Ernst & Young: Why Tanzania’s banking sector is ripe for consolidation

The banking sector in Tanzania is currently facing a wave of consolidation, with at least eight banks in the process of merging, according to a recent report by Ernst & Young Tanzania. Stanley Bijura, Senior Manager for Strategy and Transactions at EY Tanzania, highlighted the sector's resilience amidst the challenges posed by the COVID-19 pandemic. Despite a marginal decline in growth in 2020, the banking sector in Tanzania managed to grow by 4.1%. This growth can be attributed to several factors, including measures taken by the Bank of Tanzania to support the sector. The central bank cut the discount rate from 7% to 5% to encourage lending, reduced the statutory minimum reserve from 7% to 6% to increase liquidity, and allowed greater flexibility around loan restructuring and classification. These measures provided banks with the necessary support to navigate the economic uncertainties caused by the pandemic. Bijura emphasized that the focus for banks has been on shoring up their balance sheets and serving existing clients rather than extending new credit. The trend of consolidation in the banking sector is expected to continue, with recent mergers including NIC with CBA forming NCBA Bank and NMB acquiring China Commercial Bank. The Governor of the Bank of Tanzania has indicated that more mergers should be expected in the future, with a focus on creating stronger institutions with better capital adequacy, liquidity, and asset quality. The aim is to reduce the number of banks in the sector while bolstering overall strength. The consolidation efforts are primarily targeting small and regional banks that have struggled with growth and capital adequacy. This strategic approach is aimed at enhancing the overall stability and sustainability of the banking sector in Tanzania. From a macroeconomic perspective, Tanzania has maintained relatively low and stable headline inflation, averaging around 3.3% in 2020. Despite a slight decline in GDP growth to around 5-5.5% in 2020, Tanzania has demonstrated resilience compared to other countries. The economy managed to weather the storm of the pandemic with minimal disruptions, allowing businesses to continue operating. While sectors like tourism were heavily impacted, the overall economy remained relatively stable. The government's approach of balancing restrictions with the need for economic activity contributed to this stability. Looking ahead, Tanzania's banking sector is poised for further consolidation and strengthening, as efforts to create a more robust and efficient industry continue to unfold.