Tanzania - Financial Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16751 PERFORMANCE AUDIT REPORT TANZANIA FINANCIAL SECTOR ADJUSTMENT CREDIT (CREDIT 2308-TA) June 23, 1997 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents Currency unit: Tanzanian shilling (TSh) T Sh/US$ Year Annual average End period 1990 195.06 196.60 1991 219.16 233.90 1992 297.71 335.00 1993 405.27 479.87 1994 509.63 523.45 1995 574.76 550.36 Oct. 1996 592.67 597.09 Abbreviations and Acronyms CAMEL - Capital adequacy, Asset quality, Management efficiency, Earnings, and Liquidity CRDB - Cooperative and Rural Development Bank DJIT - Diamond Jubilee Investment Trust IDA - International Development Association LART - Loan and Advances Realization Trust NBC - National Bank of Commerce OED - Operations Evaluation Department PBZ - People's Bank of Zanzibar PCR - Project Completion Report TDFL - Tanganyika Development Finance Limited TIB - Tanzania Investment Bank T Sh - Tanzanian shilling Government fiscal year Fiscal 1995: July 1, 1994 to June 30, 1995 Director-General, Operations Evaluation Department Mr. Robert Picciotto Director, Operations Evaluation Department Mr. Roger Slade for Ms. Elizabeth McAllister Acting Division Chief : Mr. Rene Vandendries Task Manager : Mr. Nicolas Mathieu FOR OFFICIAL USE ONLY The World Bank Washington. D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 19, 1997 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Tanzania Financial Sector Adjustment (Credit 2308-TA) Attached is the Performance Audit Report (PAR) on the Financial Sector Adjustment Credit (Credit 2308-TA) prepared by the Operations Evaluation Department. A Credit in the amount of SDR 150 million was approved in FY92 and closed in FY95, with half year delay. An additional SDR 8.17 million from IDA reflows was provided in FY93. The credit was fully disbursed. Switzerland and United Kingdom cofinanced the program for an equivalent of US$ 6.6 million and US$ 16.8 million respectively. The main objectives of the program were to: (i) make the macroeconomic framework more favorable to financial sector performance; (ii) improve competition within the financial system by facilitating the entry of new banks; (iii) strengthen Central Bank supervision capacity; and (iv) restructure individual public banks including the dominant deposit bank (NBC), with bad loans transferred to a Loan and Advances Realization Trust (LART). A major shortcoming of this approach to reforms was to support competition while maintaining NBC as a dominant financial institution through a restructuring program. The program failed to achieve most of its policy and institutional objectives. On the macroeconomic side, no real attempt to reduce the budget deficit was made before 1993, and efforts remained minimal after tranche release. New bank supervision regulations were adopted but administrative supervision capacity built up slowly. Regarding competition, only a few foreign banks were installed after 1993. The LART facility was established as scheduled but liquidation and loan recovery actions were slow to start. Many bad loans were not transferred to LART, and for these loans, it was practically impossible to enforce a court injunction to repay or to get a court decision to liquidate a business. The PAR confirms the ratings of the PCR review. The PAR rates the outcome of the adjustment program as unsatisfactory and the sustainability of the project is rated as unlikely. Institutional development impact is rated as negligible, since the organizational and managerial restructuring of the main banks has been too slow to provide significant institutional strengthening. The main lesson emerging from project experience is that conflicting objectives in a financial sector program should be recognized early in the process and resolved at the project design stage. At implementation, it was practically impossible to achieve more competition in the domestic market, while supporting a restructuring program which maintained the predominance of a large and inefficient financial institution. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Contents Preface..... ........ ................................................ 3 Basic Data Sheet..................................................................... 5 Evaluation Summary ...................................................7 1. Background ............................................................................................................................. 11 The Incentive System...........................................11 Reform of Parastatals .................... ............... 11 Financial Sector Reforms .................................... ....... 12 Macroeconomic Impact of the Reforms ....................... ............... 13 Current Issues in the Financial Sector................................... 14 2. Project Objectives and Relevance ...................................................................................... 15 Objectives ..................................................... 15 Relevance ...................................................... 15 3. Project Implementation, Outcome, and Sustainability...................................................17 Implementation....................................................17 Outcome.......................................................17 Outcomes of Individual Banks...................... .................20 Assessment....................................................23 Sustainability.............................................................24 Bank Performance................................................25 Borrower Performance............................................. 25 4. Findings, Lessons and Next Steps....................................... 26 Findings....................................................... 26 Lessons....................................................... 26 Next Steps..................................................... 27 Annexes ........................................................... 29 Figures ...............LessonsanNe ..........................................................................................18 3.1 Current Account and Fiscal Balances .......................... .........18 3.2 Inflation Rate and M2 Growth.......................26.... ...........18 3.3 B road M oney ...................................................................................................................... 19 Figu Re l ................ ..............................................................................................................18 3.4 Real Deposit Rates......................... .............. 19 Nicolas Mathieu (Task Manager), acknowledges with thanks the contributions of: Salman Anees who prepared the financial analysis; and Jasmine Mason-Anderson and Eneshi Irene K. Davis who provided administrative assistance. 2 Tables ................................................................................................................................. 12 1.1 Macroeconomic Indicators ................................. ......... 12 1.2 Savings Mobilization in East Africa ........................... ......... 13 3.1 Selected Financial Indicators for the National Bank of Commerce.... ...................21 3.2 Selected Financial Indicators for the Cooperative and Rural Development Bank .....22 3.3 Selected Financial Indicators for the People's National Bank of Zanzibar ..........23 3.4 Selected Financial Indicators for the Tanzania Investment Bank...... ....................23 3 Preface 1. This is the Performance Audit Report (PAR) for the Financial Sector Adjustment Credit (Credit 2308-TA) to the Government of Tanzania. The credit, amounting to SDR 150.2 million, was approved by the World Bank's Board of Directors on November 14, 1991, became effective on November 20, 1991, and closed on December 12, 1994. There was no cancellation. The final disbursement was made on December 12, 1995. The funds made available under the credit were augmented by International Development Association (IDA) reflows in fiscal 1993 of SDR 8.17 million, raising the total financing to SDR 158.37 million. Switzerland cofinanced the equivalent of US$6.6 million and the United Kingdom cofinanced US$16.8 million. 2. This report was prepared by the World Bank's Operations Evaluation Department (OED). In addition, a Project Completion Report (PCR) was prepared by the Bank's Africa Regional Office. This report is based on the PCR, the President's Report, loan documents, recent Bank reports, staff files, discussions with Bank staff, and the findings of an OED mission that visited Tanzania in October 1996. The mission is grateful to the many government officials and members of the financial community in Tanzania who cooperated with and supported this evaluation. 3. This audit supplements the findings of the PCR with further insights on the financial sector's performance, based on data collected in the field and updated information. Based on these additional findings, the audit derives new lessons and draws implications for future lending. 4. The draft PAR was sent to the Borrower and Cofinanciers for comments. No comments were received.  5 Basic Data Sheet FINANCIAL SECTOR ADJUSTMENT CREDIT (CREDIT 2308-TA) Key Project Data (amounts in Us$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 234.7 - - Credit amount a/ 211.3 211.0 99.8 Cofinancing: 23.4 23.4 100 Government of Switzerland 6.6 6.6 100 Government of United Kingdom 16.8 16.8 100 Cancellation - - - a! The appraisal estimate was revised after the credit was augmented by IDA reflows of SDR 8.17 million in fiscal 1993. Cumulative Estimated and Actual Disbursements FY92 FY93 FY94 FY95 Appraisal estimate (US$M) - - 211.3 - Actual (US$M) 81.7 98.0 209.0 211.0 Actual as % of appraisal - - 98.9 - Date of final disbursement: December 31, 1995 Project Dates Original Actual Appraisal Mission 07/91 07/91 President's Report 09/91 10/91 Negotiations 09/91 09/91 Board approval 11/91 11/91 Signing 11/91 11/91 Effectiveness 11/91 11/91 Closing date 06/94 12/94 6 Staff Inputs (staff weeks) FY90 FY91 FY92 FY93 Total Preappraisal 109.5 5.4 - - 114.9 Appraisal - 34.1 - - 34.1 Negotiations - 9.3 - - 9.3 Supervision - 27.1 43.3 20.3 90.7 PCR - - 7.0 7.0 Total 109.5 75.9 43.3 27.3 256.0 Mission Data Date No. of Staff weeks Date of Report Specialization (month/year) persons infield Represented Supervision I 02/92 5 - 03/92 Finance Supervision II 05/92 5 13.5 06/92 Finance Supervision III 11/92 4 4.2 11/92 Macroeconomics Supervision IV 03/93 3 3.0 04/93 Economics Other Project Data Borrower/Executing Agency: Government of Tanzania FOLLOW-ON OPERATION Operation Credit no. Amount Board date (US$ million) Financial Institutions Development Project C 2771 10.9 08/95 7 Evaluation Summary Background Macroeconomic environment 1. In the past decade Tanzania has made significant progress in liberalizing its economy. The incentive system has been restructured. Restrictive and pervasive state controls have been abandoned. The exchange system was rationalized in June 1994, when foreign exchange auctions were replaced by an interbank market for foreign exchange. Trade policies were also liberalized. In 1995 good agricultural performance boosted GDP growth to 5 percent, foreign investment growth was above average, and gross foreign reserves improved in the second half of the year. 2. The country's economy has not been free of problems, however. In 1993 the Government introduced a parastatal reform program designed to increase competition, liquidating uneconomic units and divesting others. Implementation of the program, however, has been slow. Moreover, double-digit inflation persists, though it dropped from 30 percent in 1994 to 27 percent in 1995. Tanzania also faces severe fiscal problems. The Government deficit jumped to 8.9 percent of GDP in fiscal 1995, up from 5.4 percent in fiscal 1994 and a 0.9 percent surplus in fiscal 1992. In addition, the insolvency of many state-owned parastatals and the slow pace of parastatal reform have hindered the Government's ability to improve the performance of the financial sector. Financial system 3. At the end of the 1980s Tanzania's financial system was relatively underdeveloped. The country's financial institutions comprised three commercial banks, two development banks, several small nonbank financial institutions, and the Diamond Jubilee Investment Trust (DJIT). Except for the investment trust, all of these were owned by the state. The combination of financial repression, small capital bases, insufficient loan loss provisioning, and directed credit had made most of these institutions insolvent. 4. At that time, the country's financial system was in crisis. Competition in the sector was severely limited, credit was directed by Government policies, interest rate controls were excessive, and bank supervision was weak. Directed credit led to the financing of uneconomic activities and the misallocation of resources to loss-making parastatals and cooperatives, causing banks to accumulate nonperforming loans. At the main commercial bank, the National Bank of Commerce (NBC), nonperforming loans accounted for 60-80 percent of total loans outstanding. 5. Financial sector adjustment efforts began in the early 1990s. Interest rates, liberalized early in the process, have been high, with lending rates averaging about 40 percent and deposit rates averaging 25 percent. Inflation also has been high, at about 30 percent, reflecting high money growth due to lax commercial loan policies during 1986-90. Spreads in the banking system have ranged around 13-15 percent, at times reaching 20-25 percent. But even these high spreads have been insufficient to cover the provisioning requirements introduced in 1991, since all state-owned financial institutions were saddled with sizable nonperforming loan portfolios. 8 6. Faced with a severe crisis in the financial sector, the Government issued a letter of sectoral policy in October 1991 announcing its intention to reform the sector and to make it operate according to market-oriented principles, efficiently mobilize and allocate resources, and foster long-term economic growth. The envisaged reform program was supported by a Financial Sector Adjustment Credit from the International Development Association (IDA). Project Objectives 7. The Government had already taken a number of steps to reform the financial sector before and during the preparation of the credit (1990-91). In February 1991, building on the recommendations of the National Banking Commission, the Government issued a policy statement on financial sector reform that stressed the Government's commitment to an "effective and efficient" banking system that was "independent, competitive, and operating on sound banking principles." The Government also enacted the Loans and Advances Realization Trust Act, designed to help quickly recover the overdue debts of banks and financial institutions. 8. Building on these achievements, the credit sought to ensure that the macroeconomic framework would support financial sector performance, improve competition within the financial system, strengthen Central Bank supervision capacity, and restructure individual banks, including the transfer of bad loans to a Loan and Advances Realization Trust (LART). A major shortcoming of this approach to reforms was the conflict between promoting competition and restructuring the dominant commercial Bank, the NBC, without splitting it. Implementation 9. Program implementation was slow. No real attempt to reduce the budget deficit was made until 1993, and efforts remained minimal throughout the life of the credit. New bank supervision regulations were adopted, but administrative supervision capacity built up slowly. Only a few foreign banks began operations. The LART facility was established as scheduled, but liquidation and loan recovery actions were limited. Moreover, a number of bad loans were not transferred to the trust, and for those it was practically impossible to enforce a court injunction to repay or to get a court decision to liquidate a business. Thus it is surprising that in 1993 the World Bank determined that the tranche release conditions had been met and the loan was fully disbursed. Outcome 10. The project did not achieve its objectives. The macroeconomic framework was not conducive to financial sector reforms. The government budget remained in deficit, mainly because public debt and inflation remained high and domestic resources were limited. The banking system was deregulated and liberalized, and a treasury bill auction was introduced as part of the Bank of Tanzania's efforts to use indirect methods of monetary control. But weak fiscal performance, coupled with an accommodating monetary policy and reversals in the restructuring of the NBC, undermined accomplishments in this area. 11. Progress toward objectives more directly related to financial institution development also was limited, despite the achievements noted in the Implementation Completion Report. The new supervision capacity was implemented during a period of major restructuring and could not be tested on regular banking activities. Moreover, the entry of new banks did not really 9 stimulate competition. The new banks targeted customers with large accounts, especially enterprises, and focused on trade finance, and so worked in different markets than the existing commercial banks. Even in the few segments where they carried out tasks similar to those of commercial banks, the foreign banks did not compete on prices. And because the pricing of their services was based on the dominant and least efficient intermediary (the government-owned NBC), the new banks avoided any potential competition on prices. Finally, progress in strengthening existing banks has been disappointing. Publicly owned commercial banks are still close to insolvency, incurring losses, or barely making profits. Sustainability 12. The long-term benefits of the operation could differ from the immediate ones only in few areas. Initiatives taken under the credit-and the subsequent Financial Institutions Development Project-could have positive long-run effects. All parties in the banking system now recognize the need for continuous and tight bank supervision. The Central Bank's supervision capacity has expanded from onsite to offsite and is becoming more effective. In addition, some financial institutions are quite advanced in their restructuring, though they are still not viable. Finally, the banking system has changed from a centralized directed credit system to a decentralized and potentially competitive system in which accountability is sought at the micro level. 13. Still, splitting and privatizing the NBC remain major items on the reform agenda. The World Bank is preparing a new adjustment operation that includes a large financial sector component. In the credit proposal, the restructuring and recapitalization of the NBC is closely associated splitting and privatization. This new approach could signal a departure from past errors. For the time being, however, the financial sector adjustment credit is unlikely to be sustainable. World Bank Performance 14. The World Bank advised the borrower (Government of Tanzania) on policy reforms and institutional measures and helped design the project and coordinate donors. Still, the Bank's effectiveness was undermined by the incongruity in the project design between promoting competition and maintaining the NBC. Both the NBC and the Government were unconvinced by the National Banking Commission's July 1990 proposal to split the NBC. Since doing so would have promoted restructuring and competition in the financial sector, the Bank should have endorsed the proposal of the National Banking Commission. Instead it chose to support the Government's position. 15. The project also suffered from lack of staff continuity in preparing and implementing the credit. Task managers and mission teams were arbitrarily changed during the life of the credit. Conflicting views about project design between regional and central departments were frequent and left unresolved. As a result a sustained dialogue never emerged, and the conflicting and frequently changing advice offered by Bank staff frustrated the Tanzanians and eroded Tanzanian ownership of the program. Borrower Performance 16. Measures were taken to deregulate and liberalize the financial sector and new private banks were licensed, but Tanzania's banking sector does not yet show real signs of domestic 10 competition. Although the Government interferes less in the daily operations of banks and has ensured that banks will operate according to commercial principles, with the exception of the CRDB, bank managers have resisted implementing policies consistent with the overall strategy for the financial sector. Findings, Lessons, and Next Steps Findings 17. Considerable time and energy was wasted in attempting to restructure and recapitalize the entire NBC. The National Banking Commission's July 1990 proposal to split the NBC should have prevailed, since it would have promoted competition, and restructuring along business lines would have been easier than large-scale restructuring of the entire institution. It also would have been more conducive to privatization, although that objective was not considered by the commission. 18. The inefficient judicial system also impaired project implementation. Only the Loan and Advances Realization Trust could enforce recovery of loans. Many bad loans were not transferred to the trust, however, making it practically impossible to enforce a court injunction to repay or to get a court decision to liquidate a business. Moreover, a portion of the credit was used to finance imports, leaving the banking system illiquid. This illiquidity was reinforced by the approach to restructuring, in which bad loans were replaced by government bonds that never paid interest and could not be redeemed. Finally, slow progress in privatizing parastatals contributed to the buildup of bad loans in commercial banks. Because most parastatals were not financially viable, most of the loans made to them have not been recovered. Lessons 19. Sequencing. The World Bank's financial sector strategy for Tanzania was based on the belief that interest rate liberalization, together with the introduction of competition in the sector, would provide enough incentives to restore financial viability in the banking system. The insolvent state-owned banks did not, however, shrivel and die as was expected. The NBC remains the dominant financial institution. Liberalization came too early, before an effective legal and regulatory framework was in place. Moreover, delayed restructuring of parastatals hampered efforts to create a competitive financial sector. 20. Commitment and implementation capacity. Stakeholder commitment to reform is essential for project success-a fact that both the Bank and the borrower appear to have overlooked during project implementation. In addition, Tanzania did not have enough well- trained personnel to implement all the recommendations made under the financial sector reform program. Next steps 21. As the Tanzania Banking Commission proposed six years ago, splitting the NBC is essential. In addition, the split should be accompanied by privatization to avoid government interference and to generate new cash resources. Further restructuring and recapitalization should be carried out within the new smaller and privatized units. The new credit under preparation appears to be designed along these lines. 11 1. Background 1.1 Tanzania, a low-income country in East Africa, has an estimated official per capita income of about US$100. From the mid-1960s to the mid-1980s, the country pursued economic growth and development policies based on centralized controls and direct state investment in all sectors. Although this approach initially yielded progress in economic and social development, inefficient parastatals, restrictive policies, and a series of external shocks led to serious macroeconomic imbalances. Since the mid-1980s Tanzania has adopted reforms designed to liberalize nearly every aspect of the economy, efforts embodied in the Economic Recovery Program of 1986 and the Economic and Social Action Program of 1989. In the early 1990s reforms were extended to the trade, industrial, and financial sectors, and are still being actively pursued. The Incentive System 1.2 Price and market reforms. Early reforms focused on reviving agriculture to lead the economic recovery. Most controls, including restrictions on the marketing and transport of food grains, were abolished in 1989. Fertilizer subsidies were phased out. Producer prices in agriculture were freed between fiscal 1991 and fiscal 1993. The list of items subject to price controls shrank from 400 in the early 1980s to only petroleum products and electricity today. However, discriminatory regulations and practices still favor the public sector and to state- sponsored cooperatives. 1.3 Exchange rate reform. The system of foreign exchange controls, which resulted in an 800 percent premium in the parallel exchange rate market in the mid-1980s, was effectively restructured. Exchange rate controls were abolished. In August 1993 the official exchange rate was set based on the rate prevailing in the foreign exchange auction. The exchange system was further rationalized in June 1994, when the auction was replaced by an interbank market for foreign exchange. 1.4 Trade reform. Trade policies were also liberalized. A system of open general licenses replaced quantitative import restrictions. The tariff system was rationalized, and impediments to exports were removed. Restrictions on the current account regarding international payments and transfers were eliminated. Export volume rose by an average of 7.5 percent a year during 1987- 94, though the boost export receipts gave to external accounts was offset by a deterioration in the terms of trade (Table 1.1). The revival of exports coincided with the depreciation of the exchange rate. Reform of Parastatals 1.5 Until recently parastatals were not required to hew to fixed budgets. Moreover, most parastatals have received various explicit and implicit subsidies, including bad loans from commercial banks. In 1993 the Government introduced a parastatal reform program that emphasized increasing competition, including liquidating uneconomic units and divesting 12 others.I Progress has been slow, however. Of the 300 parastatals at the start of the program, sales agreements had been signed for 75 by December 1995. Still the imposition of fixed budget constraints is having some effect. Commercial bank credit to parastatals, including cooperatives and marketing boards, dropped by 23 percent between fiscal 1993 and fiscal 1995. Table 1.1: Macroeconomic Indicators for Tanzania, Fiscal 1987-94 Indicator 1987-90 1991-94 GDP growth 6.9 1.9 Population growth 3.3 3.0 Export growth 9.5 5.5 Import growth -3.0 11.6 Current account balance/GDP -22.2 -24.0 Fiscal balance/GDP -3.8 -6.4 Total expenditure/GDP 20.2 24.0 Revenue/GDP 16.3 17.6 Terms of trade (change) -8.9 -27.6 Domestic inflation 30.7 27.5 Note: GDP growth and trade data are available only through 1993. Source: World Bank Economic and Social database, STARS World*Data. Financial Sector Reforms 1.6 Until 1993 the banking system consisted of insolvent and inefficient government-owned banks. The largest, the National Bank of Commerce (NBC), accounted for roughly 90 percent of commercial bank deposits. The Cooperative and Rural Development Bank accounted for about 5 percent. The rest of the commercial banking sector consisted of the Tanzania Housing Bank and the People's Bank of Zanzibar. In 1991 the Government issued a policy statement on financial sector reform that acknowledged the perverse impact government interference and the lack of competition were having on the sector. In an important reversal of policy, the Banking and Financial Institutions Act was enacted to allow for private banking. In addition, interest rates were liberalized. Banks were allowed to set lending rates below a government-set ceiling and to set deposit rates freely, subject to the 12-month deposit rate being positive in real terms. The NBC underwent restructuring that involved rationalizing its branch structure and transferring some of its nonperforming assets to the Loans and Advances Realization Trust, a specialized and autonomous loan recovery agency. Although many loss-making parastatals persist, their losses are mitigated by the gains of the surplus units. The most recent survey of parastatal performance found 41 units with total losses of T Sh 24.3 billion. Three enterprises (Tabora Textiles, Southern Paper Mill, and National Urban Water Authority) account for 59 percent of the losses. The survey also found 43 profitable units with surpluses totaling T Sh 13.9 billion. Overall, estimated net losses are less than 2 percent of GDP. 13 Macroeconomic Impact of the Reforms 1.7 In the past ten years Tanzania has made significant progress in liberalizing its economy. The incentive system has been restructured, and restrictive and pervasive state controls have been abandoned. But macroeconomic management still appears inadequate, and progress in other crucial areas-including the banking system, the public expenditure program, and public administration-has been limited. 1.8 During the first part of the reform period (1987-90) GDP grew by about 7 percent a year, far exceeding population growth (see Table 1.1). This momentum could not be sustained in the early 1990s, however. Exports followed a similar pattern, increasing by more than 9 percent a year at the beginning of the period and then stabilizing at a lower level. But export earnings, together with external financial assistance, allowed imports to grow quickly during the early 1990s and, combined with continuous deterioration in the terms of trade, the current account balance remains weak. In addition, a fiscal deficit persisted during the first half of the 1990s. Low levels of fiscal revenue are the main source of the deficit. 1.9 Inflation hovered around 30 percent during the reform period, reflecting the high money growth that resulted from lax commercial loan policies during 1986-90. Deficit financing also contributed to inflation. Government borrowing from the banking system rose sharply in fiscal 1993 after falling in 1992. Treasury bill auctions were introduced to improve monetary management, but as revenues slipped and the fiscal deficit rose, the treasury bills-originally designed to mop up excess liquidity-were used for additional government borrowing. Although in 1995 the Government increased the autonomy of the Bank of Tanzania and strengthened its role in monetary management, tighter fiscal control and intensive banking reform are needed to restore macroeconomic stability. 1.10 Investment expenditures as a share of GDP remained high during 1987-94 (Table 1.2). Investment momentum was not, however, matched by a growth in domestic savings. In fact, gross domestic savings as a share of GDP declined during the reform period, leaving Tanzania with one of the lowest domestic savings rates in East Africa. Table 1.2: Savings Mobilization in East Africa, 1987-94 (percent) Gross domestic Gross domestic Current account/GDP savings/GDP investment/GDP Inflation Country 1987-90 1991-94 1987-90 1991-94 1987-90 1991-94 1987-90 1991-94 Kenya -8.8 -2.1 18.8 20.7 24.6 19.5 11.8 31.0 Tanzania -22.2 -24.0 7.9 4.4 29.8 32.4 30.7 27.5 Uganda -5.9 -11.1 -0.9 1.5 11.1 15.4 122.7 24.1 Zambia -14.8 -16.4 14.1 8.4 13.0 9.9 86.0 132.8 Note: More recent data are available for some of the variables; see Annex 1. Source: World Bank Economic and Social database. 14 Current Issues in the Financial Sector 1.11 Efforts to strengthen the banking sector have been only partly successful. Two private foreign-owned banks, Meridien BIAO and Standard Chartered, began operations in 1993, and another five banks have been licensed. But the new banks have targeted a small number of niche customers and have been reluctant to expand beyond the capital, Dar-es-Salaam. Thus competition in the sector remains limited. Moreover, the NBC's restructuring was not successful. The Government provided bonds to the NBC in exchange for taking over a substantial portion of its nonperforming debt portfolio. The bonds carried an 11 percent interest rate, but the interest payments were never provided in full. Moreover, the NBC continues to suffer from high overhead costs, weak internal controls, and the absence of a loan collection program. Its bad loans are estimated at T Sh 100 billion (US$186 million), half of it owed by parastatals. In fiscal 1994 the NBC's cumulative loan losses totaled more than T Sh 100 billion. 1.12 Additional reforms were recently introduced to protect NBC depositors, to stem the losses incurred in the past, and to foster a more effective system of financial intermediation. The NBC's board of directors was reorganized in early 1995, and a new management team has been given a mandate to make the bank self-sustaining. As part of the reform program, 40 of the bank's branches were closed by the end of 1995, 13 others were closed by November 1996, and about half the staff was laid off. The reform program was closely supervised by the Bank of Tanzania. Restructuring of the rest of the NBC's portfolio and privatization remain to be done. 1.13 The recent failure of a private bank and the problems of the public banks signal the urgency of reviewing prudential regulations and strengthening bank supervision. Although the Bank of Tanzania is strengthening its supervisory role, entry requirements should be reviewed to ensure the integrity and capacity of banking institutions. Another issue relates to financial services for the productive sector: the average annual growth of loans to industry, mining, and agriculture dropped from 54 percent in 1986-90 to 20 percent during 1991-94, reflecting the limits imposed on lending to nonperforming borrowers to protect depositors. 15 2. Project Objectives and Relevance Objectives 2.1 The primary objective of financial sector reform in Tanzania was to develop a system that operates according to market-oriented principles and that efficiently mobilizes and allocates financial resources. The Government had made significant progress toward this objective before and during preparation of the Financial Sector Adjustment Credit (1990-91). In August 1988 the Government established the Commission of Inquiry into the Monetary and Banking System, which examined the sector and presented its recommendations to the president in July 1990. 2.2 In February 1991, building on the Commission's findings, the Government issued a policy statement on financial sector reform that stressed the Government's commitment to an "effective and efficient" banking system that was "independent, competitive, and operating on sound banking principles." In April 1991 the Government enacted the Banking and Financial Institutions Act to replace the Banking Ordinance of 1960. This act reflects the sector's new market orientation and vests the Bank of Tanzania with sufficient supervisory and regulatory controls to ensure the development of prudent banking activities. In 1991 the Government also enacted the Loans and Advances Realization Trust Act, designed to provide mechanisms to recover the overdue debts of banks and financial institutions. In July 1991 the Government issued a circular that liberalized the highly segmented and regulated interest rate structure. 2.3 Building on these achievements the International Development Association (IDA) developed a four-pronged program to support further adjustment in the financial sector during 1991-93. The first component supported the use of indirect monetary policy instruments and a less regulated banking system. The second strengthened banking legislation and supervision and reviewed the accounting and auditing framework. The third addressed the competitive environment and the introduction of private participation in the banking sector, to be achieved by allowing for the entry of private banks, both foreign and domestic, as well as by privatizing banking institutions, both immediately and in the medium term. The fourth component covered institutional strengthening of existing banks, including restructuring and recapitalization. Relevance 2.4 The project was fully compatible with the overall country strategy of the early 1990s. On the real side of the economy, adjustment had already started with the Agricultural Adjustment Credit and the Industrial and Trade Adjustment Credit. The Financial Sector Adjustment Credit was designed to complement those operations in a mutually reinforcing manner. 2.5 The main shortcoming of the project design was the incongruity between promoting competition and restructuring the NBC without splitting it. The original (July 1990) proposal from the National Banking Commission of Tanzania, to split the NBC into smaller autonomous financial institutions, should have prevailed. That approach was more compatible with increasing competition, and restructuring along business lines would have been easier than large- scale restructuring of the entire institution. It also would have facilitated privatization, although the Commission did not consider that aspect when it issued its report. Still, both the NBC and 16 the Government were not convinced that the bank should be split, and in the end the commission's recommendation was ignored. 17 3. Project Implementation, Outcome, and Sustainability Implementation 3.1 The reform program proceeded much slower than was expected and, measured against its expected achievements, was only partly successful. The program's main accomplishment was deregulation and liberalization of the banking system, including the introduction of foreign and domestic private banks. 3.2 The reform program failed to effectively increase competition in the sector. The new banks focused on the high end of the market and concentrated their operations in Dar es Salaam. At the end of the program the NBC still dominated the sector, with about 73 percent of market share. Moreover, its weak financial condition had not improved. 3.3 There were other shortcomings during project implementation. One was the inefficient judicial system. The mission was told that it was nearly impossible to enforce a court injunction to repay or to get a court decision to liquidate a business. Only the Loan Asset Recovery Trust had special powers, but many bad loans were not transferred to it. Although specific conditions on new loan classification and provisioning for NBC, CRDB and TIB were met at the second tranche release in 1993, legal enforcement of loan recovery was not strong enough to contribute to improvements in the quality of the loan portfolios of these banks.2 3.4 The recapitalization and restructuring programs did not include provisions to inject new liquidity into the banks. Rather than using loan proceeds to recapitalize the banks, the proceeds were used to finance imports. And although banks received government bonds in exchange for bad loans when their loan portfolios were restructured, bonds never paid interest and could not be redeemed. The process left the banks very illiquid. Outcome 3.5 The macroeconomic framework was not conducive to the financial sector reforms supported by the credit. The government budget and current account balance continued to deteriorate after 1991, the first year of the adjustment program (Figure 3.1). The budget deficit was mainly due to a high level of public debt and lack of domestic resources. In addition, inflation remained high (Figure 3.2). As a result the reforms supported by the credit did not achieve their objectives. 2 Bank regional staff notes: "...In the final analysis, the [tranche] release was ajudgement call... It was the relatively weak conditionality that placed the supervising staff and managers in an awkward position. The awkwardness was compounded by the fact that Tanzania [program] had recently been transferred from one Department to another." 18 Figure 3.1: Current Account and Fiscal Balances, 1974-94 (percentage of GDP) Current Account & Fiscal Balances (% of GDP) 0.00 -5.00 -10.00 -15.00 ? -20.00 -25.00 -30.00 -35.00 -40.00 'I (0 CO 0 (N IT CO CO N r- N - 00 00 00 00 00 a) MD M MD -M MD MD 0) MD MD C 0) ... DefIGDP - C.A. Balance/GDP Figure 3.2: Inflation Rate and M2 Growth, 1975-95 (percent) Rate of Inflation and M2 Growth 50.00- 45.00 40.00 35.00 30.00 A S25.00 20.00 15.00 10.00 5.00. S(0 CO 0 cli V~ CO 0 C) 0 1 V N- - N- 00 00 CO 00 00 0) 0) O'j -.--o- Inflation -. .-- Growth in IV2 3.6 Financial sector performance. The situation in the financial sector has deteriorated over the period 1990-95. Real deposit rates turned negative. Domestic and Foreign interest rate spreads grow to high levels, and the gap between investment and savings as a percentage of GDP remained very large (see performance indicators Annex 1, pages 31 and 32). Although M2 as a share of GDP grew from 21.5 percent in 1990 to 26.7 percent in 1994 (Figure 3.3), suggesting better monetization within the system, 80 percent of Tanzanians still have little or no access to basic financial services. And with annual inflation still peaking above 30 percent in 1994 it is not surprising that recent growth in M2 reached 32.5 percent, albeit down from 42.1 percent in 1990 (see Figure 3.2). 19 Figure 3.3: Broad Money (M2), 1974-94 (percentage of GDP) Broad Money (%of GDP) 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 S CD 0 0 C CD N V~ M)0) 0 0 0) 0) 0D 0) 0) 0) 0) 3.7 In addition, Treasury bill rates are much higher than savings and lending rates, generating risk and return distortions in the banking system. Banks now prefer to invest excess liquidity in risk-free T-bills rather than support real sector productive investments, causing disintermediation in the system. Real deposit rates were negative during most of the program implementation period (Figure 3.4), discouraging the mobilization of financial resources. Figure 3.4: Real Deposit Rates, 1974-95 (percent) Real Deposit Rates (in %) 5.00 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 I (0CO 0 CN V* CO CO 0 CNJ I.- P- t~- 00 O CD CO 00 0) M) 0D 20 3.8 The banking system. The banking system remains quasi-monopolistic. In August 1995 the NBC still held 73 percent of market share for both net credit outstanding and total deposits, compared with 80 percent before the program. The 10 commercial banks, most of them private and licensed since 1993, account for the remaining 27 percent. Banking institutions include well-known foreign banks such as Standard Chartered (United Kingdom), Stanbic (South Africa), Citibank (United States); Banco Belgolaise, and Eurafrica (International Finance Corporation), as well as indigenous niche institutions and regional banks from Kenya and Uganda. The remaining financial intermediaries are national banks: the Cooperative and Rural Development Bank (CRDB), the People's Bank of Zanzibar (PBZ), the Tanzania Investment Bank (TIB), and the Tanganyika Development Finance Limited (TDFL). 3.9 The banking sector remains weak. The NBC, TDFL, TIB, and PBZ are still being restructured, and their financial position is fragile. The CRDB is emerging from restructuring and privatization, but its financial position is barely in equilibrium. Meridien BIAO and Tanzania Housing Bank (THB) were closed in 1995 at a significant cost to the Government.3 The Meridien failure prompted a reaction against foreign ownership, limiting the perceived benefits of liberalization and prompting stronger bank supervision. Outcomes of Individual Banks 3.10 Analyticalframework. The performance of individual banks was assessed according to financial statements provided by the NBC, CRDB, PBZ, and TIB.4 Earnings performance, liquidity, and capital adequacy were the main criteria used in this analysis. Bank earnings are required to attract investors and provide capital. Earnings also demonstrate the effectiveness of management and reflect the effects of financial policies on banking institutions. Adequate liquidity is essential to generate public confidence in banks. Adequate capital provides a check against bank failure.5 3.11 Key performance indicators. Financial indicators based on balance sheets and income statements were used to assess the performance of Tanzania's banks. Annex 2 presents an overview of the financial condition of these banks, based on CAMEL (capital adequacy, asset quality, management efficiency, earnings, and liquidity) indicators to ensure uniformity and consistency. The indicators presented here should be viewed with caution, however, because during bank restructurings these indicators can take on values that distort the true state of a bank. For example, a bank that stops lending during restructuring could see a sharp jump in its capital adequacy ratio or even come across as a highly liquid institution. Since that is clearly not the case, care must be taken when interpreting CAMEL indicators. Estimated at T Sh 21 billion, or about US$ 36.7 million in payments to depositors. Bank regional staff notes: "We have had considerable difficulty with the quality of the audits of the state-owned banks by the state-owned Tanzania Audit Corporation. ...Audited financial data have often been found to be unreliable." The Basle Committee on Banking Regulations and Supervisory Practices recommends that banks maintain capital equivalent to at least 8 percent of weighte assets. In practice, once unweighted assets are taken into account, the minimum capital adequacy ratio is about 4 percent. 21 3.12 National Bank of Commerce (NBC). The NBC's performance, as measured by CAMEL indicators, has been poor. Asset quality, as measured by the ratio of provisions for loan losses to gross loans, is dismal. The asset quality ratio, as measured by the ratio of net losses to loan loss provisions, has been above 50 percent during the two most recent years for which data are available (1994-95). The NBC only recently began tracking the nonperforming assets in its portfolio. Management appears to be quite inefficient, when using the ratio of net income to staff expenses as a measure of management efficiency. The ratio has been below 100 percent for most of the 1990s (Annex 2, page 34). The NBC's lending operations, however, have declined steadily since 1991. Still, the decline in lending and the improving trend in the ratios of loans to deposits does not provide an accurate picture of the NBC's liquidity. In fact, the bank's dismal liquidity is reflected in its extremely low ratio of cash to assets (1.9 percent in 1995). 3.13 Capital adequacy ratios have been low for most of the 1990s. In 1996, however, the ratio of capital to unweighted assets stood at 8.7 percent (Table 3.1), reflecting the reduction in lending operations in recent years as part of the restructuring efforts started in 1991. As noted earlier, the government also tried to restructure the NBC's assets and recapitalize it by exchanging its bad loans for government bonds. But the recapitalization was not successful because the bonds did not carry interest payments and could not be redeemed. 3.14 Efforts have been made to improve the NBC's performance, and some positive developments have occurred. Although earnings were low and even negative for most of the 1990s, in recent years they have improved. The return on assets has increased, reaching 2 percent in fiscal 1995 and 7 percent in fiscal 1996. In December 1995 the Ministry of Finance and the NBC entered into a Memorandum of Understanding requiring the bank to break even by June 1996 and improve its credit performance. Within six months core operating expenses were to be cut by 40 percent over the 1994-95 level. If the NBC failed to meet these targets, it was to stop all lending operations, and the Bank of Tanzania would intervene on behalf of shareholders. In addition, the NBC, or part of it, would be put up for sale. 3.15 Although the NBC did not meet these targets, it did cut administrative expenses by 24 percent by June 1996. In addition, a March 1996 review found that T Sh 26.7 billion in nonperforming loans had been repaid. By June an additional T Sh 7 billion had been recovered and T Sh 0.8 billion had been repaid. Other positive steps taken by the NBC include the closure of 53 branches by November 1996 and the retrenchment of about 40 percent of staff by March 1996. Further branch closings and staff retrenchment are expected. Table 3.1: Selected Financial Indicators for the National Bank of Commerce, Fiscal 1991-96 (percent) Indicator 1991 1992 1993 1994 1995 1996 Capital/assets 7.4 -4.5 5.8 -2.6 2.8 8.7 Earnings (return on assets) 3.1 -11.6 4.7 -31.7 2.0 7.1 Loans/deposits N.A. 89.1 58.1 68.9 46.6 N.A. Cash/assets 1.5 1.2 1.7 1.9 1.9 2.5 Source: Data provided by NBC to the OED mission, October 1996. 6 "Recommendations and Next Steps." Final report on NBC's compliance as of June 1996 with its Memorandum of Understanding with the Ministry of Finance. 22 3.16 Cooperative and Rural Development Bank (CRDB). The CRDB's earnings performance, as measured by the return on assets, has been unstable during the 1990s. The best performance came in 1994, when the return on assets reached 12.8 percent (Table 3.2). But for much of the period the return on assets has been negative. Other earnings ratios, such as net interest margin and profit margin, also have performed badly, with most ratios running negative during the 1990s. As measured by the ratio of loans to deposits, the CRDB is a highly illiquid bank. In 1995 this ratio stood at 163 percent, more than twice the 70-80 percent that is considered reasonable. Moreover, ratios of cash to assets have been very low during the 1990s, underscoring the CRDB's fragile liquidity position. Capital adequacy is the CRDB's only healthy indicator. Since the early 1990s the ratio has been nearly 8 percent because of recapitalization efforts. Recapitalization efforts are also reflected in increasing paid-in capital levels, especially during 1994-95. Finally, the ratio of cash to assets has been rising, going from 2.0 percent in 1993 and 4.7 percent in 1994 to 6.9 percent in 1995. 3.17 The Financial Sector Adjustment Credit proposed that the CRDB be run according to strictly commercial principles and operate in any profitable sector of the economy. Attracting private partners and changing management were key elements of the plan to turn the bank around. The change in management took place in 1993, and since then the bank has witnessed significant improvement in performance. Although the CRDB has made the transition from being a state-owned bank to a private bank, it still has a long way to go before completing its transformation. Management efficiency, as measured by the ratio of net income to staff expenses, was unsatisfactory. The ratio has remained negative throughout most of the 1990s. Net interest margins also turned negative, dropping from 6.9 percent in 1994 to -19.6 percent in 1995 (Annex 2, page 36). Table 3.2: Selected Financial Indicators for the Cooperative and Rural Development Bank, Fiscal 1991-96 (percent) Indicator 1991 1992 1993 1994 1995 1996 Capital/assets 5.4 7.2 4.6 7.7 7.6 8.9 Earnings (return on assets) 3.9 -39.0 116.0 12.8 -34.3 -1.1 Loans/deposits 64.2 223.2 314.0 244.2 163.0 61.7 Cash/assets 3.7 3.6 2.0 4.7 6.9 2.1 Source: Data provided by CRDB to OED mission, October 1996. 3.18 People 's Bank ofZanzibar (PBZ). The PBZ serves a dual role in Zanzibar's economy, acting as a quasi-central bank to the government of Zanzibar while engaging in usual commercial banking activities. A substantial portion of the PBZ's assets are foreign currency deposits held in overseas banks. Because of these overseas activities, the PBZ's situation is somewhat different from that of other Tanzanian banks. 3.19 Earnings performance, as measured by the return on assets, has been negative during most of the 1990s (Table 3.3). Profit margins and net interest margins have behaved erratically, undermining confidence in the bank. The PBZ's ratio of loans to deposits has ranged from 44.1 in 1993 to 98.5 percent in 1992. The low ratios in recent years indicate that the PBZ has cutback its lending activities in the face of sizable loan losses. Although the PBZ's capital-assets ratio is adequate, the recent jump in the ratio-from 7.2 percent in 1993 to 17.6 percent in 1995-may be another indicator of disintermediation as assets weaken because of lower loan volume. The 23 ratio of cash to assets rose from 2.6 in 1994 to 4.4 percent in 1995, indicating an increase in liquidity and possibly reflecting recapitalization efforts. The massive increase in paid-in capital between 1993 and 1994 also reflects recapitalization efforts. PBZ's management efficiency ratio has been encouraging for FY 92 and FY 94, years in which the bank did not make losses (Annex 2, page 38). Overall, the PBZ must further improve its loan portfolio and stabilize its profit and interest margins. Table 3.3: Selected Financial Indicators for the People's Bank of Zanzibar, Fiscal 1991-96 Indicator 1991 1992 1993 1994 1995 1996 Capital/assets 5.4 7.8 7.2 16.7 17.6 18.1 Earnings (return on assets) -1.0 15.0 -30.4 20.1 -16.2 0.0 Loans/Deposits 71.8 98.5 44.1 59.1 63.8 52.6 Cash/Assets 16.2 8.3 4.0 2.6 4.4 4.6 Source: Data provided by the PBZ to the OED mission, October 1996. 3.20 Tanzania Investment Bank (TIB). TIB, like the other banks was restructured as part of the Financial Sector Adjustment Credit. Restructuring was designed to transform TIB from a bank providing residual financing to state industrial enterprises into a merchant bank that would ultimately be privatized. Restructuring has caused TIB to perform in an erratic manner. Its return on assets has ranged from -36.1 in 1992 to 21.1 percent in 1996 (Table 3.4). But except for the 1996 figure, all other returns were either low or negative. The net interest margin fell to - 9.9 in 1995 from 11.2 percent in 1994 (Annex 2, page 40). On the positive side, high capital adequacy ratios reflect recapitalization and a drop in lending activities, as well as increased provisioning for loan losses. Paid-in capital increased sharply between 1992 and 1993. During the same period the ratio of cash to assets increased from 3.8 percent to 6.5 percent. TIB's management has also improved recently (Annex 2, page 40). Table 3.4: Selected Financial Indicators for the Tanzania Investment Bank, Fiscal 1991-96 Indicator FY91 FY92 FY93 FY94 FY95 FY96 Capital/assets 32.6 52.0 126.0 118.8 133.8 122.7 Earnings (return on assets) 0.1 -36.1 1.9 1.4 -21.4 21.1 Loans/deposits 220.3 244.5 499.5 329.1 196.5 444.4 Cash/assets 5.6 3.8 6.5 5.0 0.9 1.3 Source: Data provided by TIB to the OED mission, October 1996. Assessment 3.21 Progress in achieving project goals. The Financial Sector Adjustment Credit was somewhat successful in achieving two of the four goals of the reform strategy. 0 As noted in the Project Completion Report, the program sought to develop a deregulated and liberalized banking system.7 The banking system was deregulated and liberalized, and a treasury bill auction was introduced as part of the Bank of Tanzania's efforts to foster indirect methods of monetary control. But weak fiscal "Tanzania Financial Sector Adjustment Credit," Report 14828, June 3, 1995. 24 performance, coupled with an accommodating monetary policy and reversals in the restructuring of the NBC, undermined accomplishments in this area. * Also confirming the Project Completion Report, the program has helped strengthen the financial infrastructure by revising banking legislation and improving bank supervision. The Bank of Tanzania is developing most of the basic skills needed to conduct bank examinations and has conducted a series of onsite exams. But professional skills and staff training are still weak. * The program did not increase competition in the banking system by fostering private sector participation. Participation was envisaged through the entry of new banks and the restructuring and privatization of existing banks. Two new banks began operations in late 1993, and two others began more recently, but their services mostly complement the services provided by existing banks and so only marginally enhance competition. The NBC remains the dominant financial institution. * Institutional strengthening of existing banks has been limited. Although the government-owned financial institutions were recapitalized, their liquidity did not improve. Only part of their nonperforming assets were transferred to the Loans Advances Realization Trust, and the loans remaining in their portfolios are nonperforming. Finally, the banks are still insolvent and incurring losses. 3.22 Follow-up technical assistance. IDA recognizes the need for continuous and effective assistance to strengthen Tanzania's financial institutions. The most recent instruments of Bank assistance were two small technical assistance projects designed to support the Government's short-term objectives in the sector. The Financial Institutions Development Project is a relatively new technical assistance project (US$ 10.9 million) that became effective in February 1996, mainly to follow-up on work not completed under the Financial Sector Adjustment Credit. The new project's objectives include divesting and privatizing the NBC to promote competition in the sector; supporting the ongoing development of the banking infrastructure, including the legal and regulatory system, the payments system, an insurance commission, and a credit bureau; and assisting with the development of the capital market. The second project, the Financial and Legal Management Upgrading Project (US$ 20 million) will help strengthen the legal and accounting infrastructure. A recent midterm review rated both projects satisfactory. Sustainability 3.23 The long-term benefits of the Financial Sector Adjustment Credit could differ from the immediate ones only in few areas. Initiatives taken under the credit-and the subsequent Financial Institutions Development Project-could have positive long-run effects. All parties in the banking system now acknowledge the need for continuous and tight bank supervision. Supervision capacity has expanded from onsite to offsite and is becoming more effective. In addition, some financial institutions are quite advanced in their restructuring, though they are still not viable. Finally, the overall climate in the banking system has changed from a centralized directed credit system to a decentralized potentially competitive system in which accountability is sought at the micro level. Still, the final restructuring, splitting and privatizing of the NBC remain major items on the reform agenda and, mainly for this reason, the adjustment operation appears unsustainable. 25 3.24 Future operations. The Bank is preparing a new adjustment credit that includes a large financial sector component. The concept paper being prepared for the new credit calls for further restructuring of the loan portfolio and more recapitalization while identifying new business lines that could be privatized. Although this paper does not specify whether restructuring and recapitalization of the NBC should precede or follow its splitting and privatization (see paras. 77 and 78 of Concept Paper dated October 11, 1996), it is clear from past experiences that restructuring and recapitalizing the NBC should be closely associated with splitting and privatizing it. In this way past mistakes may not be repeated. Bank Performance 3.25 The World Bank advised the borrower (the Government of Tanzania) on policy reforms and institutional measures and helped design the project and coordinate the donors. Nevertheless, the Bank's effectiveness was undermined by a major inconsistency at the design level-promoting competition in the sector while maintaining the NBC. Both the NBC and the Government were unconvinced by the July 1990 proposal by the National Banking Commission that the NBC be split. Since the World Bank wanted to restructure and introduce competition in the financial sector, it should have endorsed the findings of the Banking Commission. Instead the Bank decided to support the Government's position. 3.26 The project also suffered from a lack of continuity in the staff assigned to prepare and implement the credit. Task managers and mission teams were arbitrarily changed during the course of the credit. Conflicting views in project design between regional and central departments were frequent and left unresolved, reflecting lack of coordination, lack of continuity in strategic thinking, and limited trust among Bank staff and management. As a result a sustained dialogue never emerged, and the conflicting and frequently changing advice offered by Bank staff frustrated the Tanzanians and eroded Tanzanian ownership of the program. Borrower Performance 3.27 Measures were taken to deregulate and liberalize the financial sector, and new private banks were licensed, but Tanzania's banking sector still has not been exposed to real competition. And while the Government has stopped interfering in the daily operations of banks and has ensured that banks operate according to commercial principles, bank managers-with the exception of those at the CRDB-have been slow to implement policies consistent with the overall strategy for the financial sector. 8 These findings on Bank performance are based on staff interviews. They could not be confirmed through evidence from Bank archives, because a significant number of Bank memoranda are missing from the central and regional files. 26 4. Findings, Lessons, and Next Steps Findings 4.1 The lack of meaningful restructuring, recapitalization, and privatization of financial institutions was the most disappointing aspect of Financial Sector Adjustment Credit. Many senior managers resisted changes in their banks. Although banks' boards of directors should have ensured implementation of Government policy for restructuring the banks, board members at that time had little technical know how. 4.2 Considerable time and energy were wasted in attempting to restructure the entire NBC. The July 1990 proposal by the National Banking Commission to split the NBC before restructuring it should have prevailed. That approach would have been more compatible with introducing competition, and restructuring along business lines would have been easier than restructuring the entire institution. It also would have been more conducive to privatization. 4.3 There should have been more Bank supervision of commercial bank restructuring; reviewing progress in this area would have been invaluable for building the capacity of the Bank of Tanzania's Banking Supervision Directorate. 4.4 Efforts to promote competition in the sector, mainly through the entry of new banks, failed. The credit also sought to improve the NBC's performance so that it would be able to compete with the new private banks. Since the NBC accounted for more than 90 percent of the deposit base in the early 1990s, these conflicting objectives could be reconciled only by splitting or significantly downsizing the NBC. In fact, the NBC's continued prominence-it still accounts for about 70 percent of market share -will continue to undermine competition and stifle the emergence of an indigenous banking sector. 4.5 Earlier findings on institution building have been well incorporated into the design of two subsequent technical assistance credits (the Financial Institutions Development Project and the Financial and Legal Management Upgrading Project). It also appears that the findings on policy that emerged from this Financial Sector Adjustment Credit are being incorporated into the designs of the structural adjustment credit currently being prepared. Lessons 4.6 Sequencing. The Bank's financial sector strategy failed in part because Bank staff thought that interest rate liberalization, together with the introduction of competition in the sector, would fix the banking sector's problems. The insolvent state-owned banks did not shrivel and die, however. The NBC remained the dominant financial institution. And liberalization came too early, before an effective legal and regulatory framework could be put in place. Moreover, delayed restructuring of parastatals impeded efforts to stimulate competition. 4.7 Competition. Although several new banks have opened in recent years, the NBC still dominates the banking sector. The NBC's dominance is detrimental to Tanzania's banking sector for two important reasons. First, its consistently poor performance has led some observers to question its viability. And because of its size, any misgivings about the NBC fuel concern 27 about the entire banking sector. Second, the NBC has some perverse effects on the practices of other banks. For example, some foreign banks have set interest rates just below the NBC's rates-a move that is contrary to what should have happened. 4.8 Directed credit. Tanzania's banks have long suffered from excessive government and political interference. In the past directed credit policies made it almost impossible for banks like the NBC, CRDB, and TIB to function in a commercially viable way. Privatization of the CRDB, privatization efforts at TIB, and the presence of other private foreign banks have substantially reduced the Government's role in directing credit. But unless the NBC is privatized, pressures to provide loans to inefficient activities may resurface when lending resumes. 4.9 State-owned enterprise restructuring. Changes in Tanzania's banking sector must be accompanied by the restructuring of state-owned enterprises. Tanzania has a large public sector, and the Government will likely retain control over many state-owned enterprises even if they are privatized. Thus these enterprises will continue to need credit, and Tanzanian banks will conceivably lend to them. It is in the best interests of the banking sector and the Tanzanian economy that these enterprises become financially stable. With World Bank support, the Tanzanian authorities are taking steps to address state-owned enterprise restructuring and privatization. 4.10 Commitment and implementation capacity. All stakeholders must be committed to reform if it is to succeed. Both the Bank and the Government of Tanzania seem to have ignored this fact during implementation of the Financial Sector Adjustment Credit. In addition, well- trained personnel were not available to implement the recommendations made under the financial sector reform program. Next Steps 4.11 Keeping the NBC in its current form is not a viable solution, either in terms of strengthening institutions or increasing competition in the financial sector. Just as the National Banking Commission proposed in 1990, the NBC should be split immediately. In addition, the split should be accompanied by efforts to privatize to avoid government interference and attract new cash resources.9 Further restructuring and recapitalization should take place only within the smaller and privatized units. Moreover, these privatized units would increase competition in the sector, encouraging better services and more efficient practices at Tanzanian banks. 4.12 Increased competition will require a prudential regulatory environment in which the banks can function. In the past inadequate accounting standards allowed banks to accrue income on nonperforming loans or to roll over such loans. Although these moves provided temporary relief to bank's faltering cash flows, they turned out to be very costly. Tanzanian banks should be forced to adopt strict accounting standards, and independent firms should undertake regular audits. The Bank of Tanzania's Banking Supervision Directorate has already introduced several initiatives to achieve those goals. Bank regional staff notes: "...In fact, the division and privatization of NBC is now official Government policy and has been publicly announced. Major consulting firms are already onsite preparing for the split (i.e. they are undertaking the necessary operations review, audit, legal and public relations work). The Government's aim is to split NBC into three private banks by October..."  29 Annexes s 31 Annex I Tanzania Macro Environment and Financial Depth Graph 1: Inflation Graph 2: Nominal and Real Exchange Rates 40.00 35 00 30.00 10 0 25.00 -000=a 10.00 5.00 5.00 010000 Graph 3: Current Account & Fiscal Balances Graph 4. M2/GDP 0.00 4500 5.00 "00 500 -00 t ___25.00_ _ __ __ _ 10 '45.- 10.001 -5.00 -40500 30. 0000 0 0,00 , -.00 I _______ll l_______i_____l_____ The Central Bank and Interest Rats Graph 5: Central Bank Capital Adequacy Graph 6: Real Deposit Rates 3.00 500 01000 -5.00. S.00 -10.00 1.50 . 1 1.00 -20.00 50-2500 0.00.35.00 0.0 0 0 1 Graph 7: Domestic and Foreign Spreads Graph 8: Money MarketRae 20,00 2.00 125.00 10cp FeS -5.00 -10.00 .10.001 -2000.20.00 .15.00 -25.00 I -25.0017 \I --0DOSWs--ornead0 0 32 Annex I Tanzania ComnmecIa Banking Graph 9: Comnuerl Bani~ Capital Adquaey Graph 10: Loans/Depok 2.00 200 16.00 300 16.00 14.00 200.00 12.00 10.00 8.00 00 .00 500.00 4.004 .00 5000 0.0010 2.000 Graph 11: OP 0 owd Oph 12: ODSMGP and GOVODP 100.00 6.00 50.0 7.00 40.00 &W0 30.00 5.00 2DLWa S4.00 1.00 3M0 1.00 nM . , . "l.l 1.00 S! Groph 13: F~rin DkU~ Investen~( Milæ) Gah14:- Chag In Lo~nsQDI DWpoWlDS 70 50 00 400 30 100.00 10~0 20 20 -1,0..00 -0 .150.C- inCumak L~*u biao.k Dq~am 33 Annex II National Bank of Commerce Summary Balance Sheet (in billions of T sh.) FY91 FY92 FY93 FY94 FY95 FY96 Domestic Assets of which cash 3,148 3,903 5,753 6,660 8,765 11,913 Deposits with BOT 34,475 Treasury Bills (investments -current) 621 28 5,421 2,423 583 Other securities (Investments) 3,059 22,798 38,074 79,696 121,641 163,143 Loans and Overdrafts 108,895 83,123 79,838 57,934 46,369 43,374 Bills receivable 10,005 12,112 16,654 14,284 14,322 5,603 Long term Loans 14,775 15,179 13,129 17,252 14,311 less: provision for loan losses Other Domestic financial assets Due from other banks 35,357 60,343 77,929 97,053 148,748 105,600 Foreign assets Fixed assets 11,469 16,159 22,403 36,087 36,597 34,065 Interbranch Suspense 64,288 Other assets 16,877 103,341 86,696 40,812 80,086 13,149 Total assets 204,206 316,986 345,897 352,201 471,422 475,610 Domestic Liabilities of which Current Deposits 57890 77,009 125,796 168,399 231,717 Savings Deposits 19702 29,339 41,517 56,681 78,742 Time Deposits 31430 44,696 59,425 51,197 67,220 Deposits 368,830 Liabilities to the banks (Due to banks 38336 70,888 550 14,511 626 1,100 Bills Payable 28,636 Accrued expenses 8,456 Foreign liabilities Other domestic liabilities Other liabilities 41732 109,376 98,651 70,747 79,625 27,191 Total liabilities 189090 331308 325939 361535 457930 434213 Retained earnings (Profit and loss acc 0 -36,923 -8,912 -109,092 -88,690 -53,003 General Reserve 10595 10,280 10,330 10,330 10,330 Fixed assets revaluation reserve 17,686 17,686 17,686 Women in Develppment Fund 79 Workers housing fund 2970 2,970 2,970 2,970 2,970 Grants from SIDA 14 14 14 14 14 Grants from KFW 61 61 61 61 Exchange equalization 1,487 9,226 8,332 17,935 20,358 15,122 Paid in capital (Share capital) 50 50 50 50 50 50 Advance towards share capital 7,113 50,713 50,713 61,463 Total equity 15116 -14,322 19958 -9333 13492 41397 Total liabilities and equity 204,206 316,986 345,897 352,202 471,422 475,610 Source: Data provided by NBC to OED Mission, October 1996 Annex II 34 National Bank of commerce Summary Income statement (in billions of T sh.) FY91 FY92 FY93 FY94 FY95 FY96 Loans and overdrafts 23,957 Investments 3,820 Other (Interest Income) 5,213 Interest Income 33231 24,704 30,186 46,522 46,491 Discount 317 327 247 404 172 Commissions 4689 6,214 6,327 8,458 10,249 Exchange Gains 5929 1,636 8,392 9,222 5,164 Bad debt recovery 0 0 1,584 126 4 Decrease in provisions 5,159 0 9,525 Postage recovery 3 Management Fees 800 Dividends received 0 102 130 Non Interest Income 29,601 Total Income 44,166 32,881 51,895 64,834 72,538 62,591 Interest paid on savings 12,933 16,242 2,913 Interest paid 26415 29,144 20,055 23,010 27,013 Prov. for oth. Debt & Risk Assets -39,561 Sundry Foreign expenses 0 4 7 25 328 General expenses 11509 40,657 15,645 153,400 35,907 Non Interest Expense 36,235 Total expenses 37,924 69,805 35,707 176,435 63,248 28,762 Profit before tax 6,242 -36,924 16,188 -111,601 9,290 33,829 Provision for tax 3123 0 Profit after tax 3,119 -36,924 16,188 -111,601 9,290 33,829 Extraordinary items 11,824 0 -11,436 Profit/loss brought foreward 0 0 -36,923 -8,911 -109,092 -75315 Prior Years Adjustment 0 11,420 11,112 Appropriations -3119 Profit carried forward 0 -36,924 -8,911 -109,092 -88,690 -52,922 Retained earnings on bal. sheet -36924 -8,912 -109,092 -75315 -53003 National Bank of Commerce Selected Financial Sector Indicators (in percent) FY91 FY92 FY93 FY94 FY95 FY96 Capital/Assets 7.4 -4.5 5.8 -2.6 2.8 8.7 Asset Quality N.A. 17.9 16.7 53.0 57.4 N.A. Management 27.1 -90.8 103.5 -72.8 25.9 93.4 Earnings 3.1 -11.6 4.7 -31.7 2.0 2.0 Liquidity N.A. 89.1 58.1 68.9 46.6 N.A. Cash/Assets 1.5 1.2 1.7 1.9 1.9 2.5 Source: Data provided by NBC to OED Mission, October 1996 35 Annex II Cooperative and Rural Development Bank Summary Balance Sheet (in thousands of T Sh.) FY90 FY 91 FY 92 FY93 FY 94 FY95 FY96 Assets Domestic assets of which: 22,269,422 54,099,712 21,615,473 36,039,515 45,102,683 46,269,289 59,230,253 cash 1,151,108 2,031,834 892,804 827,093 2,404,016 3,595,428 1,371,068 Deposits with BOT 565,762 0 952,922 2,038,708 3,577,089 3,626,629 3,455,551 Treasury Bills 0 0 0 - 1,787,931 3,169,440 5,012,264 Other securities 0 0 10,506,150 10,633,500 11,815,000 21,615,000 30,659,400 Loans and bills 3,482,983 7,318,027 37,165,621 65,161,411 63,311,018 55,369,423 22,348,402 less: provision for loan losses (760,541) (1,757,130) (28,618,775) (45,921,035) (38,424,719) (43,684,545) (13,991,051) Other domestic financial assets 17,194,622 45,533,808 440,874 3,248,703 632,348 2,577,914 10,356,627 Due from other banks 635,488 973,173 275,877 51,135 17,992 Foreign assets 0 0 1,540,932 3,261,966 3,926,430 3,479,812 3,464,051 Fixed assets 798,157 1,113,582 1,642,650 2,375,685 2,455,969 2,437,993 2,915,212 Other assets Total assets 23,067,579 55,213,294 24,799,055 41,677,166 51,485,082 52,187,094 65,609,516 Liabilides and eqsdty Domestic liabilities of which: 20,285,520 48,597,577 30,772,400 33,165,101 35,354,447 41,656,805 46,476,031 Deposits 6,926,549 11,398,493 16,651,582 20,752,820 25,921,244 33,976,706 36,211,279 Liability to BOT 5,109,090 2,694,678 672,644 1,623,919 215,995 181,376 520,268 Liabilities to the banks 2,686,872 697,965 2,238,757 1,182,495 273,979 39,564 159,958 Other domestic liabilities 5,563,009 33,806,441 11,209,417 9,605,867 8,943,229 7,459,159 9,584,526 Foreign liabilities 0 0 0 Proposed dividends (foreign shareholders) Retained earnings (1,048,680) 464,656 (12,011,976) (5,614,906) 346,799 (7,622,921) (1,210,694) Grants, asset revaluation, reserve 1,510,335 1,501,277 251,574 242,120 2,268,318 1,841,885 3,721,551 Paid in capital 1,448,427 1,497,427 1,536,427 1,678,427 1,678,427 2,131,500 2,136,350 Total equity 1,910,082 3,463,360 (10,223,975) (3,694,359) 4,293,544 (3,649,536) 4,647,207 Other liabilities 871,977 3,152,357 4,250,630 12,206,424 11,837,091 14,179,825 14,486,278 Total liabilities and equity 23,067,579 55,213,294 24,799,055 41,677,166 51,485,082 52,187,094 65,609,516 Source: Data provided by NBC to OED Mission, October 1996 Annex II 36 Cooperative and Rural Development Bank Summary Income Statement (in thousands of T Sh.) FY90 FY91 FY92 FY 93 FY94 FY95 FY 96 Interest on loans and bills 3,264,992 5,432,417 5,792,602 10,075,188 7,469,167 5,095,808 3,561,739 of which: foreign Investment interest income Total Interest Income 3,264,992 5,432,417 5,792,602 10,075,188 7,469,167 5,095,808 3,561,739 Interest on Deposits 1,905,232 2,586,455 1,889,440 2,515,364 3,628,363 4,734,963 2,133,993 Other interest payments 1,836,078 460,973 610,527 539,289 262,207 Total Interest Expenses 1,905,232 2,586,455 3,725,518 2,976,337 4,238,890 5,274,252 2,396,200 Interest margin 1,359,760 2,845,962 2,067,084 7,098,851 3,230,277 (178,444) 1,165,539 Provision for losses 1,365,268 117,160 17,589,397 9,046,329 0 9,959,884 236,628 Net Interest Margin (5,508) 2,728,802 (15,522,313) (1,947,478) 3,230,277 (10,138,328) 928,911 Non Interest Income 287,283 430,867 2,342,094 625,391 8,144,350 1,878,839 3,065,156 Staff costs and office expenses 293,014 577,540 839,317 1,361,765 2,102,976 2,637,102 1,259,913 Maintenance 25,335 35,383 300,897 496,779 431,994 539,177 239,740 Depreciation 75,005 123,079 221,344 357,112 164,873 1,183,428 180,327 Other non operating expenses 565,453 910,331 1,065,720 1,764,080 2,713,079 5,150,524 2,944,290 Total Non Interest Expenses 958,807 1,646,333 2,427,278 3,979,736 5,412,922 9,510,231 4,624,270 Income before taxes (677,032) 1,513,336 (15,607,497) (5,301,823) 5,961,705 (17,769,720) (630,203) Income Tax Net Income (677,032) 1,513,336 (15,607,497) (5,301,823) 5,961,705 (17,769,720) (630,203) Cooperative and Rural Development Bank Selected Financial Ratios (in percent) FY90 FY91 FY92 FY 93 FY94 FY 95 FY 96 Capital/Assets 5.4 7.2 4.6 7.7 7.6 8.9 Asset Quality 24.0 77.0 70.5 60.7 78.9 62.6 Management 262.0 -1859.5 -389.3 283.5 -673.8 -50.0 Earnings 3.9 -39.0 -16.0 12.8 -34.3 -1.1 Liquidity 64.2 223.2 314.0 244.2 163.0 61.7 Cash/Assets 3.7 3.6 2.0 4.7 6.9 2.1 Net Interest Margin 7.0 -38.8 -5.9 6.9 -19.6 1.6 Source: Data provided by NBC to OED Mission, October 1996 37 Annex II Peoples' Bank of Zanzibar Summary Balance Sheet (in thousands of T Sh.) FY 90 FY 91 FY 92 FY 93 FY94 FY95 FY96 Assets Domestic assets of which: 4,999,267 6,127,329 7,515,760 7,554,603 15,157,012 15,403,637 14,510,096 cash 297,591 1,545,912 946,913 500,537 548,309 885,773 882,679 Deposits with BOT 65,510 195,233 513,349 1,238,616 2,321,773 1,503,347 2,057,558 Treasury Bills 122,600 65,000 343,109 239,991 803,966 Other securities 5,000 5,000 5,000 8,892,092 8,895,198 8,675,699 Loans and bills 3,664,815 3,324,904 4,247,146 3,108,500 6,479,425 8,007,768 6,694,975 less: provision for loan losses (48,972) (148,972) (1,579,239) (4,395,232) (5,454,343) (5,680,507) Other domestic financial assets 593,692 627,425 1,035,116 3,813,190 480,845 801,727 450,749 Due from other banks 250,059 412,827 574,099 233,008 829,800 764,167 624,977 Foreign assets 5,245,217 2,689,871 3,103,591 3,923,309 4,142,562 2,950,101 3,022,106 Fixed assets 426,636 705,117 791,803 983,414 1,542,508 1,610,040 1,642,272 Other assets Total assets 10,671,120 9,522,317 11,411,154 12,461,326 20,842,082 19,963,778 19,174,474 Liabilities and equity Domestic liabilities of which: 8,301,258 7,151,580 7,558,687 12,370,952 14,831,642 15,918,955 14,140,707 Deposits 4,307,305 4,630,841 4,313,614 7,043,234 10,965,522 12,560,744 12,724,199 Liability to BOT 2,460,175 549,775 1,013,117 1,944,439 1,050,500 1,205,820 Liabilities to the banks 9,147 294,766 398,221 1,239,480 1,528,260 241,574 63,049 Other domestic liabilities 1,524,631 1,676,198 1,833,735 2,143,799 1,287,360 1,910,817 1,353,459 Foreign liabilities 3,918 143,697 156,117 18,915 24,798 - Proposed dividends (foreign shareholders) - Retained earnings 1,855,890 1,716,984 2,802,432 (822,458) 2,529,813 503,753 1,174,285 Grants, asset revaluation, reserve 494,055 494,055 877,917 877,917 1,397,288 1,432,935 1,385,161 Paid in capital 16,000 16,000 16,000 16,000 2,083,339 2,083,339 2,083,339 Total equity 2,365,945 2,227,039 3,696,349 71,459 6,010,440 4,020,027 4,642,785 Other liabilities Total liabilities and equity 10,671,121 9,522,316 11,411,153 12,461,326 20,842,082 19,963,780 18,783,492 Source: Data provided by NBC to OED Mission, October 196 Annex II 38 Peoples' Bank of Zanzibar Summary Income Statement (in thousands of T Sh.) FY 90 FY91 FY 92 FY 93 FY94 FY95 FY 96 Interest on loans and bills of which: foreign Investment interest income Total Interest Income 913,676 915,735 759,748 789,657 1,210,716 1,210,716 Interest on Deposits 727,040 621,724 359,582 534,149 997,890 814,473 Other interest payments Total Interest Expenses 727,040 621,724 359,582 534,149 997,890 814,473 Interest margin 186,636 294,011 400,166 255,599 212,826 396,243 Provision for losses 3,035,374 2,046,588 1,778,170 Net Interest Margin 186,636 294,011 400,166 (2,779,775) (1,833,762) (1,381,927) Non Interest Income 57,250 74,976 252,347 267,694 245,313 989,103 Staff costs and office expenses 93,425 221,895 362,151 228,734 461,451 784,315 Maintenance 7,471 10,339 23,325 141,773 141,773 28,258 Depreciation 15,557 26,660 30,153 78,818 84,409 Other non operating expenses Total Non Interest Expenses 100,896 247,790 412,136 400,660 682,042 896,982 Extraordinary items 1,669,774 (220,103) 1,328,934 (712,058) 5,832,010 (2,010,909) Income before taxes 1,812,765 (98,905) '1,569,311 (3,624,891) 3,352,272 (3,300,716) Income Tax Net Income 1,812,765 (98,905) 1,569,311 (3,624,891) 3,352,272 (3,300,716) Peoples Bank of Zanzibar Selected Financial Ratios (in percent) FY90 FY91 FY92 FY93 FY94 FY95 FY96 Capital/Assets 5.4 7.8 7.2 16.7 17.6 18.1 Asset Quality 1.5 3.5 50.8 67.8 68.1 84.8 Management -44.6 433.3 -1584.8 726.5 -420.8 N.A. Earnings -1.0 15.0 -30.4 20.1 -16.2 N.A. Liquidity 71.8 98.5 44.1 59.1 63.8 52.6 Cash/Assets 16.2 8.3 4.0 2.6 4.4 4.6 Net Interest Margin 2.9 3.8 -23.3 -11.0 -6.8 N.A. Source: Data provided by NBC to OED Mission, October 1996 39 Annex II Tanzania Investment Bank Summary lsM e Shet (in thoumans of T Sb.) FY 90 FY91 FY 92 FY 93 FY 94 FY 95 FY 96 Assets Domestic assets of which: 7,604 9,706 8,764 8,706 6,912 4,766 5,990 cash 339 561 349 605 592 97 149 Deposits with BOT Treasury Bills 140 420 300 800 Other securities Loans and bills 6,987 7,678 11,067 12,617 8,336 7,330 7,035 less: provision for loan losses (737) (772) (5,414) (6,047) (3,257) (4,601) (3,332) Other domestic financial assets 875 1,819 2,462 1,531 1,191 1,940 1,338 Due from other banks Foreign assets Fixed assets 247 303 390 596 5,040 5,845 5,586 Other assets Total assets 7,851 10,009 9,154 9,302 11,952 10,611 11,576 Liabilities and equity Domestic liabilities of which: 1,820 3,486 4,526 2,526 2,543 3,730 1,583 Deposits' 1,820 3,486 4,526 2,526 2,548 3,730 1,583 Liability to BOT Liabilities to the banks Other domestic liabilities Foreign liabilities 3,224 2,952 3,013 Proposed dividends (foreign shareholders) Retained earnings 354 309 (3,147) (4,948) (4,797) (7,320) (4,209) Grants, asset revaluation, reserve 2,152 2,961 4,461 7,289 9,766 9,766 6,222 Paid in capital 301 301 301 4,435 4,435 4435 7,980 Total equity 2,807 3,571 1,615 6,776 9,404 6,881 9,993 Other liabilities Total liabilities and equity 7,351 10,009 9,154 9,302 11,952 10,611 11,576 Source: Data provided by NBC to OED MsWon, October IG Annex II 40 Tanzania Investment Bank Summary Income Statement (in thousands of T Sh.) FY90 FY 91 FY92 FY93 FY94 FY95 FY 96 Interest on loans and bills 1671 2322 3,981 971 1,246 465 3,393 of which: foreign Investment interest income 18 51 97 236 22 109 Total Interest Income 1,689 2,373 .4,078 971 1,482 487 3,502 Interest on Deposits Other interest payments 620 920 856 2 138 138 218 Total Interest Expenses Interest margin 1,069 1,453 3,222 969 1,344 349 3,284 Provision for losses 890 1,136 6,365 52 155 1,470 150 NetInterestMargin 179 317 (3,143) 917 1,189 (1,121) 3,134 Non Interest Income 46 54 160 24 37 343 420 Staff costs and office expenses 186 268 428 695 855 1,354 904 Maintenance Depreciation 19 25 43 67 215 272 306 Other non operating expenses 1 2 3 4 5 7 8 Total Non Interest Expenses 206 295 474 766 1,075 1,633 1,218 Income before taxes 19 76 (3,457) 175 151 (2,411) 2,336 Income Tax (65) Net Income 19 11 (3,457) 175 151 (2,411) 2,336 Tanzania Investment Bank Selected Financial Ratios (in percent) FY90 FY 91 FY92 FY93 FY 94 FY95 FY96 Capital/Assets 32.6 52.0 126.0 118.8 133.8 122.7 Asset Quality 10.1 48.9 47.9 38.8 62.8 47.4 Management 4.1 -807.7 25.2 17.7 -178.1 258.4 Earnings 0.1 -36.1 1.9 1.4 -21.4 21.1 Liquidity 220.3 244.5 499.5 329.1 196.5 444.4 Cash/Assets 5.6 3.8 6.5 5.0 0.9 1.3 Net Interest Margin 3.5 -32.8 9.9 11.2 -9.9 28.3 Source: Data provided by NBC to OED Mission, October 1996   IMAGING Report No.: 16751 Type: PPAR