Why Government Should Not Close Small Commercial and Community Banks : Shirumisha's Platform

Shirumisha Kwayu
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Why Government Should Not Close Small Commercial and Community Banks

by Shirumisha Kwayu on 12/15/17

This week President Magufuli has sent seismic waves to the financial industry with his dissatisfaction of the underperforming banks, especially the ones which have not reached the minimum required capital. Today the Prime Minister Majaliwa, through the minister of finance Dr. Mpango, has order the central bank to close all banks that have not reached the minimum capital requirement by the end of this month. This is a shock to small community and commercial banks which are struggling to raise their capital. The Government is arguing that it is not ready to inject capital into struggling banks and that these banks are posing a threat to the economy. Given this argument and the potential impact of closing such banks, this entry is going to argue why closing is not a suitable option for the government to pursue.

Closing the small banks can trigger a financial crisis within the economy. Considering that most banks do not operate in isolation, inter-bank lending is a normal practice, thus an effect in one bank can trigger a ripple effect in other banks consequently, leading to collapse in the banking sector.

In addition, many financial institutions, business, communities and individual have invested in small-scale banks that are threatened with closure. Closing them will further jeopardise the capital that has already been invested in the banking industry. Given that these are small banks and most investor presumably are local investor who are trying to squeeze themselves into the financial sector, a move to close  the banks is to squeeze the local investors out of the central engine of the economy.

Furthermore, these small banks cannot be compared to the well-established and aggressive commercial banks. These small commercial and community banks have less experience, expertise, and capital but they were implemented to serve segments of rural communities, however, the commercial banks ignored them for the bigger slice of cake. Most community and small commercial banks are the ones that were first to reach out in rural areas with cooperation of small financial institutions such as saving and crediting societies (SACCOS) and Village commercial banks (VICOBA). Thus, closing these banks is punishing the small communities, which lend through SACCOS and VICOBA.

A quick closure will almost indefinitely lead to the chaos of a bank run, similar to that experienced by Northern Rock during the 2007 financial crisis; the question is Tanzania ready with such situation? Likewise, the investors may withdraw their capital from banks fearing the instability caused to the banking industry. Thus, the government should be wary in their threats of closure to the banks, as this might lead to instability in larger picture of the financial sector.

Such a move will signal banks to stop their lending and call back their loans having significant implications to lenders who borrowed for investment. The lenders will be triggered to sell their guarantees at a much-discounted price in order to meet loan agreements. This in essence is public theft, taken from the people who decided to invest and/or lend for rural development.

Considering the potential threats posed by the government announcement, my personal suggestion are as follows: 

  • First, the government should not interfere with the central bank. The Central bank’s independence is very important for financial stability. The laissez-faire tendency of the Central bank to these commercial and community banks can be seen as a weakness by the ministry and executive branch, but a hard approach can have dire effects. 
  • Second, the government can top-up the capital in return for the shares, this will help boost the banking industry, which is inevitably the heart of the economy. 
  • Third, the government should capacitate the small banks with training and technical assistance on financial products and technologies, which in turn will allow assistance to our local communities as well as to muscle up and compete with foreign banks. 
Lastly, I will recommend one of my favourite book ‘The Alchemist’ – Three Central Bankers and a World on Fire by Neil Irwin. If that will be a long read and you are restricted in time, you can read my review of the book here.


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