Why banking charges were targeted for VAT

Dar es Salaam. The government found the hundreds of billions of shillings earned by banks annually in charges and fees too good to resist, prompting it to impose 18 per cent value added tax (VAT) on the levies, The Citizen has learnt.

An analysis conducted by The Citizen earlier this week established that the ten largest corporate and commercial banks raked in a cool Sh235.5 billion in fees and commissions from January 1 to June 30, this year. This is a 16 per cent increase on the sum recorded in the same period last year.

The Minister for Finance and Planning, Dr Philip Mpango, proposed the imposition of 18 per cent VAT on banking fees and charges when he tabled the 2016/17 Budget in Parliament in June. The tax came into effect on July 1 following the passing of the Budget and Finance Bill, 2016.

Many banks raised their charges and fees effective July 1 to reflect the newly imposed VAT. Had the imposition of VAT taken effect on January 1, 2016, the government would have collected Sh42.39 billion in revenue. This amount is enough to fund the construction of a 40-kilometre tarmac road.

Tanzania has 41 commercial banks, three financial institutions, 12 community banks, four deposit-taking micro-finance banks and three financial leasing companies, but 70 per cent of the market is dominated by only ten banks in terms of assets, deposits and gross loans.

These are CRDB Bank plc, National Microfinance Bank plc (NMB), National Bank of Commerce (NBC), Barclays Bank, Exim Bank, Standard Chartered Bank, Stanbic Bank, DTB, TIB Development Bank and Bank M.

Banking services which customers pay for include cash withdrawals; account maintenance; mobile banking; internet banking; statement requests; funds transfers and balance enquiries.

However, services and rates differ from one lender to the other. For example, while Standard Chartered and NBC offer new ATM cards free of charge, NMB charges Sh10,000 for current accounts.

For processing personal loans, Standard Chartered charges three per cent of the total loan sum, Barclays charges 2.5 per cent and NBC charges between 1.5 and 2.5 per cent.

Standard Chartered charges Sh750 for every ATM transaction. Barclays, NBC and NMB, on the other hand, charge Sh2,300, Sh100 and Sh800, respectively.

Banks also charge commissions upon issuance of import and export letters of credit and guarantees.

“Fees and commissions are part of banks’ revenue, but about 70 per cent of income is generated through interest,” says Prof Mohamed Warsame, CEO of Dhow Financial, who is also an independent financial analyst.

An analysis of various banks’ quarterly financial statements conducted by The Citizen showed that CRDB Bank earned the largest sum in fees and commissions in the first half of 2016 at Sh78.4 billion, followed by NMB at Sh70.3 billion.

The two banks, which are listed on the Dar es Salaam Stock Exchange, are the largest in the country, accounting for over 35 per cent of industry assets. They also have the largest branch networks in the country. NBC registered Sh17.2 billion, while Exim raked in Sh16.7 billion during the period under review.

Other indicators

The bulk of banking income comes from interest. The other revenue platforms include foreign currency dealings and dividend income.

The ten top banks recorded Sh248.6 billion in net profit in the first half of 2016. However, the level of profitability is not directly linked with amounts banks collected through fees and commissions.

NMB had the largest profit at Sh84.3 billion, while CRDB registered Sh65.9 billion. In third and fourth places are Exim Bank and Standard Chartered on Sh59.3 billion and Sh12.4 billion, respectively. The operating income for the ten banks was Sh1.3 trillion in the six months.

Fees and charges comprised 18 per cent of the operating income of the ten banks. It was also the largest earning in the category of non-interest income as foreign exchange dealings earned the ten banks Sh69 billion.