Tanzanian banks post record profits in H1

The Tanzanian banking sector has seen unprecedented growth in the first half of 2022, with commercial banks posting record profits. Most banks witnessed a surge in profits, painting a bullish outlook that the industry's net profit could surpass the one trillion Tanzanian shilling mark by the end of the year. Happy M Saleh, Manager at Ernst & Young Tanzania, shared insights on the remarkable performance of the banking sector in a recent interview with CNBC Africa. The impressive financial results recorded by Tanzanian banks in the first six months of 2022 have raised eyebrows in the industry. Comparing the profits generated in the previous six months, which amounted to approximately 300 billion Tanzanian shillings, the current record profits signify a significant leap. Saleh attributed this remarkable growth to a combination of factors, including supportive monetary policies implemented by the Bank of Tanzania. Two leading banks in Tanzania, NMB and CRDB, have played a pivotal role in driving the sector's growth. These banks, which collectively control over 40% of the industry's total assets, have leveraged their strategic initiatives and vast resources to capitalize on opportunities for expansion. Saleh emphasized that the growth witnessed by these banking giants far exceeds the combined profit growth observed in 2020. The robust growth trajectory of the banking sector can be primarily attributed to the notable increase in both interest income and fees and commission income. Saleh highlighted that advancements in technology have enabled banks to enhance their service offerings and attract more customers, leading to a surge in fee income. Additionally, the shift towards digital banking platforms has resulted in substantial growth in the unfunded portion of banks' portfolios. The positive trend in the private sector credit creation, which escalated by over 13% in the first half of the year according to the central bank, indicates promising prospects for the banking sector in Tanzania. Saleh underscored that the recent decline in interest rates on government securities has prompted banks to redirect their focus towards lending to the private sector to secure higher returns. The favorable business environment fostered by the new government's pro-private sector stance has instilled confidence among banks, encouraging increased lending. As banks in the region steer away from government securities towards higher-yielding private sector credit, Saleh anticipates this trend to persist throughout 2022. While government securities were previously favored by banks due to their low risk profile, the diminishing returns on these investments have prompted a shift towards more lucrative private sector lending. Despite the need for banks to prudently manage credit risk amidst the changing landscape, Saleh remains optimistic about the industry's growth potential. When addressing the possibility of rising interest rates amidst mounting inflationary pressures across various economic sectors, Saleh predicts a status quo in interest rates for the foreseeable future. He noted that the buildup in demand for government securities, which were historically oversubscribed, may temporarily keep interest rates stable until the backlog is addressed. Saleh's insights shed light on the complex dynamics influencing Tanzania's banking landscape, emphasizing the need for prudent risk management practices amidst evolving market conditions. Reflecting on the fragmented nature of the Tanzanian banking sector, Saleh acknowledged the dominance of a few key players controlling a significant portion of the market. While consolidation has been advocated in the past to address inefficiencies and enhance competitiveness, Saleh suggested that the momentum towards consolidation may wane in the coming years. The recent directive by the Bank of Tanzania for banks to achieve a cost-to-income ratio of approximately 55% by year-end aims to drive operational efficiency and safeguard depositors' interests. In conclusion, Saleh emphasized the importance of balancing regulatory measures with opportunities for innovation and growth within the banking sector. While challenges persist, particularly for smaller banks grappling with capital constraints and operational inefficiencies, Saleh highlighted the potential for creative solutions to enhance financial inclusion and expand banking services to underserved rural areas. As Tanzania's banking sector continues on its growth trajectory, industry players are poised to navigate evolving market dynamics and capitalize on emerging opportunities.