Financial Sector Reform in Tanzania

Financial Sector Reform in Tanzania had been adopted in the 1980s to minimize poverty and enhance economic growth. During the last three decades the economic conditions of Tanzania had been worse. Political instability also added to this problem.

Reasons Behind the Financial Sector Reform In Tanzania:

Until 1991 the financial institutions and banks of Tanzania had been nationalized through the Arusha Declaration and the financial and economic system was fully controlled and owned by the state. In that financial system there were three commercial banks, two insurance companies, five Development Finance Institutions (DFI), two contractual savings institutions, one hired purchase company and the central bank.

The state government owned many of the above mentioned institutions like, the solitary social security institution, three commercial banks, three DFIs and two insurance companies etc. Among all these institutions, the National Bank of Commerce had only some significance in Tanzanian economy, for it was handling the deposit taking institutions, who were neither subject to market competition nor they had any proper supervision or maximum deposit liabilities.

Several branches of the National bank and a few DFIs were running through huge loss due to the wrong choice of projects and incompetent management. Therefore, these institutions were subjected to certain aids like, proper supervision, legal protection and auditing, to help the creditors and debtors.

Reform Process:

In 1991, the Bank of Tanzania introduced some new guidelines to improve the management structure and financial growth and also to stop further mismanagement in the financial sector. Through these guidelines the Bank initiated the licensing of banks and formed a prudential framework for asset management, accrual of interest and provision for losses.

The eligibility to get a license, that is, the minimum capital requirement, was increased and the demonstration of the ability to operate profitably, efficiently and prudentially was made mandatory for the applicants. To supervise the whole financial system of the country the Bank of Tanzania also strengthened its Supervision Directorate.

Effects of reform:

According to the African Development Bank, the Tanzanian government witnessed some advantageous effects by implementing financial reform. These were:

1. Some new financial institutions had been established and two banks were formed by 1994.
2. Through the reform in National Bank of Commerce, the public confidence on the banks had been increased.
3. The capital flight had been repatriated through the liberalization of the Tanzanian foreign exchange and financial markets and poverty was reduced to some extent.