bank failure in Tanzania is determined by the BOT through a series of assessments, including asset quality reviews, stress tests, and evaluations of the bank’s capital adequacy and liquidity positions. If the BOT deems a bank to be in a precarious financial state, it may declare the bank as “failing or likely to fail.”
The BOT, as the primary bank supervisor in Tanzania, has the legal mandate to identify failing banks, initiate resolution proceedings, and enforce corrective measures. The BOT’s powers are derived from the Banking and Financial Institutions Resolution Act of 2015, which outlines its responsibilities and functions.
After a bank failure is determined, the BOT may initiate resolution proceedings, which could involve a range of measures, including recapitalization, restructuring, or even liquidation. Common reasons for bank failure in Tanzania include inadequate capitalization, poor corporate governance, and weak risk management practices.
The BOT’s supervisory and resolution planning processes aim to preserve critical bank functions and ensure continuity in times of financial distress. This involves proactive supervision, early intervention strategies, and contingency planning for potential bank failures.
When a bank fails, the BOT, as the resolution authority, follows a series of steps. These may include appointing a statutory manager, identifying viable resolution strategies, and engaging with relevant stakeholders, such as creditors and depositors.
Resolution Options and Tools
Several options are available for resolving failed banks in Tanzania, including reorganization, recapitalization, restructuring, or dissolution. Tools such as the sale of the business, bridge banks, and asset separation can contribute to an efficient resolution. The sale of the business involves transferring the assets and liabilities of the failed bank to a third party, while bridge banks are temporary institutions created to maintain critical functions until a permanent solution is found. Asset separation involves transferring the impaired assets of a failed bank to an asset management vehicle for orderly disposal.
Deposit and Creditor Protection Laws
In Tanzania, account deposits are protected by the Deposit Insurance Board (DIB) under the Deposit Insurance Fund (DIF). The DIB guarantees deposits up to a specified limit, ensuring that depositors receive some level of compensation in the event of a bank failure. Other creditor interests are protected under the Companies Act of 2002 and the Bankruptcy Act of 2010, which provide a legal framework for the treatment of creditors during insolvency proceedings.
To ensure that non-viable firms exit the market in an orderly manner, the BOT collaborates with other regulatory agencies, such as the DIB and the Tanzania Revenue Authority, to oversee the resolution process. This coordination helps to minimize the risks and disruptions associated with the exit of non-viable firms.
In the final stage of the resolution process, if it is determined that liquidation is the most appropriate course of action, the BOT follows the provisions of the Companies Act of 2002 and the Bankruptcy Act of 2010. This includes appointing a liquidator, realizing the assets of the failed bank, and distributing the proceeds to creditors in accordance with the statutory hierarchy of claims.