DAR ES SALAAM, Dec 7 (Reuters) - Nearly half of Tanzania’s 45 banks are vulnerable to adverse shocks and risk insolvency in the event of a global financial crisis, the International Monetary Fund (IMF) said on Friday.
The IMF urged the East African country to improve asset quality, address non-performing loans (NPLs) and increase capital buffers in the banking system.
“Solvency stress tests reveal that 22 banks, representing 32 percent of banking assets, would become undercapitalised in the tail risk scenario,” the IMF said in its latest financial system stability assessment of Tanzania.
The IMF carries out the stress tests every after five years.
The scenario envisaged a rare but possible combination of external and domestic shocks, IMF said.
“These assumed shocks trigger a sharp slowdown in domestic growth, a currency depreciation, spikes in domestic inflation and interest rates and a credit squeeze.”
Tanzania has been trying to tighten controls on the banking industry as well as push ahead with reforms to bolster the economy, which grew 7.1 percent last year and is expected to maintain the same pace of growth in 2018, supported by agriculture, mining, construction, communication and financial services.
Last month, Tanzania’s central bank suspended five banks from trading in the interbank foreign exchange market for one month for breaching regulatory rules.
The suspension came days after the central bank conducted surprise inspections of foreign exchange bureaus in the northern town of Arusha, a tourist and gemstone trading hub, in a crackdown on illegal forex trading and money laundering activities.
In January, the central bank had revoked the licences of five “critically undercapitalised.” community banks in January to protect financial stability.
The IMF’s latest stress tests revealed that six banks in Tanzania were currently undercapitalised, while 37 out of 45 banks showed varying degrees of under-provisioning by the end of last year.
The IMF advised the government to enhance surveillance and monitoring of liquidity risks in the foreign exchange market and undertake measures to mitigate them.
The IMF also said bad loans posed a risk to the country’s financial system, with bank asset quality deteriorating in recent years, hence increasing the need to raise provisions.
Non-performing loans ratio industry-wide increased from 6.8 percent in 2014 to 11.5 percent in 2017 while at end-2017, 24 banks had NPLs ratios exceeding 10 percent, the IMF said.
Editing by Elias Biryabarema and Jane Merriman