THE SECOND GENERATION OF FINANCIAL SECTOR REFORMS

[Photo courtesy of: Muhidin Issa Michuzi]

OPENING SPEECH BY H.E. JAKAYA MRISHO KIKWETE, PRESIDENT OF THE UNITED REPUBLIC OF TANZANIA DURING THE CONFERENCE OF FINANCIAL INSTITUTIONS, ARUSHA, 6TH NOVEMBER, 2008


Hon. Mustafa Mkullo, Minister for Finance and Economic Affairs;
Madame Antoinette Sayeh, Director for Africa Department, IMF;
Mr. Gray Mgonja, Permanent Secretary, Ministry of Finance;
Professor Benno Ndulu, Governor of the Bank of Tanzania;
Deputy Governors of the Bank of Tanzania;
Leaders and Representatives of Financial Institutions in Tanzania;
Distinguished Invited Guests;


(I recognize Mzee Mtei, Bob Makani and Mr. Mbaya;
Ladies and Gentlemen.

Introduction
It is, indeed a pleasure for me to be afforded the opportunity to address such an important conference which brings together the practitioners of the financial institutions that are so key, to the realization of the growth and development of Tanzania.


Since independence, the hope for each Tanzanian has been better life. Building and nurturing a nation whose people are free of ignorance, disease and poverty have been the hallmark aspirations, guide and preoccupation of the successive administrations in our dear country.

Today, the
vision that underlies our socio-economic agenda and programs still carries these great dreams of each Tanzanian since dawn of independence.
History has over time taught us that success in achieving these goals sustainably lies ultimately in the private sector’s maximum involvement in economic activity.

It is in recognition of this important fact, that the reforms that we have undertaken over the past two decades have brought the private sector to the centre of the economic development agenda in our country.
As you all know, human intellect and entrepreneurship are among the greatest assets any nation can have.

But the best ideas, as truly as they are human, will hardly get off the ground effectively, without being properly nurtured and empowered. Financing is critical in this regard. It does not matter whether the idea is big or small.
A widow, who is struggling to feed her children, may identify a good market for pancakes that she knows she can easily take advantage of. A good market or a good idea without finance, will not enable this woman realize her ambition to change her life.
A graduate of agricultural science may identify a fertile peace of land suitable for a crop that has good local and global demand. He knows what to do to get maximum output from the land, but without finance his knowledge will be worthless. Likewise, an investor with an excellent idea about a good project is helpless without finance.

Tanzanians are a very resourceful people. They are full of good ideas which can transform this nation into the dreamland of our people. But, without proper financing though, those man y ideas will not be realized. It is just as good as having no ideas at all.

I am saying this, Mr. Governor and distinguished representatives of the financial institutions, just to remind ourselves of the importance of having a financial intermediation system that efficiently collects the funds from those who have money to spare, and channel them to those in need of funds for investment. Morden civilization has been made possible and sustained by credit flows—a fact that is even more clear now that, the world is going through a financial crisis.

Our entrepreneurs—small and large—need reliable, accessible and sustainable sources of financing. Providing funds at reasonable cost, remains a major challenge in our country, more so for people in the rural areas and small enterprises.

That is why, Governor and distinguished delegates, I consider this meeting to be an opportune moment for me to address officials who are best placed to give us answers as to how this gap can be filled and indeed, bring those answers to reality.

First Generation Financial Reforms in Tanzania
Before identifying the challenges ahead let me reflect on the ground that we have covered in addressing the financial sector problems in our country. We are, today, in the middle of financial sector reforms whose first phase started in the early 1990s.

Two important pieces of legislations were passed in the first half of the 1990s, namely:
The Banking and Financial Institutions Act 1991 which opened up the financial sector to private capital both local and foreign, and;
The Bank of Tanzania Act 1995 that shed the non-traditional functions off the responsibilities of the Bank of Tanzania and gave the Bank the independence it needs in pursuit of financial and price stability, which the Act made the primary objective of the Bank.

I am happy to have been associated with the conception and passage of the BOT Act. At that time I was the Minister for Finance.

Both acts have now been revised in 2006 to match with the changing times and needs of modern financial sectors.

Several additional laws were enacted which gave the financial sector its current market based character. The Foreign Exchange Act 1992, that among others provided for the administration and management of dealings in gold, and foreign currency and the Bureau de Change Regulations of 1992 that, provided for establishment of bureaus de change are cases in point. The other is Capital and Securities Market Authority Act 1994 that formed the Capital and Securities Market Authority and laid the ground for establishm ent of the Dar es Salaam Stock Exchange in 1996.

Today, distinguished participants, a decade and half since the financial sector reforms began, notable strides have been made in provision of financial services in our country. Allow me to mention some of them here. These include:
The number of financial institutions has increased and their efficiency in provision of services has improved.

From only three public owned banks in early 1990s, the number of banks has increased to 35; We have seen success in refocusing monetary policy to price stability as evidenced by the decline of inflation from rates ranging between 20 and 30 percent before 1995, to single digit rates since 1999. This is an indication that our economy has become remarkably resilient to shocks. For instance while the recent food and oil price shock has caused inflation to soar in many nations around us inflation in Tanzania has increased by much less;


Tanzanians have a wider range of instruments to put their savings in now. They are no longer limited to only cash and shilling bank deposits, but they can also put their savings in government securities, shares and foreign currency;
Exchange rate and interest rates are now market determined and I trust the markets are, as expected, making better allocation of the financial resources, on the basis of where the highest return is. This has contributed to the steady increase in the strength of our economy that we have witnessed in the recent past; and Credit to the private sector has expanded substantially as the government become less and less dependant on bank borrowing to finance its activities.

Ladies and Gentlemen;
These, are by any standard, not trivial achievements. They are significant and you deserve praise from all of us. You are the ones who are at the centre of it all. As we celebrate these achievements, I want us not to forget how far we have come and how far we still have to go.

Challenges to Financial Sector
Let me now say something about some of the key challenges that financial sector faces in the work of supporting growth of the Tanzanian economy and improvement of the livelihood of the this great nation of ours.

Ladies and Gentlemen;
Access to bank services in Tanzania is still very low even by sub-Saharan Africa standards. In 2004, only about 5 percent of our people had bank accounts compared to the sub Saharan Africa average of 26.8 percent.

The 2001 Household Budget Survey showed that the average distance to a bank in 15 out of the 21 regions of Tanzania Mainland exceeded 25 kilometres.
In some reforms new outreach challenges have surfaced. For instance, the question about how to broaden access to finance when private banks have rolled back their branch network to ensure profitability? Can we use modern technology to address this challenge?

As we all know the majority of Tanzanians live in rural areas and depend on agriculture for their livelihood. But, agriculture is faced with numerous constraints which can be overcome by availability of inputs and other resources. It is, therefore, important that we enable rural Tanzanians to have access to credit to enable them overcome the constraints. I have recently talked about opening a window in Tanzania Investment Bank to channel credit to agriculture as a first step towards the realisation of the age old dream of establishment of an agricultural bank.

This is a challenge that needs to be operationalized. An even bigger challenge for you is how to make sure that at the retail end, the credit will reach as many Tanzanians as possible. I am told in some countries banks set aside a certain percentage of their resources for agriculture credit. Can we emulate such examples?
Mr. Governor, Delegates, Ladies and Gentlemen;
Banks and financial institutions can also be helpful in supporting value addition to agricultural commodities. We now have examples of outgrower schemes which integrate production by small holders, large scale producers and processing plants. This is happening in sugar cane and sugar production, tea and even fruit production and canning in Morogoro. This approach has helped small farmers to get extension services and access to credit to mechanize cultivation and get other inputs. I challenge all financial institutions in the country to help promote and expand credit to the agricultural sector. This way Tanzanian farmers would be enabled to increase productivity hence raise their incomes and improve their livelihood.
There are new products that are just emerging now which could also be helpful both to small enterprise and rural communities. One of these is lease financing where with a small deposit and the asset as collateral, more Tanzanians can have access to small machinery and other equipment to improve productivity. In this regard, small tractors, bakery equipment, small transport equipment etc. will be easily available to small holders and enterprises. It is my hope that this instrument will not be used to finance purchase of luxury cars but to raise the opportunities for income generation for a much wider range of Tanzanians.
Affordable credit is an important facilitator for investment and growth. Credit in Tanzania is still too costly and therefore not within the reach of the majority of Tanzanians. Partly this situation arises from extremely high risk premium that banks place on potential borrowers and partly because of insufficient competition in the sector. The government over the past ten years has reduced substantially its share of total domestic credit and therefore, is much less of a problem in terms of crowding out the private sector. Unfortunately, most of the credit released tends to sit in the banks as excess liquidity instead of being lent out. As a result the cost of credit made to the private sector has to be borne by the small part that is lent. I am happy to note that the interest rate spread has been declining but the cost of finance still remains too high.
I have also learned that the Bank of Tanzania and financial institutions are working on credit reference bureau which will open up a possibility of using “moral” collateral where someone’s track record for servicing debt will serve as collateral. I hope this also will be given rapid push to be realized.
Ladies and Gentlemen;
Financial stability is an important goal to be achieved by operations in this sector. I am pleased that supervision of banks and deposit taking non-bank institutions has been strong and that the insurance industry has a strong regulator too. I am, however, still worried about the lack of strong regulator of pension funds which have tended to face major collapses—for instance in Latin America. A pension fund is a fiscal contingent liability because ultimately, the government has to shoulder the obligation to pensioners in the event of failure. It also poses big risk for financial instability because of pension funds’ wide integration to the whole financial system. The Social Security Act has been passed and the draft investment guidelines for pension funds have been prepared. I hope that concerned institutions will now move quickly to establish and operationalize the regulatory framework.

Concerning access to long-term finance we have been facing challenges in mortgage, infrastructure and venture capital areas. Household access to mortgage financing remains highly limited. A young employee’s desire to acquire a home is frustrated by the fact that it would take too long (and in most cases impossible) to save enough money to purchase or build one. Our financial system is yet to develop an accessible and reliable mechanism to meet the demand for mortgage financing. I take notice that some of you have begun to venture into this area—commendable effort—but it is still too little.


A Mortgage Finance bill has already tabled in the Parliament. After this bill is passed in law by the signature of the President it will help to expand mortgage finance, and that the expansion will help to provide funds for acquisition of low cost housing and not just for mansions and skyscrapers. As we venture into this we should be mindful of the current financial crisis which originated from subprime mortgage lending. We must make sure that the regulatory framework for this avenue of financing is effective and robust.


Ladies and Gentlemen;
We have been working on sovereign rating in preparation for issuance of sovereign bond to raise funds for infrastructure projects. The current financial crisis, that began in mortgage finance in US has not only raised the lending risk and the attendant increase in interest rates, but also has reduced the probability of success through credit rating as the crisis has shaken the credibility of the rating agencies themselves. This underlines the importance of looking inside for long term sources of infrastructure financing. In this regard, the challenge for the financial system is to provide mechanism for facilitation of such financing from within the country.

It is my hope that the set-up of TIB as the national development financial institution will strengthen the provision of long-term financing for growth enhancing projects in agriculture, manufacturing, tourism and other sectors, as well as provision of venture capital. This is an area that we can encourage the private financial institutions to venture into, albeit by opening some windows for long-term financing.


Before finishing, let me say something again about the current financial crisis. As developed nations struggle to rescue their financial systems, huge government resources have already been committed and will continue to be committed to that endeavour. This may cause stress on aid funds, but we still have trust on the promises that the international community has continued to make on its dedication to make provisions for the attainment of Millennium Development Goals.


One of the outcomes of the crisis has been the loss of trust among financial institutions and the accompanying credit dry up, which is now causing worries about impending recession in developed economies. I am comforted Governor by your assurance that our financial sector remains safe and that systematic steps are being taken to minimize our exposure to risk by transferring our official reserves to safer hands. I urge you, in the financial community, to work together to keep our financial system from being pulled into the turmoil.
Conclusion


Ladies and gentlemen,
Let me finish by reiterating that: absence of reliable and accessible source of finance for poverty reducing activities remains a big challenge to our nation. It is a challenge that falls directly on you, and our people are looking at you, and their government for the answers. The theme of this conference “Second Generation of Financial Sector Reforms”, gives me hope that all matters vital to filling this gap, will be carefully considered and workable solutions will emerge from this conference.

As you discuss and deliberate on various issues in this conference, let us make sure that we come up with answers on how we can meet the various challenges mentioned earlier. We all have our roles to play in resolving these challenges. I call upon all the key financial sector players to go from here with good implementable ideas and put them into practice.

Having said this, now I have the pleasure to declare this conferences e opened. I wish you fruitful deliberations and outcomes.
I Thank you for your kind attention!