As the year draws to a close, we highlight the firm’s 2020 legal updates for the Tanzania banking sector, providing clients and interested parties access to sector developments we reported on during the year.

Highlights include:

  • financial consumer protection regulations
  • spousal consent on mortgages
  • financial consumer complaints handling mechanism
  • monetary policy and non-performing loans (NPLs)
  • foreign exchange directives
  • COVID-19 and banking
  • microfinance service providers

Financial consumer protection regulations

In January, we published an update on the new Bank of Tanzania Regulations on financial consumer protection. The update explored key provisions of the Bank of Tanzania (Financial Consumer Protection) Regulations that were published as Government Notice No. 884 of 2019 (the Regulations). Key players under the Regulations are the financial consumer, the financial service providers and the Bank of Tanzania (BOT).

The Regulations make it imperative for financial service providers to adopt policies and a mechanism for ensuring financial consumer protection. Every financial service provider must have a structure of governance that ensures effective implementation of consumer protection. The Regulations also provide for non-discrimination of consumers and the need for financial service providers to adopt transparent consumer contracts with fair terms. The Regulations also provide for the requirement of financial service providers to establish complaints handling and redress mechanism.

The BOT plays a major role in the general supervision of compliance to the Regulations, having the mandate to investigate potential breaches of the Regulations and impose penalties and sanctions thereto.

Spousal consent on mortgages

In June, we published a legal update following the decision of the Court of Appeal of Tanzania (the Court) regarding the requirement of spousal consent on mortgages. The case of Hadija Issa Arerary v Tanzania Postal Bank, involves a mortgage secured by a third party with whom the Appellant claims to be married to. The Appellant challenged the Respondent’s right to sell the mortgaged property after the borrower defaulted on the loan.

The Court considered both the duty of the mortgagor to disclose his marital status and the mortgagee to take reasonable steps to investigate whether the property was a matrimonial asset. The Court reasoned that the mortgagor’s affidavit of not being married was sufficient. The Respondent was deemed to have taken reasonable steps in satisfying itself that the mortgagor was not married and that there was no third party interest.

The Court’s decision may seem favorable to mortgagees; however “reasonable steps” may vary on a case by case basis. It is imperative that lenders exercise due diligence to ascertain the marital status of the mortgagor in order to properly satisfy the spousal consent requirement.

Financial consumer complaints handling mechanism

We issued a further update which was published in July on the requirement of financial service providers to establish a consumer complaints handling mechanism. Under such mechanism, a consumer has the right to file a complaint against a financial service provider which must be acted upon by the financial service provider and reverted to the consumer within the statutory time frames provided. A consumer may escalate the complaint to the BOT if dissatisfied with the actions taken by the financial service provider or upon the financial service provider’s failure to resolve the complaint in a timely manner. The BOT, however, must satisfy itself that the complaint has been properly lodged before it.

The BOT’s determination of the complaint is binding and conclusive. An aggrieved party may seek revision of the determination from the Governor of the BOT and may further file for judicial review at the High Court of Tanzania. The statutory timelines must be adhered to for the process and mechanism to be effective. Failure to establish a complaints handling mechanism attracts enforcement actions and sanctions by the BOT.

Monetary policy and NPLs

An update on the BOT’s monetary policy and NPLs in light of COVID-19 was published in August pursuant to the BOT’s June 2020 Monetary Policy Statement (the Statement). According to the Statement, the ratio of NPLs to gross loans increased to 11% in April 2020 due to the outbreak of COVID-19.

The BOT immediately took action by, among other things, reducing the statutory minimum reserves requirement from 7 percent to 6 percent; lowering discount rates from 7 percent to 5 percent; reducing haircuts on treasury bills from 10 percent to 5 percent and on treasury bonds from 40 percent to 20 percent; and providing regulatory flexibility on restructuring of loans. Furthermore, the BOT’s intended steps towards economic recovery for 2020/2021 include easing the monetary policy in order to increase liquidity.

Foreign exchange directives

We published an update in August on the BOT’s new directives on foreign exchange operations pursuant to the BOT’s circular published on 6 August 2020 (the Circular). The Circular became effective on 7 August 2020 and addresses the following:

  • the threshold for trading foreign exchange transactions within quoted prices of the interbank foreign exchange market;
  • reduction of the minimum tradable currency per quoted price;
  • account relationship between banks and exporters selling foreign currency;
  • mandatory quoted prices for the trading of foreign exchange in retail markets;
  • prohibition of trading with unlicensed international foreign currency brokers; and
  • foreign exchange dealers to observe KYC procedures in their undertakings.

COVID-19 and banking

In October, we issued an article on the impact of COVID-19 on Tanzania’s banking and financial services sector. The article analyses the United Nations Development Programme (UNDP) impact assessment that took note of the possible increase of NPLs. Such increase would be a direct result of COVID-19 measures such as closure of borders, lockdowns and travel bans which would lead to the slowdown and collapse of businesses.

The article summarised Tanzania’s economic and financial status as showcased in BOT statements and bulletins (the BOT Publications). According to the BOT Publications, banks had enough capital reserves to withstand financial difficulties brought by COVID-19. The BOT had sustained an accommodative monetary policy and enhanced liquidity easing measures to shield the economy from the effects of COVID-19.

Banks responded to the BOT’s relief measures by offering relief packages such as moratoriums and loan restructuring. However, the issue of NPLs led to the deterioration of customer-bank relationship. Bank deposits also witnessed a shortfall as businesses engaged in import and export struggled to maintain operations amidst the measures of countering COVID-19. The transportation, tourism and accommodation industry also suffered hurdles occasioned by the reduced and limited inflow of goods and people.

On the upside, some major Tanzanian banks strived and managed to increase their net profit.

Microfinance service providers

In November, we published an update on the BOT’s time extension for registration and licensing of Microfinance Service Providers (MSPs). Under a public notice issued by the BOT, the BOT extended the time for the registration and licensing of MSPs to 30 April 2021 from the previous deadline of 31 October 2020. The MSPs addressed in the public notice are Non-Deposit Taking Microfinance Service Providers (NDTs), Savings and Credit Cooperative Societies (SACCOS) and Community Microfinance Groups.

Our update briefly captured licensing procedures for NDTs and SACCOS as well as offences and penalties for failure to apply and obtain a licence after 30 April 2021. As a reminder, NDTs shall attract a fine of between TZS 20,000,000 and TZS 100,000,000. SACCOS shall be liable to a fine of between TZS 10,000,000 and TZS 50,000,000.

Envisioning 2021

COVID-19 has created severe setbacks in Tanzania’s banking sector since its dawn in late March 2020. However, with the BOTs effective monetary policy, mitigating measures and businesses gradually going back to normal, the banking sector is anticipated to thrive in 2021. Businesses engaged in import and export, transportation, tourism, accommodation and other sectors are recovering hence issues such as NPLs and bank deposits are expected to improve.

The banking and debt finance team at Clyde & Co Tanzania publish regular legal updates on significant developments in Tanzania’s banking sector.