Where and how Tanzania's banks are making billions in profits

Dar es Salaam. The reduction of queues that used to define Tanzania’s banking halls about a decade or so ago is coming at a cost to bank clients who now have to pay handsomely in fees and commissions associated with alternative banking channels.

With the number of people who visit the traditional brick and mortar bank branches dropping as clients shift to alternative channels such as agents, mobile banking and internet banking, commercial banks’ earnings in fees and commissions are on the rise.

In fact, this appears to be the major driving factor in the growth of non-funded income stream for commercial banks as analysed in the recently-published financial statements.

An analysis of 31 commercial banks by The Citizen indicated that during the first six months of the current calendar year, the banking sector registered a cumulative profit of around Sh580.13billion.

This was about Sh279.83billion more than the Sh300.3 billion that they registered during a similar period last year.

The banks include NMB Bank Plc, CRDB Bank Plc, NBC Bank, Exim, Stanbic, Standard Chartered, Diamond Trust Bank (DTB), Azania, Tanzania Commercial Bank (TCB), Citibank, People’s Bank of Zanzibar (PBZ) and Absa Tanzania.

Then list also includes KCB-Tanzania, Equity Bank, Bank of Africa (BoA), I&M Bank, NCBA, Tanzania Agriculture Development Bank (Tadb), Ecobank, Bank of Baroda, Amana Bank, Mkombozi, DCB Commercial Bank, United Bank of Africa (UBA), BancABC, Maendeleo Bank, Guaranty, Mwanga Hakika Bank, TDB, Mwalimu Commercial Bank and the International Commercial Bank.

The analysis also shows that while funded income remains the top source of the banking sector’s revenue, its rise was modest compared to that of the non-funded income stream.

Data shows that while the interest income of the 31 commercial banks grew by 18.3 percent to Sh2.45 trillion from Sh2.07 trillion, the non-interest income grew at a staggering 43.4 percent.

The 31 lenders earned Sh716.22 billion from non-interest income during the first half of the current year, from Sh499.39 billion during a similar period last year.

Non-interest income includes foreign currency dealings, dividend income, other operating incomes and also revenue from fee and commissions that banks charge for their products and services, including wealth management advice, checking account fees, overdraft fees, ATM fees, interest and fees on credit cards.

With the number of Tanzanians who access banking services through alternative channels like through mobile phones and banking agents on the rise, their transactions translate into money for the lenders.

“It is true that there had been an increase in use of mobile transactions plus online transaction as banks aggressively promoted use of online banking and mobile banking. Transaction fees from increased use of these platforms may have contributed to the increase in non-interest income,” said an independent financial analyst, Mr Christopher Makombe.

He said the increase may have also included increases in such fees like loan processing fees which should have increased following an overall increase in loans offered to private sector, particularly, personal loans.

Bankers say though it is a source of revenue through the non-interest income stream, exploitation of digital banking systems also provides convenience to clients.

“The digital development in the banking sector helps to provide convenience to customers and easy access to their money because through services like internet banking, one can transact anywhere at any time,” said the finance manager at Equity Bank-Tanzania, Mr George Radonde.

He said while this has helped banks to grow their incomes, the increasing scale of access has also widened the mobilization of deposits making lenders able to meet obligations and accumulate funds for short and long term investments.

Similar sentiments were aired during a recent annual general meeting for the Mkombozi Commercial Bank Plc.

The bank’s board chairman, Mr Gasper Njuu, told shareholders that the lender has now shifted its focus towards repositioning digitalization interventions by putting special emphasis on agency banking, mobile banking application, internet banking and cash management solutions.

“Mkombozi Bank will focus on innovation and investment in technology in order to deliver quality service and improve customer experience (Successfully completed integration with key partners in the provision of digital services especially Mobile Network Operators (MNOs) and other digital solution integrators),” he said in a statement that was availed to The Citizen.

Available data shows that a number of lenders were currently making more transactions through agencies and alternative channels than they do on brick and mortar branches.

Some analysts are however sceptical about the banking sector’s profitability trend, saying the f act that it is largely dominated by a few lenders means that those on the lower end must do an extra job.

A close look at the recently published financial results shows that nearly 66 percent (or Sh381.87 billion) of the sector’s total profit came from the two largest banks (NMB and CRDB Banks Plc).

The co-founder and partner at Bankable Tanzania, Mr Ivan Tarimo, said this was largely because the two and a few more other large banks, have the scale in terms of experience, expertise, client relationships, transaction origination and distribution, branches, agencies, and wider networks of ATMs.

“These big banks due to their wider scale of coverage are able to mobilize deposits which is a lifeline to lenders, lowering cost of funds, making better credit investments and managing their operating expenditure,” he said.

“While some mid-tier banks and the smaller ones still make profits, they are limited with their level of mobilizing deposits, fewer branches and small networks across the country make them fall behind the market,” said Mr Tarimo.

The banking expert says despite all these limitations the mid-tier and small banks still have an opportunity to increase efficiency and grow their profitability levels through focusing on digital transformation.

“Innovative products and solutions would help banks to expand and widen the access of financial services even to the remote areas, and help them expand their reach in mobilizing funding,” said Mr Tarimo.

Another notable factor was the level of non-performing loans among the banks in Tanzania, as while the central bank benchmark was set below five percent, the majority of banks are still struggling to maintain minimum levels.

However, late last year during the 20th Conference of Financial Institutions (COFI), the Bank of Tanzania Governor, Prof Florens Luoga, said that generally the country has the potential to decrease its NPLs to below five percent mark as good progress have been recorded in data shows the rate have gone down to 9.3 percent in June 2021, from 10.8 percent that was in June 2020.