Implementing Successful Reforms and Transformations in DFIs:...

Tanzania Investment Bank Limited

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Implementing Successful Reforms and Transformations in DFIs:

The Experience of Tanzania Investment Bank Limited

Peter M. Noni Managing Director Tanzania Investment Bank Ltd


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PRESENTATION SUMMARY: A) INTRODUCTION

B) HISTORY OF TIB

C) TRANSFORMATION PROCESS

D) TRANSFORMED TIB E) IMPORTANT LESSONS

F) CONCLUSIONS


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A) INTRODUCTION • Soon after its independence specialised development

finance institutions were established to supplement the commercial banks that were already existing.

• Tanzania Investment Bank was one of them and was established in November 1970 to finance industrial development.

• Other institutions included Tanzania Rural Development Bank (TRDB) to deal with medium and long term financing to agriculture and the rural sector, and Tanzania Housing Bank (THB) to provide housing loans.

• Operational results of all these institutions during initial years showed very encouraging trend.


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A) INTRODUCTION • Profitability trend changed when Tanzania went

through an economic crisis during the 1980s and 1990s

• The crisis was a result of, among others, oil price shocks, war with Idi Amin, falling world commodity prices for traditional exports and acute shortage of foreign exchange (leading to emergence of black market for foreign exchange and severe depreciation of the local currency).


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A) INTRODUCTION • Following the economic crisis the Government

implemented IMF/World Bank supported stabilisation and structural adjustment programmes.

• The first generation financial sector reform were kicked off by enactment of the Banking and Financial Institutions Act (BFIA) 1991.

• This paved way for the liberalisation of the financial sector and licensing of new banks and other non financial institutions.

• The reforms also included enactment of Foreign Exchange Act 1992 which deregulated the foreign exchange and allowed its free trading.


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A) INTRODUCTION • IMF/WB stabilisation and structural reform measures

did not support DFI strategy and therefore adversely affecting the development banks which were already grappling with effects of the economic downturn.

• As a result their performance worsened as the level of non performing loans kept growing.

• This necessitated series of measures which varied from the government taking over non performing loans to privatisation or liquidation of some DFIs.

• As a result THB was closed down in 1995, TRDB was privatised in 1996 and turned into a commercial bank while renaming as CRDB.

• TIB on the other hand was left unattended hence initiated its own in house transformation process


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A) INTRODUCTION • Unfortunately the TIB transformation focused more

on survival and not on its role as a DFI. • A Financial Sector Assessment Program (FSAP) by

IMF/World Bank in 2003 observed that access to medium and long term finance was still a problem.

• This led to Second Generation Financial Sector Reforms which among other things aimed at facilitating the provision of Long Term Development Financing.

• One of the action plans under this objective was establishment of a DFI.

• Government decided to transform TIB into a DFI • A consultant was appointed and advised on the best

way to transform TIB.


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B) TIB HISTORY • Formed in 1970 with a main mandate of providing

medium and long term credit for industrial development.

• Industrial development was broadly defined to include large-scale commercial agriculture, manufacturing, assembly and processing, engineering, construction, transport, tourist and mining activities.

• The source of funding to finance its lending operations was mainly foreign funds from bilateral and multilateral agencies and local currency funds from shareholders (mainly the Government).

• The bank offered a single product, i.e. medium to term lending and therefore its income was mainly derived from interest income from loans.


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B) TIB HISTORY • In the 1970s and 1980s, TIB was at the forefront

of economic development in Tanzania. • A good proportion of the country’s gross capital

formation was achieved as a result of the role played by the bank.

• Tanzania economy economic crisis in the mid 1980s which impacted negatively on TIB’s performance.

• As most of the TIB loans were denominated in foreign currencies, the drastic local currency devaluations of that period ballooned the borrower companies’ obligations, making them un-serviceable.


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B) TIB HISTORY Chart 1: Trend of TIB Balance sheet on selected variables (1971-1999)

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71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

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/TZS

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ASSETS SHAREHOLDERS FUND BORROWING DEPOSITS USD/TZS


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B) TIB HISTORY

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(12 500)

(10 000)

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(5 000)

(2 500)

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1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

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Chart 2: TIB's Profit before tax and USD/TZS rate 1971-1999

Profit before tax USD/TZS rate


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C) TRANSFORMATION PROCESS • The poor performance necessitated restructuring. • The first phase of TIB restructuring involved two

stages; • During stage one (1994-1998) the balance sheet

was cleaned up by the government through PSRC taking over non performing loan portfolio and by realigning human resources.

• The bank retrenched workers and kept only a critical number of staff.

• The bank also stopped new lending and concentrated on following up collections of the previous loans.


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C) TRANSFORMATION PROCESS • The second stage (1999-2002) involved the

overhaul of operational systems, introduction of new commercial banking products, and recruitment of new staff with skills required for the newly introduced products.

• In order to provide for flexibility, the TIB Act was repelled and TIB was incorporated under the Companies Ordinance (Cap 212), now Companies Act.

• The restructuring turned the bank around from losses, improved efficiency and led to more streamlined and profitable operations.

• The two stages of restructuring relied largely on TIB’s internal resources.


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800

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1 000

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Trend of selected Balance Sheet 2000-2010

ASSETS SHAREHOLDERS FUND BORROWING DEPOSITS USD/TZS


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1 000

1 200

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 oct.-10

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TIB's Profit before tax and USD/TZS rate 2000-2010

Profit before tax USD/TZS rate

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C) TRANSFORMATION PROCESS • Despite the positive performance trends, TIB is

still far from being able to fill the huge development financing gap or make major impact since it has been operating as a non banking financial institution.

• The Financial Sector Assessment Program (FSAP) that was conducted by IMF/World Bank revealed a huge gap in provision of development financing, especially lack of medium and long term funds for investment projects.

• Establishment of DFIs is one of recommendations of the second generation financial sector reforms

• In 2005, the Government decided to re-capitalize TIB and transform it into a national DFI (its original role).


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D) TRANSFORMED TIB • Once it is fully transformed, TIB would operate

under a two-tier structure, with a parent DFI and a corporate bank subsidiary.

• The parent DFI (TIB Ltd) would be responsible for mobilizing medium and long term resources and lending them on medium and long term basis.

• The new corporate bank subsidiary (TIB Corporate Bank) would mobilize short term deposits and provide short term and checking facilities in support of the core function of TIB.

• The two-tier structure would make the DFI more effective and sustainable and positions TIB as a modern DFI offering “complete” solutions to clients and not just a single product (term loan) entity.


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D) TRANSFORMED TIB • The focus on a single product (term loan) was

seen as the main stumbling block for TIB during the turbulent times in the mid 1980s.

• The corporate banking subsidiary would focus mainly on the clients of the parent DFI and would have limited retail focus.

• The TIB Corporate Bank will be supervised under the commercial banks regulatory framework

• The parent TIB Ltd will be governed by the legal and regulatory framework for DFIs now being formulated by BOT.


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D) TRANSFORMED TIB • New TIB requires sufficient capital that would

enhance its ability to offer loans at rates that are economical for the borrowers

• A large capital injection will minimize TIB dependence on borrowing from the market.

• The Government is committed to inject substantial amounts of equity over the initial period of five years

• It will also provide guarantees and other forms of support to enable TIB to borrow from other sources at lower rates

• Non-government participants including foreign development banks may be considered to take an equity stake of up to 40% in TIB.


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D) TRANSFORMED TIB • For TIB to be a strong, profitable and sustainable

DFI, a complete “bouquet” of solutions to clients will be offered. They are:

• Fund based products and services which will include project financing, bridge financing, refinancing, leasing and equity financing.

• Fee based products and services which will include administration of government and/or donor funds on agency basis.

• Support services include provision of advisory services such as technical assistance to SMEs.

• Retail banking business: Provision of checking accounts, short term financing (working capital and trade financing), guarantees and letters of credit.


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D) TRANSFORMED TIB • TIB is in the process of developing a robust

corporate governance system. • A “corporate governance charter” to ensure

transparency, fairness, responsibility and accountability.

• TIB and its subsidiary be governed by separate Boards of Directors

• There are to be clearly demarcated management structures.

• The Board members will be appointed through a Nomination committee that will invite applications from eligible candidates.

• A shortlist will be submitted to the shareholders (Government) for final appointment/approval.


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D) TRANSFORMED TIB • The success of TIB as a national DFI is hinged on

the quality of the talent pool that the institution is able to attract and retain.

• Capacity Building: A thorough staff audit will be done, primarily to assess the existing skill sets and aptitude vis-à-vis required capabilities.

• Recruitment: Due to the transformation, the activities and operations of the DFI will expand which will lead to an increase in staff number.

• Remuneration: Since the market for skilled personnel in the banking sector is highly competitive, good remuneration levels are therefore critical for the bank to retain and attract high calibre personnel.


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D) TRANSFORMED TIB • TIB considers Information and Communication

Technology (ICT) a strategic resource to its business.

• Under the programme TIB has recently implemented a Credit Risk Management Systems (CRMS) for the purpose of improving the credit appraisal process and credit portfolio management.

• Currently TIB has in place sound operational policies and procedural manuals covering the various areas of its present operations.

• These manuals are updated regularly to keep abreast with the market developments and to smoothen the operations where necessary.


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E) IMPORTANT LESSONS • DFIs have an indispensable role in national

economic development. • Since most of the DFIs are state owned there is a

need for unwavering support from the Government.

• Successful transformation requires an independent and strong Board of Directors and management team.

• Skilled and committed staff are required for a successful transformation

• Reliance on limited sources of funding and limited product offering makes an institution incapable to remain resilient to economic shocks.

• Modern risk management practises must be implemented in DFIs


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F) CONCLUSION • TIB has come a long way from the narrow

operational base and precarious financial position of the 1990s to sustainable levels of performance at present.

• In the process, a number of lessons have been learnt, particularly in the areas of (i) governance, (ii) products and services, (iii) human capital, and (iv) IT systems.

• Yet TIB is far from being an effective national DFI. • A clear transformation strategy and attendant

business plan have been prepared. • Results of the current transformation are expected

to be obvious within three to four years ahead.


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