Main Article Content
The Interrelationship Between Bank Failure and Political Interventions in Tanzania in the Pre-Liberalization Period
Abstract
Over the years there has been an increase in the number of bank failures in both centralized and decentralized economies (Saunders, 1994; Williams, 1995; The Economist, 1992; European Bank of Reconstruction, 1993). Internal reasons given for the bank failures include reckless lending, corruption, non-use of prudent classification risk assessment methods, fraud and management deficiencies. External factors such as deregulation; lack of information among bank customers; homogeneity of the banking business, connections among banks do cause bank failure. For centrally planned economies government and political interference in the banking operations and policies also contribute to bank failure. Tanzania, which until recently was characterized by a centrally planned economy, and the government having majority (51%) share holding in parastatals and banks also experienced bank failure in form of non-performing assets (NPAs).
In Tanzania, bank policies reflected government directives and policies as well as political motives. Due to the dual government ownership of the bank and the parastatals, bank lending policies, procedures and regulations favored parastatal firms and agricultural marketing boards. For example, at the end of 1998, out of 78% NBC loan portfolio the majority went to parastatals and cooperative unions, with only 3% going to private firms. The majority of parastatals and cooperative unions were frequent loss makers and financially distressed. For continued existence they had to depend on the government subvention, which proved to be a heavy burden to the government. As a result, when the parastatals were experiencing financial difficulties and unable to pay the bank loans, the government solved the problem by directing the National bank of Commerce (NBC), the only commercial bank, to offer loans to the troubled parastatals and cooperative unions. By 1991, due to increased lending to financial distressed parastatals and cooperative unions, the NBC suffered large non-performing loans (NPAs) equal to 70% of the total bank NPAs. Considering the high rate of NPAs suffered by NBC, this paper has tried to show that government and political interventions and the non-use of prudent credit scoring methods had contributed to the NBC failure.
African Journal of Finance and Management Vol.9(1) 2000: 14-30
In Tanzania, bank policies reflected government directives and policies as well as political motives. Due to the dual government ownership of the bank and the parastatals, bank lending policies, procedures and regulations favored parastatal firms and agricultural marketing boards. For example, at the end of 1998, out of 78% NBC loan portfolio the majority went to parastatals and cooperative unions, with only 3% going to private firms. The majority of parastatals and cooperative unions were frequent loss makers and financially distressed. For continued existence they had to depend on the government subvention, which proved to be a heavy burden to the government. As a result, when the parastatals were experiencing financial difficulties and unable to pay the bank loans, the government solved the problem by directing the National bank of Commerce (NBC), the only commercial bank, to offer loans to the troubled parastatals and cooperative unions. By 1991, due to increased lending to financial distressed parastatals and cooperative unions, the NBC suffered large non-performing loans (NPAs) equal to 70% of the total bank NPAs. Considering the high rate of NPAs suffered by NBC, this paper has tried to show that government and political interventions and the non-use of prudent credit scoring methods had contributed to the NBC failure.
African Journal of Finance and Management Vol.9(1) 2000: 14-30
