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.