Interviews - TanzaniaInvest

TanzaniaInvest had the pleasure of interviewing Gift Shoko, CEO of Commercial Bank of Africa (CBA) Tanzania.

CBA Tanzania is a member of the Commercial Bank of Africa Group, headquartered in Nairobi, with subsidiaries in Kenya, Tanzania, and Uganda.

CBA Tanzania offers personal, corporate and investment banking solutions.

Shoko discusses the Tanzanian banking sector and CBA’s future plans.

TanzaniaInvest (TI): The Tanzanian banking system is currently experiencing a credit crunch. The transfer of parastatals’ accounts from commercial banks to the Bank of Tanzania (BOT) that took place this year seems to be among the reasons. What is your take on that? Could consolidation take place?

Gift Shoko (GS): Centralizing treasury accounts for control purposes has been done in other countries before.

Tanzania is indeed currently experiencing a period of tight liquidity; however, this is not enough to judge whether consolidation should take place.

Whether expansion or consolidation should occur depends on certain key factors such as the target market and the potential of that market.

The case for consolidation depends to a large extent on the time it will take to stabilize the liquidity situation in the market and the continuity and sustainability of the regulatory interventions under the Open Market Operations (OMO).

The current liquidity stress also raises the question of whether Tanzania is overbanked which is difficult to assess but the country has great potential and a lot of unexplored opportunities in agriculture, mining, industry, tourism etc.

Overbanking is a function of the economy’s capacity to convert its available resources into liquidity.

However, I believe that the liquidity crunch is temporary because banks in Tanzania are actually highly segmented with quite different target markets.

There are banks focused on particular communities, others on certain segments of the economy, and commercial banks, which are not that many.

TI: The Non-Performing Loans (NPLs) ratio has risen in recent years, with 22 banks having NPL ratios above the indicative ceiling of 5% set by the BOT. What is the current situation at CBA?

GS: In general, the rate of NPLs depends on each bank’s approach and the exposure that it has.

NPL is a general albatross of the banking sector and this is linked to Tanzania’s economic performance. It is the phase that the industry is going through.

All banks including CBA Tanzania have been affected but what differs is the approach and management of the situation.

The causes for these high NPL rates are various but the main ones are general liquidity tightness in the economy and slow circulation of money.

At CBA Tanzania we have taken a proactive approach in engagement with our clients.

Going forward we have put measures and controls that ensure prevention as a better approach to cure.

TI: CBA offers a wide range of financial services, including personal, corporate, and investment solutions. Considering the performances so far in 2016, which segment has proven the most profitable for you?

GS: In 2016, we witnessed the fastest growth in the low end banking segment and the Small and Medium Enterprises (SMEs), in particular through our product MPAWA [a technology-based product, which enables people to make savings and access loans through the mobile platform].

Our corporate banking segment has also experienced significant growth, particularly in the construction industry.

CBA is one of the biggest banks supporting construction in Tanzania, in terms of guarantees and asset financing.

TI: The current Government has made the decision to move its headquarters to Dodoma. How do you think this would impact real estate in Dar es Salaam?

GS: I do not foresee significant changes. I expect some short-term changes as the government relocates to Dodoma; however, I think that Dar es Salaam will remain the commercial hub of Tanzania due to its strategic location.

Taking Nigeria as an example, Lagos remains the country’s commercial centre and land prices are quite high despite the government’s relocation to Abuja.

TI: Tanzania is aggressively pursuing its financial inclusion strategy and mobile technology is playing a key role in that. How is fintech impacting CBA’s strategy?

GS: Our focus is on the use of technology, as we believe that the customer of the future wants to move with their bank in their own hands, doing the transactions on-the-go.

We started with the mass market and came up with a technology-based product, MPAWA.

Through MPAWA, our customers can access loans using the mobile platform; and we are now coming up with products for the other segments as well.

First, we have started with an enhanced form of internet banking that will be launched soon.

Two months ago we have also launched our Private Banking targeted at decision makers for whom time is critical and technology will be key for this segment.

Also, there will be a number of other technology-driven products that are coming forth for each segment of the market.

We aspire all of our products to be accessible using digital platforms but we will remain a bank in essence with a focus on providing loans and creating technology enhanced products.

In addition, our parent company has a big bancassurance division, and we have started to implement the same model as well.

TI: How do you keep competitive while using technology?

GS: In terms of competitiveness, the available customer databases are critical.

But these databases do not necessarily have to come from the mobile companies.

For example, municipalities have at their disposal huge databases.

The question is how can we convert those prospects into clients and derive mutual value with partners.

TI: Tanzania is on the path of an industrial revolution. In which segments of the Tanzanian economy do you see the best opportunities for CBA’s growth?

GS: We see huge opportunities in manufacturing as the government has a strong focus on value addition and we believe that we will also derive a lot of value from that process that will be carried out.

We are also planning to enter specific segments of agriculture, such as fisheries, which is highly untapped and offers a lot of potential. In this area we are targeting companies focussing on value addition.

We also consider increasing our presence in the tourism sector as it is also full of potential.

TI: What are CBA’s overall ambitions and development strategy for the coming years?

GS: In the next couple of years, I see us identifying ourselves with technology, for which we have planned vast investments engaging technology partners.

CBA is a technology-driven bank, and it will remain focused on that.

We anticipate some external constraints and challenges, including changes across the board.

Nonetheless, I believe that in the next 2–3 years there will be a solid path, and the government would have created a predictable and dependable economic model for Tanzania and for us to thrive.

TanzaniaInvest had the pleasure of interviewing Tom Philibert, Tax Partner for Tanzania at Ernst & Young (EY), one of the largest professional services firm in the world with strong expertise in tax, accounting, audit and advisory.

Philibert talks about the current tax environment of Tanzania, and the importance of implementing the right tax framework to support business and investments. He also discusses the expertise of EY in the Tanzanian tax space.

TanzaniaInvest (TI): The Tanzanian tax system relies on the contribution of VAT, income tax, import duties, and excise taxes.

To what extent do you consider the current tax framework to be competitive and conducive for investment?

Tom Philibert (TP): Unfortunately the tax system of Tanzania has somewhat worsened in the past years.

Due to severe pressure on public finance, the Government is reacting with several fiscal measures.

The complexity and lack of clarity of certain new tax rules and the tremendous focus on tax collection are often indicated by clients as factors creating concerns for the business and investment climate.

In the first place, companies need stable and predictable tax treatments for doing business and making investments and expansions.

I believe that companies do not mind paying taxes as long as the tax system is fair and reasonable, predictable and as long as there is a legal basis for these taxes.

Although the need for public funds is clear, there is a limit to how much tax companies can withstand, and if this limit is breached, it might disrupt business and prevent taxpayers of making additional investments.

I think the level of taxation for certain sectors is already quite high; for example tourism, mining, oil and gas, telecom.

Taxation should be predictable as well, not suddenly changing the landscape. Otherwise it is impossible for investors to calculate the cost and return on investment.

I believe that the Tanzanian tax system would be significantly improved if taxpayers could conclude rulings with TRA to agree and clarify the tax treatments of certain investments and transactions upfront.

This would give taxpayers and investors more certainty on how certain transactions would be treated from a Tanzanian tax perspective.

It would also make the job of the TRA easier, and the TRA will get more insight in the running of the companies.

If this could be carefully and efficiently implemented, it would be very beneficial for the Tanzanian business and investment climate, as well as for Tanzania’s ranking on the ease-of-doing-business scale.

In practice, companies in Tanzania are often faced with long audit cycles.

Typically, a company files tax returns, and after a couple of years, the Tanzania Revenue Authority (TRA) reviews the returns and conducts an in-depth tax audit of the company, which is a very time-consuming process for the taxpayers and the TRA.

This could put the continuance of the business in jeopardy, because companies are busy with reconstructing what has happened in the past and sometimes are faced with huge unexpected tax bills as a consequence of the tax audits that are performed.

This could be partly prevented by concluding advance tax rulings.

TI: What causes such unexpected tax bills arising years later? Is it due to the introduction of new taxes along the way, or a possible misunderstanding of the tax framework?

TP: In principle new taxes do not have retro-active effect; so new legislation should not have a direct impact on tax audits of earlier years.

To a certain extent, tax audit adjustments are related to errors that were made by the company in the past, or items that cannot be sufficiently substantiated by underlying documentation.

But it could also be the consequence of a different interpretation of an applicable law between the TRA and the taxpayer.

This happens because the law is often not clear, with the TRA and the taxpayers having a different interpretation of how the law should be applied.

That is also the reason why it is a concern that the audit cycle is so long and that no advance tax rulings are concluded, because it means that that uncertainty continues.

If decisions are taken on how certain items should be interpreted and treated, then that gives guidance and precedence for the future.

We notice that in practice the TRA is coming in very keen on concluding the first part of the audit, based on which they issue their tax assessment.

If the taxpayer disagrees, he can object to the assessment, but based on the Tanzanian Tax Law, he has to pay 1/3 of the total assessment amount to be able to object, which is a direct cash out for the company while the subject is still undecided and in dispute.

But after the taxpayer has filed his note of objection, it takes in general a very long time before the discussion continues and a decision is obtained.

This gives the impression that the first focus is on collecting the 1/3 payment rather than on closing the tax audit; apparently there is a huge pressure on immediate cash collection by the TRA.

TI: On July 1st, 2016 the VAT was suddenly introduced on tourism and financial services. What is your take on that?

TP: There is no issue with changing the landscape as such, but as already mentioned it is always a balancing act between enhancing revenues and maintaining a fair and attractive taxation system.

If the tax pressure gets too high or the landscape changes too often, companies may refrain from making further investments and even may decide to continue the business elsewhere in the region.

Tourism and the financial sector were traditionally already high taxed; so one should be prudent when introducing new taxes in this sector.

If tourism is overtaxed, travels to Tanzania may become too expensive compared to other destinations and tourists may decide to go on safari elsewhere in Africa.

This would be a disaster for the sector and the employment in the industry, including their suppliers, and would have a big negative impact on the economy of the country.

So before introducing new taxes or an increase of the existing taxes, one should carefully assess the possible impact.

Further, new legislation should be clear. In my opinion, the law with respect to the amendments to the VAT legislation is not clear enough.

For example, as of 1st July 2016, fee based financial services are subject to VAT. So based on the law, interest payment on loans should be subject to 18% VAT.

When announcing the law changes, the Minister however indicated that interest should not be affected by the new law amendment with respect to fee based financial services.

Taxpayers can rely on this policy statement, but needless to say that the tax technical dimension of the statement is not very clear and that it would be much more preferable to have this governed by the law itself rather than by unwritten policy that can be changed overnight.

TI: What are EY’s competitive advantages in tax advisory in Tanzania?

TP: EY has a very large and strongly experienced team which understands the law and the business environment.

We also have a large network, on which we can rely, and so, we are exposed to a vast experience on how similar issues are treated in different countries, and this is a major asset for us.

Stephen Lokonyo CEO Britam Insurance Tanzania

TanzaniaInvest had the pleasure of interviewing Stephen Lokonyo, Chief Executive Officer of Britam Tanzania, part of Britam (NSE: BRIT), a diversified financial services group with operations in Kenya, Uganda, Tanzania, Rwanda, South Sudan, Mozambique and Malawi, offering insurance, asset management, banking, and property.

Lokonyo talks about the Tanzanian insurance sector, its outlook and the opportunities available.

TanzaniaInvest (TI): Tanzania is among the 20 fastest economies in the world and yet the insurance penetration ratio is less than 1%. In your opinion, what is the reason for such low penetration?

Stephen Lokonyo (SL): The reasons for the low insurance penetration in Tanzania are varied, ranging from economic, social to political.

Poverty levels are still high in the country making insurance and other financial services unaffordable.

Insurance awareness is also low, combined with general low financial literacy.

Socially, most communities had their own mechanisms for dealing with misfortunes both at family and at community level. These are forms of social insurance that are still very strong.

TI: The Tanzanian insurance market grew by 17% in gross premium returns in 2015, reaching more than TZS650b. How do you see the future outlook for the insurance market?

SL: Tanzania has experienced consistent economic growth over the last 10 years and the forecast is that this growth will continue.

This has led to general improvement in the standards of living and purchasing power.

The future outlook is very bright for the insurance industry. The growth for 2016 may not be as high as 2015 but the economic fundamentals are right and we foresee continued growth.

With the government’s plans to launch major infrastructure projects, focus on industrialization and the continued fight against corruption, the future can only get better.

TI: Which segment of the insurance industry hold the greatest potential for growth?

SL: We see tremendous growth opportunities in the middle class, SME sector and in manufacturing and processing driven by the new government’s focus on industrialization.

Tanzania is greatly endowed with natural resources and the exploitation of oil and gas will transform the economy and insurance premiums generated from this sector will be substantial.

The insurance sector must, therefore, prepare itself well to exploit this potential.

Currently, we have partnered with A rated securities from around the world to provide bespoke insurance solutions for the oil and gas sector.

We believe that every risk is unique and coverage must be suited to the risks presented.

Agriculture is another major driver of the Tanzanian economy as it currently contributes over 25% of the GDP.

The agricultural sector has not received enough interest from the insurance sector mainly due to lack of suitable and affordable products and the subsistence nature of the current practices.

Lately, though there has been a lot of activities aimed at designing suitable products and deepening insurance awareness in order to harness this potential. Britam has been and will continue to be part of these industry initiatives.

TI: In 2014, Real Insurance Company Tanzania became part of Britam, a Kenyan diversified financial services group in Kenya. What are the benefits of this takeover and what has been the market’s feedback?

SL: With the acquisition of Real Insurance in 2014 Britam became a pan-African company operating in 7 countries in East and Southern Africa.

This has enabled Britam Tanzania to tap into synergies in IT, actuarial and legal expertise not previously available.

The expansive regional reach that we now have across the 7 countries has also put in us in a very good position to serve our clients better, particularly those with regional operations.

With group’s assets in excess of USD800m in 2015, Britam Tanzania is part of strong financial services group.

The launch of the Britam brand in Tanzania has been received very well by our customers, partners, and potential clients.

The Britam brand has brought with it financial strength and experience gained over a period of 50 years.

Our new identity is a renewal of our commitment to values of Integrity respect, innovation, and customer focus.

TI: Britam has branches Dar es Salaam, Arusha, Dodoma, Mwanza, Mbeya, and Mtwara. What are your plans for further expansion of Britam’s branch network in Tanzania? What are your ambitions in term of market share, what are your competitive advantages and the challenges ahead?

SL: For now our focus is to explore the distribution of our products using alternative channels, hence opening of new offices is not a priority.

Britam’s ambition is to be a market leader in service and profitability.

Key challenges include adherence to ethical standards in the industry, high poverty levels and the low financial literacy in the country.

However, we have qualified staff, the IT infrastructure and the financial strength to support our ambitions.

TanzaniaInvest had the pleasure of interviewing Edward Marks, Managing Director of NBC Bank Tanzania, the oldest bank in the country and the 3^rd largest by assets and market share.

Barclays Africa Group Limited holds 55%, while The government of Tanzania holds 30%, and the remaining 15% is held by the International Finance Corporation (IFC), a member of the World Bank Group.

Prior to his appointment in May 2015, Marks served as Managing Director of Barclays Bank Egypt where he led the bank through a difficult operating environment.

In this exclusive interview Marks discusses the challenges and opportunities in the Tanzanian banking sector and the role and strategy of NBC.

TanzaniaInvest (TI): There are approximately 53 banks, not including other financial institutions in Tanzania in spite of limited banking penetration. The sector is currently affected by credit squeeze and increased Non-Performing Loans (NPLs). What is your assessment of the situation and how has NBC been performing in the midst of the overlying situation?

Edward Marks (EM): As a bank, we were quite proactive in Quarter 1 2016 and as a result we had one of the best liquidity position in the market in Quarter 3 and Quarter 4.

This is because we predicted the incoming liquidity challenge and we bought bulk deposits, which tightened our budget but provided us with extra liquidity; this allowed us to be able to lend and execute large deals in those challenging conditions.

That said, the new incoming capital requirements expected in 2017 are going to impact the banks nationally and we are all forced to evaluate our decisions around whether to lend or keep our capital.

In as much as the liquidity challenge will continue, we are also concerned with Non-performing loan percentage.

We have already come up with a plan, in conjunction with the Bank of Tanzania on how to get back to the 5% threshold [of NPLs set by BOT].

However, 5% is a chosen figure, it is a KPI that shows that the banking sector portfolio is in good health. Market conditions can cause upswings so it is normal to be above. The trick is how to bring it down quickly.

Overall, banks can be profitable even with higher levels of NPL. This is because banking is a business of risk and reward and when you take risks, you will have some losses.

TI: Interest rates applied by banks are pretty high in Tanzania. What is the correlation between high NPL levels and high interest rates?

EM: It is logical for banks to set higher interest rates to cover their losses when NPLs are present.

However, what really drives interest rates is supply & demand and when the government announces the budget and the amount it will borrow from T-bills, it is setting the demand, and as mentioned earlier we (banks) are all conserving capital to meet new requirements & with increasing NPLs the supply side is restricted as well.

TI: NBC offers a wide range of services, including retail, business and corporate banking, and treasury. Which segments have proved to be more profitable in 2016?

EM: Retail banking has been very profitable but each of our segments has been profitable during 2016.

Corporate banking took the interest expense hit because we bought large corporate deposits, which led to improved liquidity.

TI: The banking penetration in Tanzania is still very low; nonetheless, the use of mobile money is rapidly growing. What is your take on that and how is fintech going to impact your growth?

EM: Banking in the traditional sense is indeed quite limited in Tanzania, but financial inclusion has improved dramatically, thanks to the spike in the use of mobile money provided by mobile network operators (MNOs).

The advancements in technology have also contributed to an increase in banking penetration, and are morphing the linkages between banks and MNOs.

We already see banks acquiring mobile licences and I see the merging of banks & MNOs inevitably happening at some point.

There are opportunities happening in the coming year where the MNOs will list 35% of their capital.

I think that the retail appetite for this is going to be extensive and from an investment bank side NBC will be active in the advisories of these IPOs and the collection of the subscriptions from Investors.

TI: What is NBC’s strategy for 2017?

EM: Our strategy has been deliberately spent on fixing our core systems and introducing technological improvements to ensure that we run efficiently, which in the end drives sustainability and improves our customer’s experience.

Consequently, we have also been investing in our people, providing real career ladders & attracting the best from the market when we have to.

We now have a comparable e-footprint to other banks, providing internet banking, mobile payments and other paperless banking services like cash management and business banking advisory services among others.

The plan for 2017 is to bring in even more bridging innovations to Tanzania, contributing to the country’s financial inclusion agenda and empowering Tanzanians.

Our main drivers will be in the retail, business banking with select corporate / investment bank with large deals.

In the retail space it will be all about making banking easier and accessible through alternate channels.

We are also quite invested in the SME segment, from a commercial and a CSR perspective.

We will be investing in entrepreneurial and financial skills and offering advisory services to nurture infant SMEs.

We are definitely working on growth and in providing an improved user experience, but we will not be investing in network expansion,

TI: What are your ambitions and what are the challenges ahead?

EM: In 2015, our profit was TSH 17.6b. In 2016, we grew that by 32%.

We are going to be selective in our choice of liabilities. We are not buying expensive deposits, so you’ll see us focus on current accounts, and we will consequently try to make them interest-bearing. We will bring in new products and put more capability into electronic platforms.

Payments are also key because they will keep the currents account balanced. So, it is all about current accounts and fast execution of payments.

We also want to keep our liquidity, enabling us to execute deals in the infrastructure sector and with the large corporates.

I foresee our biggest challenge being the balance between asset growth and capital position. This is because every asset creates risk-weighted assets, which in turn means that we have to set aside more capital.

Tanzania is evolving quite fast; I believe the government efforts in curbing corruption and driving revenue collection is the right thing and is setting an efficient base for the country’s progress.

We are confident about the future and we will keep on making bountiful leaps in the banking sector in Tanzania.

TanzaniaInvest had the pleasure of interviewing Mr. Rajab S. Kakusa, CEO of TAN-RE, the only reinsurance company licensed in Tanzania.

TAN-RE provides a broad range of reinsurance products and services to clients in Africa and selected parts of Middle East and Asia.

Mr. Kakusa discusses the company’s expansion strategy, the Tanzanian insurance sector’s outlook, and the opportunities available.

TanzaniaInvest: The Tanzania insurance market is crowded with 32 insurance companies but only one reinsurance company, TAN-RE.Is this ratio adequate for the market to grow?

Rajab Kakusa: TAN-RE was established in 2001, by the Government of Tanzania, to transact reinsurance business in respect of both, short-term and long-term reinsurance business, locally as well as across the region.

The Government of Tanzania saw the need to protect the growth of the insurance industry in the country, with the aim of curbing insurance premiums flight out of the national boundaries, and extended mandatory cessions to TAN-RE.

This has contributed greatly to our course and increased our competitiveness with giant reinsurance companies in the region.

Protecting national reinsurers for a certain period of time, is a norm practiced in other countries as well, like Kenya (Kenya Re), Ghana (Ghana Re), Senegal (Sen Re) Algeria (CCR Algeria), Tunisia (Tunis Re), Namibia (Namib Re), Uganda (Uganda Re) and Ethiopia (Ethiopia Re, the newly established company) just to mention a few.

With adequate capacities to support the market growth, the Mandatory Treaties shares ceded to TAN-RE will remain at twenty percent (20%) indefinitely, and Policy Cessions are at ten percent (10%) to cease in year 2025.

Therefore additional capacity for full placement of reinsurance business is sought from other reinsurance companies not domiciled in Tanzania.

There are a few specialized classes of insurance that TAN-RE is not providing yet, like cover to protect against cybercrimes, underground mining, just to mention a few, hence for these specialized types of risks companies continue to obtain coverage from other reinsurers outside this market.

As we continue to grow, we strive to expand our portfolio to also cover emerging classes of business in support of insurance industry growth and its contribution to the economy of our country.

TI: In 2015, TAN-RE was trading with 222 (208 in year 2014) companies in 48 markets in Africa, Middle Eaast and South East Asia. How relevant is the Tanzanian markets to your overall operations?

RK: The Tanzanian market is the largest market in our portfolio (being over 80% of our portfolio) when compared to the business written from the international market.

TAN-RE values the growth of the local market given potential for growth and its direct contribution to the well-being of our people and economic growth at large.

Our local insurance penetration rates are still low, and the insurance fraternity under the leadership of TIRA strives to increase the penetration rate.

The local context in other African countries mandates that local capacity must be exhausted before insurance business can be externalized to foreign reinsurers; this limits the volume of insurance business transaction from international markets, where also certain classes of business like life, motor and marine classes of business in some cases, are localized.

Recognizing this niche market in our business portfolio, and responding to the needs of our local market, TAN-RE is working with partners and regulatory authorities in promoting micro insurance as a key strategy to rapidly increase insurance penetration rates in Tanzania, particularly by capacity building through provision on trainings in close collaboration with lead global experts in insurance and reinsurance.

TI: In your 2015 report you indicate that diversification of TAN-RE portfolio remains critical and paramount to its business strategy. How competitive are you in the African market?

RK:Our vision is ‘to be among the best Reinsurers in Africa’, and our current 2015-2019 Strategic Plan provides a road map with details.

Briefly, we are pursuing the diversification of our portfolio, at two main levels: first by introducing new products into our portfolio, and second by expanding our footprint across the region.

We now have the facility to write political violence and terrorism business, oil and energy business, and are working on introducing new products to cater for micro insurance business and takaful (Islamic compliant) business.

In addition, we have recently established our presence in the Southern region of Africa, through Ezulwini Re. This extends our reach in the SADC region, and strengthens our competitiveness in Africa.

TI: The Tanzanian insurance industry total premiums reached TZS618.9b in 2015, increasing by 12% from 2014 and by 30% from 2013. What is your preliminary feedback for 2016?

RK: Our 2016 financial report will be released by the end of Q1 2017. I would suggest we wait for this official announcement of our performance for 2016.

What I can tell you for now is that, based on the trends from the past few years, we can confidently project continued growth of our premiums by end 2016.

Equally important to mention is the fact that our focus goes beyond premium growth, to emphasize not just quantity of business that we do but also the quality of our business operations.

We have successfully maintained our credit rating of A+ (local currency claims paying ability) and B+ (international currency claims paying ability) rated by GCR of South Africa, and in 2016 were awarded with Quality Management Systems Certification on new Standard ISO 9001:2015.

The award of ISO 9001:2015 QMS Certification to TAN-RE demonstrates compliance and commitment to industry-respected practices and sustained client satisfaction as well as better determination and planning for risks arising as a result of external and internal issues relevant to TAN-RE’s purpose and strategic direction.

TI: What has been the effect of the introduction of 18% VAT on insurance products?

RK: I think it is too early to comment. However, VAT is applicable on all services and/or transactions thus not unique for insurance services. This is one way that growth of insurance directly supports our economy.

I commend the steps taken by the Government and I urge the insurance community to educate our beneficiaries on importance of paying appropriate taxes.

I believe going forward there is always room for improvement including on the applicable VAT rates etc.

TI: The insurance penetration (premiums as a percentage of GDP) remained at 0.7% in 2015 as recorded in 2014. How do you see the future outlook for the insurance market?

RK: The future is very promising for increased penetration rates for insurance in Tanzania.

This requires deliberate efforts and innovations in expanding and scaling up micro insurance.

At the moment TAN-RE is working closely with the Association of Tanzania Insurers (ATI), the Tanzania Insurance Brokers Association (TIBA) and the Insurance Institute of Tanzania (IIT) to increase public awareness on the importance of insurance.

We have a remarkable opportunity to do this now than before, given the population growth and the overall efforts by our Government on taking Tanzania to a middle-income level economy by 2025.

TI: Which segments hold the greatest potential for growth?

RK: In ensuring that every individual in Tanzania attains basic insurance coverage, life as well as non-life, and that insurance supports core economic activities and business growth – especially small entrepreneurs, we must not forget that 80% of our population is made of farmers, small holder farmers for the vast majority.

So the question is, how do we reach them more efficiently and provide appropriate micro insurance products, in particular, agriculture insurance products for farmers.

There is potential growth on microinsurance through increasing use of information technology, especially mobile phones, and the expansion of mobile banking services, including in rural areas, provides us with unique opportunities to transform insurance industry, and rapidly increase insurance penetration rates across the country.

This is in line with TAN-RE mission that is to provide sustainable reinsurance capacity and security in the best interest of our customers, shareholders and other stakeholders.

Tuselike Kibonde African Trade-insurance Agency ATI Tanzania

TanzaniaInvest had the pleasure of interviewing for the second time Ms. Tusekile Kibonde, Resident Underwriter for Tanzania at the African Trade Insurance Agency (ATI) to discuss in details ATI’s core product: credit insurance.

ATI is a multilateral insurer, providing political risk and trade credit risk insurance products with the objective of reducing the business risk and cost of doing business in Africa.

ATI operates in Benin, Burundi, Democratic Republic of Congo, Kenya, Madagascar, Malawi, Rwanda, Tanzania, Uganda and Zambia. Ethiopia, and Zimbabwe, and is currently expanding to West Africa with Cote D’Ivoire, expected to join in Q1 2017.

TanzaniaInvest: Ms Kibonde, can you kindly remind us, what is credit insurance?

Tusekile Kibonde; Credit insurance is known by a variety of names including; trade credit insurance, bad debt insurance, debtor insurance, debtor protection, business credit insurance and export credit insurance, amongst others.

Credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies (known as insurers) to business entities and lenders wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.

This insurance product is specialised and should not be confused with such products as property, casualty insurance, credit life or credit disability insurance which individuals take to protect against the risk of loss of income needed to pay debts.

Credit insurance can include a component of political risk insurance (another one of our products) which is offered by the same insurers to cover the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.

TI: What is the major role of credit insurance?

TK: The major role that credit insurance plays is facilitating trading activities at both the local and international level.

Credit insurance supports customers or borrowers as an alternative to prepayment or cash on delivery terms, providing time for them to generate income from sales to pay for the product or service.

For suppliers and lenders, accounts receivable is a loan and represents capital invested. If the customer’s debt is credit insured, risky asset becomes more secure and can be realised faster than other forms of collateral offers.

It helps to reduce transaction expenses and produce more trading activities. Credit insurance is therefore, a trade finance tool.

TI: From ATI’s perspective, who can benefit from such a product?

TK: Credit insurance is offered to both business entities and lenders to insure their accounts receivable from delayed payment, non-payment and loss due to the insolvency of the debtors.

The product is not available directly to individuals but companies can request the cover from their financiers.

Our main clients are financial institutions such as banks, both local and international, which currently account for over 80% of our business.

In Tanzania, we work with 80% of the banks, including local, international, developments banks and other DFI lenders.

Over the years, our products have become very well known among lenders as we provide alternative solutions to their businesses.

We also have a growing list of manufacturing clients, contractors, exporters from the agricultural sector, and importers from Europe and Asia. All of these seek for credit insurance to cover their business against potential losses.

We are also attracting more local companies and in this way we are helping to increase intra-African trade of goods, services and financing.

TI: Why do financial institutions and lenders need credit insurance?

TK: Financial institutions and lenders use credit insurance to protect their businesses against default by both corporate and government borrowers on their obligations under trade, commodity finance, export finance, project finance transactions, general corporate loans and other financial assets against default on scheduled payments.

The product’s broad applicability and flexible policy wordings offer benefits to financial institutions and lenders of all sizes. Advantages which come with credit insurance policies include, but are not limited to, the following:
• Helps financial institution adhere to standards for a qualified risk mitigant under Basel II/III. The Basel II & III framework stresses on the need for banks to have better collaterals and prudential requirements with a view to achieving a safer financial system. The guidelines on capital, liquidity, maturity and leverage aimed at reducing the incentives for building-up high-risk and highly leveraged banks assets.

Given the above, the banks in the region are today more willing to share their spreads with investment grade credit insurers such as ATI as an excellent collateral to minimize their non- performing assets and reduce their regulatory capital under Basel II & III;

• Maintain competitive advantage by holding the borrower in their books as opposed to down selling the loan or seeking a risk participation from another financial institution;

• Increase lending capabilities via management of single obligor and/or country limit constraints;

• Access to credit remains the biggest challenge for SMEs in the region; credit insurance cover will help extend credit facilities such as short term loans, invoice discounting, bank guarantees and letters of credit even where there is inadequate solid collateral as is the current practice;

• Helping local banks compete with international banks. This type of insurance allows banks to offer great conditions to their clients including capital relief of up to 100% for transactions backed by national ECAs. Subject to agreement of the local bank regulator, ATI can address this handicap.

TI: How do you differ from other insurance companies in Tanzania?

TK: Due to the nature of the business, offerings specialised products, ATI does not compete against local insurance companies. Our mandate is to help the local insurance market by bringing added capacity.

ATI was created to act similarly to the export credit agency (ECA) for African countries. In Africa when a transaction occurs in an ATI-member country it is not unusual for ATI to participate.

We partner with international ECAs and other insurers on many transactions in Africa because these partners have come to trust ATI’s risk assessment and because of our unique relationships with governments.

TI: How efficient is your claims Process?

TK: The true test of the relationship between an insurer and their customer is what happens when a claim is filed. We strive to fully support our customers throughout the process.

In the unfortunate event that a client incurs a loss, the claims process begins when they notify ATI of a potential loss. We will immediately start working to minimize or avert a loss within the waiting period specified in the policy.

If a claim materializes despite our best efforts at recovery, we would then launch a full-scale investigation with the objective of paying our client upon expiration of the waiting period.

TI: What are your plans in the future to bring more awareness to banks?

TK: That is a timely question! For the first time in Tanzania, we will host a Bankers’ forum that will be held here in Dar Es Salaam in early March 2017.

The purpose of this forum is to bring more awareness to our major clients (banks) on the various products we offer as solution to their business.

We have developed a specific product which banks will find very useful in increasing their lending portfolio.

In addition, at the request of banks, we normally hold in-house training to their key departments such as Business Generation units, Credit and Recovery departments.

Should any Bank request for such service, ATI – Tanzania office is available at Private Sector House – 1st Floor, 1288 Mwaya Road, Masaki.

Our telephone numbers: Landline: +255 22 260 1727/2751/2818 and Mobile: +255 782 390 531.

You can also read TanzaniaInvest first interview with Tusekile Kibonde about ATI’s role in Tanzania, and with John Lentaigne, Chief Underwriting Officer, explaining ATI’s ambitions in Tanzania and in Africa.

TanzaniaInvest interviewed David Mestres Ridge, CEO of Swala Oil and Gas (Tanzania) plc (DSE: SAWLA, a Tanzanian oil and gas exploration company that is actively exploring the East African Rift System.

David discusses the prospect for oil discoveries in Tanzania, provides an update of the exploration activities of Swala in Tanzania and abroad, and clarifies about the ongoing corporate bond offering to investors.

TanzaniaInvest: Swala Tanzania was established in 2011 to undergo exploration of hydrocarbon in Tanzania. Particularly, the company is focused on the Rift System oil potential. Why Tanzania, and why oil, when no oil has been discovered to date in this country, but proven gas reserves abound?

David Mestres Ridge: Whilst there may be proven gas reserves, most if not all are deep offshore in environments suited to bigger companies.

Swala started by focusing on the Rift System, an environment in which oil has already been discovered (Uganda, Kenya…).

We know that there are indications of oil systems in Tanzania – seeps, slicks, tar balls, the Tundaua oil seep on Pemba Island – and are confident that commercial oil can be discovered in Tanzania.

TI: Swala currently has equity in a number of exploration licences in Tanzania, and has an active business development program in Tanzania and elsewhere. Can you provide an up-to-date description of your licenses, Swala’s interests and the actual status of explorations? What is your drilling program for 2017?

DMR: We started off with two exploration licences in Tanzania – Pangani and Kilosa-Kilombero.

We were awarded both in 2012 and, in the subsequent years, we invested heavily in surveys and seismic acquisition to determine the potential of each of the licences.

Unfortunately, Pangani has no commercial potential and we asked to be allowed to surrender it.

On the other hand, Kilosa-Kilombero showed significant potential, with a large-scale prospect (which we called Kito) and a number of additional prospects around it.

In 2017 we shall be drilling the Kito prospect and we are already preparing the team that started work on the project in 2016.

In 2016 we also took our first step overseas as a way to start to grow the company. Block D in Burundi is a technically very interesting block in an area where oil slicks and tar balls have been identified.

We are carrying out technical work on the available data on the block and look forward to investing further once the political situation in Burundi stabilizes.

TI: Swala listed at DSE in August 2014. Why did you choose to list at DSE, when other companies active in minerals in Tanzania are listed at LSE? What are the prospects for dividends in the near future?

DMR: Natural resources companies typically list in established markets – London, Sydney, Toronto…

Our view when we set up the company was that we wanted to open the investment opportunity to Tanzanians and we wanted to contribute to the development of the Tanzanian capital markets.

There is plenty of evidence showing that liberalized and active capital markets are important contributors to economic growth.

That said, Tanzania must also recognize that there are significant barriers to that development, ranging from -at one extreme- a fiscal and regulatory regime that hinders economic activity through to -at the other extreme- the lack of market infrastructure (liquidity, research, etc…) that we find in the places I mentioned earlier. It will come, but we need to help make it happen.

TI: In October 2016 Swala engaged Exotix to place corporate bonds of up to a value of USD120 million in order to finance a material transaction. What has been the success of the placement? What are you future financing need and what are the investment opportunities available?

DMR: Buyer and seller want to ensure that Swala opens up investment opportunities to Tanzanian institutions and individuals within this Exotix transaction.

What we did was to split the USD120 million into two tranches – a USD60 million tranche that is primarily placed within London and a second tranche, also of USD60 million, that we aim to make available in Tanzania.

We have started to talk to some of the banks and the pension funds, and have received quite a lot of interest in what are essentially USD-linked, but shilling-denominated, corporate bonds.

The main problem is the requirement that institutions may only invest in bonds with coupons greater than that provided by Government bonds with the same tenure.

No-one is going to place corporate bonds that pay an interest of 20% when they can raise money elsewhere at much lower rates.

Look at our raise, as an example: if we raise USD60 million at -say- 10% for five years we are paying a total of USD30 million on the debt. At 20%, this would be USD60 million. Why would we pay another USD30 million for the same instrument?

By keeping rates uncommercially high, the danger is that – in this example – USD30 million that could go into the Tanzanian economy go elsewhere.

This is one of those things I mentioned earlier that will require a review of policy if we are to encourage the development of the local economy.

Ineke Bussemaker CEO of NMB Bank Tanzania

TanzaniaInvest had the pleasure of interviewing Ineke Bussemaker, MD and CEO of the National Microfinance Bank (NMB), Tanzania.

NMB is one of the biggest commercial banks in Tanzania, 32% of which is owned by the government.

Bussemaker talks about the current lack of liquidity in the banking sector, the country’s investment potential and economic outlook.

TanzaniaInvest (TI): Tanzania is among the top African destinations for FDI. What is your view on the country’s potential and framework for investments?

Ineke Bussemaker (IB): Tanzania, as well as Kenya and Cote d’Ivoire, are the top African countries that investors are very interested in.

The investment appetite for Tanzania is largely driven by its size with 50m people but the country is still quite underdeveloped so there is high growth potential, especially in agriculture.

However, Tanzania is struggling to transform that potential and ideas into practical projects.

This is due to a range of issues that Tanzania has to solve.

One is political decision-making: it is taking investors a very long time between their first visit to Tanzania and the time when they reach an agreement with any government entity.

TI: In which sectors in Tanzania do you see the highest potential for growth?

IB: Tanzania’s largest potential is hiding in agriculture and particularly in the agro-processing industry.

However, the sector is dominated by smallholder farmers, which is somewhat limiting in terms of size of the investments.

I believe that medium or large commercial farms will help Tanzania to develop, because these farms will also create infrastructure.

Accordingly, there will be power, water, and means of transportation.

Large farmers have the advantage of scale, and the small farmers can benefit from it.

For example, there are 7,000 smallholder farmers benefiting from the infrastructure of the Kilombero Plantations (KPL), a farm in the Kilombero Valley, charged with developing over 5,800ha of land.

I strongly believe in this model and I think that Tanzania can make significant progress by applying it.

At NMB, we work with farming cooperatives and farmer groups, providing them with loans and working capital as well as training / capacity building by NMB Foundation.

TI: Which other sectors of the Tanzanian economy have the greatest realistic potential for growth?

IB: I believe that Tanzania’s gas, helium, energy, and construction sectors also have great potential for growth.

The government is very focused on building infrastructure, including roads, schools, and health clinics, and so, the building sector is growing especially in the rural areas.

Tanzania is also endowed with large mineral resources, which will continue to support the country in the future.

Also, the potential of Tanzania to double its population from 50 to 100m people in the next few decades is calling for industrialization.

TI: Tanzania is currently experiencing a lack of liquidity in the market. What are the reasons behind this situation and how is this impacting your balance sheet?

IB: Part of the liquidity was in the banking system, but the government has asked all of that to be transferred to Bank of Tanzania (BOT), especially the deposits from parastatals and local governments.

So, in the last few months there has been a shortage of liquidity in the market, which in turn impacts our capacity to lend and our balance sheet significantly.

We have tried to mitigate these effects by using other funding sources.

These include our own bond issue and longer-term funding from the Netherlands Development Finance Company (FMO) and The European Investment Bank (EIB).

However, these sources of funding are more expensive, resulting in higher interest rates on loans, which is not conducive to a growing economy.

TI: According to NMB’s results for Q3 2016, net income after tax increased by 8.5% over the period, and by 9% in the cumulative year. What has been the driver of this growth, considering that other large banks are showing losses for Q3?

IB: The driver of our growth has been stability with a solid and growing customer base.

In addition, over the last 3 years, we have completely renovated our entire branch network and provided better IT services to all of our customers.

This attracts new customers, and at the same time, we have trained our staff in the branches to become more customer-sales focused.

TI: In Q3 2016 several Tanzanian banks have shown high percentages of Non-performing Loans (NPLs), above the 5% threshold set by the Bank of Tanzania (BOT). What is the situation at NMB?

IB: The percentage of NPLs at NMB is around 3%.

We have invested a lot in our credit-scoring systems, and we are also using the credit bureaus that were recently introduced.

And after the loans are approved, we conduct a proper follow-up with our customers.

However, we also foresee that some businesses that we support will default on their loans because of the current challenging environment.

TI: Tanzania’s banking penetration is limited; however the use of mobile money is widespread. How is fintech impacting your expansion strategy in light of the fact that you have the largest banking network in the country?

IB: In Tanzania roughly 15% of the 50m population have a bank account, while 30m people have a mobile phone, and potentially use a mobile wallet.

So, there are at least 20m more potential customers for us in the market that we can reach with digital technology, which is scalable, cheaper, and far more reachable.

We will never reach those 20m in a scalable, profitable way, through our branch network.

TI: Does this mean that you’re not going to open new branches?

IB: NMB is partly owned by the government and when it is establishing new districts, which need banking services, we consider opening a branch.

But if we can work with agents and through digital services instead of opening a branch, that would be our preference.

Overall, our vision is to make the whole value chain digital, building credit history and historical data, so that businesses and individuals can get microloans based on the transaction history in the use of digital services.

TI: The Tanzanian market includes 60 banks and other financial institutions. Do you foresee new players coming into the market or consolidation taking place?

IB: In my opinion a healthy banking sector is comprised of a smaller number of stable banks, and I think 60 banks are a bit too many.

In addition, the investments that banks need to make in modern and digital technology, might be overwhelming for small banks.

So, yes, I foresee a consolidation in Tanzania’s banking sector.

TI: Tanzania is on its path of becoming a middle-income country by 2025. For this, it needs a GDP growth of 10% against the current growth of 7%. Is this feasible in your opinion?

IB: The government’s ambition of reaching a GDP growth higher than the current 7% keeps me optimistic.

The plans are in place, but Tanzania needs to speed up the execution process, which will require better collaboration between the government and the private sector.

TanzaniaInvest interviewed Warren Deats, Chief Operating Office of Obtala (LON:OBT), a vertically integrated group focused on sustainable agriculture and forestry in Tanzania and Mozambique.

Warren is based in Tanzania where he oversees the Group’s operations in Africa. In this interview, he discusses the company’s focus and operations in Tanzania and the ambitions for further expansion.

TanzaniaInvest: Obtala has 2 primary focuses, agriculture in Tanzania and forestry in Mozambique. Why Tanzania?

Warren Deats: We looked at the successes of Kenya as an agricultural producer and questioned why Tanzania hasn’t had the same results.

Tanzania has many of the qualities Kenya does, such as a great climate, access to a workforce, arable land, improving ports and support from the government.

Where it is lacking is in experience and a legacy of years of agricultural production.

We see this as a huge opportunity to be part of the growth and development of Tanzania

TI: In Tanzania, Obtala has 1,735 hectares of farmland. How conducive has been the investment framework to your project?

WD: Tanzania is definitely moving in the right direction as far as business friendliness but there are still quite a few challenges and delays in starting businesses.

I feel the government is very motivated to help us. They do sometimes lack the resources but not the motivation.

TI: Your focus is on short‐term revenues on fresh and dried produce. How much is destined to local, regional and international markets?

WD: Our focus isn’t on short-term revenues. It’s on long-term development while still offering short-term returns to our investors.

We are balancing short-term crops to create revenues now, with long-term orchard development to create sustainable assets for the future.

Our goal is to supply as much as we can locally and regionally with the balance going to the Far East, Middle East and Europe.

As it stands there is significantly more demand for produce in the export market, however, with the demographics of Dar es Salaam and the rest of the region, we expect that to change over the coming years

TI: You intend to move into large-scale orchards in the medium‐term. Which other agricultural products yield the great opportunities?

WD: We are currently analyzing the best crops to produce. This involves assessing the climate, soil, water, export markets and various other factors.

Mangoes and avocados are at the top of our list for the moment but that could change before we plant.

TI: What are you overall ambitions in Tanzania in term of crop production and turnover?

WD: I think our mission statement says it best: “To take the lead in the sustainable commercialization in Sub-Saharan Africa of two of the world’s most in demand and diminishing natural resources, arable land and forestry. To pursue every opportunity to move up the agriculture and forestry value chain, in partnership with key stakeholders, contributing to long-term economic and social development in the markets we operate in.”

TI: What are the greatest opportunities and challenged ahead?

WD: The two main challenges in Tanzania are logistics and global recognition.

Tanzania still needs additional development and investment in cold chain and port handling.

This will be key to becoming a world class producer and exporter.

Secondly, we hope to play a role in putting Tanzania on the map as being recognized as a high-quality producer.

We are already seeing this in coffee and chocolate, we just need to develop this for other produce.

This is one of our major focuses when we are at trade shows. Not just marketing our products, but marketing Tanzania as a whole.

As I mentioned before, the greatest opportunity is to harness all the agricultural qualities that Tanzania has and develop the industry.

TanzaniaInvest had the pleasure of interviewing Ali Mufuruki, Founder, CEO and chairman of Infotech Investment Group.

Infotech is a group of companies with interests in ICT, media, telecoms, private equity, retail and real estate across a number of countries in Africa and beyond.

Mufuruki is also a co-founder and chairman of the CEO Roundtable of Tanzania, a policy dialogue forum that brings together more than 100 CEOs of leading companies in Tanzania.

Mufuruki discusses the impact of the government’s measures on the business climate in Tanzania and on Infotech.

TanzaniaInvest (TI): President Magufuli’s government is channelling its efforts to eliminating corruption and optimizing budget expenditure. This is clearly impacting the business climate. To which extent?

Ali Mufuruki (AM): I measure the impact of policy on the business framework mainly by looking at how it has affected my own businesses, and by listening to my colleagues, particularly from the CEO Roundtable.

What we have seen so far is that President Magufuli’s reduction of government spending has negatively impacted businesses that depend on consumer expenditure.

This shows that a big amount of money feeding those businesses actually came from the government.

For example, the number of air passengers has been affected since Magufuli banned unnecessary trips of government officials.

However, I believe that this is not necessarily bad since our economy wasn’t sustainable and wasn’t based on fair competition.

Now, we are going to have a more efficient, competitive and sustainable economy, and as a society, we are going to adjust to this new environment with less money in circulation. Accordingly, the population is reducing its spending.

TI: And how has this affected Infotech so far?

AM: In general, retail has not been impacted that badly, which is a very good indicator of economic performance and consumer behaviour.

Within our group, we are currently slightly below budget, but we are ahead of last year, so I suspect this is seasonal and we should recover soon.

I think that solid businesses will last, especially businesses that were loan-free.

TI: The current cash crunch is also impacting Non-Performing Loans (NPLs) whereby in Q3 2016 many banks in Tanzania have shown NPLs above 5%. Do you see this negative trend to continue?

AM: I suspect that we will further see some residual NPLs that were not covered in Q3 2016.

And I believe that we will witness similar NPL levels in the coming quarters because not many businesses have the capacity to recover within the space of 90 days.

For instance, if there is a company that is 100% dependent on government funding, and the government cuts off funding from that particular sector, then this company will have to restructure its business, which may not be sufficient to pay off the company’s loans.

So, I think that there will be quite a significant increase in NPLs in the near future.

TI: There are 60 banks and non-banking financial institutions operating in Tanzania. Given the current climate, do you foresee a consolidation?

AM: One of the reasons why these NPLs are threatening banks is because many of these banks are undercapitalized.

Many banks in Tanzania have capital bases of USD7.5m or USD5m, which could lead to a crisis.

Hence, consolidation could be a solution. I think what Tanzania needs is the Nigerian type of consolidation that occurred about 15 years ago where the statutory minimum reserves were increased.

At the same time the central bank advised banks to collaborate and merge to better withstand and absorb the shocks.

TI: The current government has made the decision to move its headquarters to the capital city Dodoma. How will this impact real estate in Dar es Salaam?

AM: I think this poses a big opportunity for Dar es Salaam.

Dar es Salaam is struggling to develop and one of the biggest obstacles is the government since it occupies most of the real estate in the city.

And the government was never interested in renovation or improvement of the buildings it occupies.

President Magufuli has said that he intends to auction and sell those buildings to private developers, which means that they are probably going to be available at a very low price.

TI: All in all, do you see the current government undertaking the right steps for the social-economic development of Tanzania?

AM: I think that what has been done in relation to eliminating corruption was absolutely necessary, and it needs to continue, because the consequences were beyond economic.

However, I think that the government also needs to create an economic stimulus, which will counterbalance the cash crunch that we are all facing due to the fight against corruption.

Tanzania depends a lot on the actions of the government and this government has managed to sustain the pressure on corruption for 12 months now.

If this continues, I believe that Tanzania will turn into a country where people will have to work to earn money, and where money will actually have value.

All we need for this transition to happen is the GDP growth to continue and reach double digits.

For this, there are a lot of infrastructural projects that the government has agreed to spend money on; these projects include the railway line for USD7.5b, the crude oil pipeline from Uganda to Tanga for USD3.5b, the LNG plants, and the gas pipelines.