(Adds details, background)
By Fumbuka Ng‘wanakilala
DAR ES SALAAM, June 13 (Reuters) - Tanzania’s central bank announced new rules on Tuesday for capital conservation buffers, a move that will force banks to hold more capital to withstand financial shocks following a sharp rise in non-performing loans.
The Bank of Tanzania said it has directed commercial banks to implement capital charges over operational risks with effect from August.
“The minimum core and total capital ratios will remain 10 percent and 12 percent respectively ... but banks and financial institutions shall be required to maintain a capital conservation buffer of 2.5 percent of risk-weighted assets and off-balance sheet exposures,” it said in a statement.
The new capital requirements are part of the east African country’s efforts to implement Basel III guidelines, brought in globally after the 2008/09 financial crisis highlighted the need for banks to be more resilient to credit stresses.
“The bank has also started developing rules for implementation of Basel II/III in order to make sure that the existing supervision practices are in line with the internationally accepted standards,” the central bank said.
After shutting down a small bank last month over capital adequacy concerns, it also warned Tanzanian banks against a rise in non-performing loans (NPLs).
Analysts said a steep increase in bad loans coupled with a sharp decline in credit to the private sector are threatening to undermine growth in one of the region’s biggest economies.
“The Bank of Tanzania has continued to implement prudential measures to strengthen risk management practices in the financial sector and has directed banks with high NPL ratios to formulate and implement strategies to bring the ratio to at most 5 percent,” said the central bank.
It said the ratio of non-performing loans to gross loans in Tanzania’s banking sector rose to 10.8 percent at the end of April 2017 from 8.2 percent a year ago.
Tanzania’s regulator cut the minimum reserve ratio required of commercial lenders to 8 percent from 10 percent in March, part of monetary easing measure aimed at reducing borrowing costs and stimulating economic growth.
The change to the statutory minimum reserve requirement (SMR), which took effect in April, follows the central bank’s decision to slash its discount rate to 12 from 16 percent.
Lending to the private sector grew by 2.5 percent in 2016 after expanding 26.8 percent a year earlier. New lending to the agriculture, construction, transport and communication sectors was dramatically curtailed after a spike in bad loans.
Tanzania has been taking measures to clean up its financial services sector, with licenses of some banks being revoked. The sector grew 10.7 percent in 2016 from 11.8 percent a year ago. (Editing by Aaron Maasho and Catherine Evans)