Evolution and Development of Tanzania’s Banking Industry

Over the past two decades, Tanzania’s banking industry has undergone significant transformations driven by regulatory changes, technological advancements, and economic developments. As the Financial Sector Deepening Tanzania (FSDT) celebrates its 20-year anniversary this year, it is important for us in the financial sector to take a moment to reflect on the past achievements, including noteworthy success and persistent challenges in order to shape the future of financial inclusion in Tanzania for the coming years. We will do so by releasing a series of articles exploring how various industries in the financial sector have fared over the past 20 years. In this article, in particular, we will focus on the banking industry.

Early Development and Regulatory Changes

The banking industry in Tanzania has its roots in the colonial era, but substantial growth and restructuring began in the late 20th century. The financial sector reforms of the 1990s, which included the liberalization of the banking industry, marked a turning point. These reforms aimed to enhance competition, improve efficiency, and foster financial stability.

The establishment of the Bank of Tanzania (BOT) as an independent central bank was a crucial step in this process. BOT’s role in regulating and supervising the banking sector has been instrumental in ensuring a stable financial environment. Additionally, the enactment of the Banking and Financial Institutions Act (BFIA) provided a robust legal framework for the operation of banks and financial institutions in the country.

Technological Advancements and Financial Inclusion

The advent of technology has revolutionized the banking industry in Tanzania. The introduction of electronic banking, mobile banking, and internet banking has significantly improved the accessibility and convenience of banking services. Mobile banking, in particular, has played a pivotal role in promoting financial inclusion. With a substantial portion of the population living in rural areas, mobile banking has provided a practical solution for reaching the unbanked and underbanked segments of the society.

The FinScope Tanzania 2006 report noted that over half of the population were without access to financial services, and most had never had a bank account. By 2017, the landscape had changed dramatically, with significant growth in mobile financial services and digital financial inclusion. The FinScope Tanzania 2023 report further underscores the transformative impact of mobile banking, noting that mobile money services have become the primary means of financial transactions for many Tanzanians, especially in rural areas. This development has been facilitated by the proliferation of mobile network operators and the expansion of mobile money agents across the country.

• 2006 Statistics: Only 9% of adults had access to formal financial services.
• 2017 Statistics: 65% of adults were financially included, with a significant increase in mobile money usage.
• 2023 Statistics: 72% of adults had access to formal financial services, with over 40 million mobile money users.

In addition, in March 2024, BOT officially launched the Tanzania Instant Payment System (TIPS), a national retail payment infrastructure that is changing the way money is issued digitally, re-thinking the way we pay for things every day. TIPS allows for affordable and real-time payments across banks, mobile network operators, and other payment service providers, to promote interoperability, usage of electronic retail payments, efficiency in retail payment systems, and enhance security of payments. FSDT worked closely with the National Payments Directorate at BOT to facilitate the development of TIPS in alignment with the National Payment System and FSDT strategies to improve the availability of inclusive financial sector infrastructure for financial sector players to have the means to meet the financial needs and aspirations of Tanzanians.

Expansion and Growth of the Banking Industry

The liberalization of the banking industry led to an increase in the number of banks and financial institutions operating in Tanzania. This expansion has brought about increased competition, which in turn has driven innovation and improved customer service. Foreign banks have also entered the market, bringing with them international best practices and advanced banking technologies.

The growth of the banking industry is evident in the increase in the number of bank branches and ATMs across the country. According to the FinScope Tanzania 2017 report, the banking infrastructure has expanded significantly, enhancing the accessibility of banking services and contributing to economic development and financial inclusion.

• 2006 Statistics: Limited banking infrastructure with few branches and ATMs.
• 2017 Statistics: Substantial growth with over 700 bank branches and 2,000 ATMs.
• 2023 Statistics: Continued expansion with more than 1,000 bank branches and 2,000 ATMs.

In addition, the banking industry also saw itself adopting an agency banking model as a result of the rise of mobile money agency in the country. This model enabled banks to bring services closer to the consumers, especially those residing in remote areas. FSDT supported CRDB Bank and Equity Bank to adopt the agency banking model to improve access to relevant, appropriate and sustainable financial services to the underserved and deepen financial inclusion.

Customer Behavior and Financial Literacy

Understanding customer behavior has been key to the advancements in Tanzania’s banking industry. The FinScope Tanzania surveys have provided valuable insights into customer needs and demographics, enabling banks to design products that cater to specific segments of the population, such as women and youth, who were previously excluded from the formal financial system. This customer-centric approach has allowed banks to develop tailored financial solutions that address the unique needs of different demographic groups.

Financial literacy and customer engagement have also been areas of focus for the banking industry. Banks such as NBC have shifted their strategies from waiting for customers to visit branches to actively engaging with them in their communities. This proactive approach has significantly increased the active customer base, demonstrating the importance of understanding and meeting customer needs. By going out into the communities and engaging directly with customers, banks have been able to build stronger relationships and foster greater trust among their clients.

Product Innovation

The introduction of new banking products over the years has also been significant. Previously, products such as mortgage loans, insurance premium finance, and life insurance were virtually non-existent. Today, these products are widely available, providing essential financial security and catering to the diverse needs of customers. The growth in the customer network, facilitated by the expansion of agents, ATMs, and digital channels, has been pivotal in this transformation.

Mortgage products, for example, have become more prevalent, allowing more Tanzanians to finance the purchase of homes. This development has had a positive impact on the real estate market and has provided many people with the opportunity to invest in property. Insurance products have also seen considerable growth. Products such as insurance premium finance and life insurance offer customers financial security and peace of mind. These products are particularly important in a market where many people previously had no access to insurance, leaving them vulnerable to financial shocks.

The introduction of digital banking platforms has further expanded the range of services available to customers. Digital banking allows customers to perform transactions, check account balances, and manage their finances online, providing greater convenience and accessibility.

Over the years, FSDT worked with several banks, including NBC and NMB banks, to spark innovation in product development through evidence-driven financial solutions design approaches.

Challenges still faced: Centralized KYC Systems

A centralized Know Your Customer (KYC) system is seen as a crucial step towards simplifying the process of accessing financial services. Currently, customers often need to go through multiple KYC processes with different financial institutions, which can be time-consuming and cumbersome. A centralized system would allow customers to complete the KYC process once and use the same credentials across multiple financial institutions.

This system would not only streamline the onboarding process but also reduce costs for both customers and financial institutions. For customers, it means fewer documents and less time spent on administrative tasks. For financial institutions, it means lower operational costs and a more efficient way to verify customer identities. Additionally, a centralized KYC system could enhance security and reduce the risk of fraud. By having a single, secure database of customer information, financial institutions can better monitor and prevent fraudulent activities.

Challenges still faced: Addressing the Needs of Small Business Owners

Small business owners represent a significant segment of the Tanzanian economy, yet they often face challenges in accessing credit and other financial services. Many small businesses operate informally and do not keep detailed financial records, making it difficult for them to qualify for traditional loans.

To address this issue, banks are developing solutions that help small business owners maintain records of their business activities. For example, digital platforms that allow businesses to track sales, expenses, and profits can provide the necessary documentation to support loan applications. By improving their record-keeping practices, small business owners can enhance their creditworthiness and access the financing they need to grow their businesses.

Moreover, the development of universal accounts that are accessible by all financial services providers can further support small business owners. These accounts would provide basic financial services, such as savings and payments, and could be linked to other financial products, such as loans and insurance.

Challenges still faced: Universal Accounts

The concept of universal accounts is an innovative approach to financial inclusion. A universal account would be a basic bank account that is available to every citizen, regardless of their income or location. These accounts would have no fees and would provide essential financial services, such as deposits, withdrawals, and payments.

The implementation of universal accounts could significantly enhance financial inclusion by providing a gateway to the formal financial system for millions of unbanked Tanzanians. These accounts could also be linked to other services, such as health insurance and social security benefits, providing additional value to account holders.

For young people, universal accounts could serve as a foundation for building financial literacy and savings habits. By starting to save at an early age, young people can develop good financial habits that will benefit them throughout their lives. Additionally, these accounts could help young people build a credit history, making it easier for them to access credit in the future.

Challenges still faced: Access to Credit

Financial inclusion has been a central goal for Tanzania’s banking industry, driven by the need to bring more people into the formal financial system. The FinScope Tanzania 2023 report highlights several key trends and insights in this regard. One of the significant findings is the increase in the percentage of adults with access to formal financial services. This increase has been driven by the expansion of mobile money services, which have made financial transactions more accessible to people in rural and underserved areas.

Access to credit remains a critical issue for many Tanzanians, particularly for small and medium-sized enterprises (SMEs). The lack of formal financial records and collateral makes it challenging for these businesses to secure loans from traditional banks. To address this issue, innovative financial products and services are being developed to provide alternative forms of credit assessment and risk management.

Conclusion and the road ahead: Digital Transformation and Future Prospects

The banking industry in Tanzania has come a long way over the past two decades. The industry has undergone significant transformations, driven by regulatory changes, technological advancements, and economic developments. While challenges remain, the banking industry has demonstrated resilience and adaptability. The future of the banking industry in Tanzania looks promising, with numerous opportunities for growth and development. Continued efforts to enhance regulatory frameworks, promote financial inclusion, and leverage technological advancements will be crucial in shaping the future of the banking industry in Tanzania.

The ongoing digital transformation presents numerous opportunities for the banking industry in Tanzania. The adoption of fintech solutions, such as blockchain technology, artificial intelligence, and big data analytics, has the potential to enhance the efficiency and security of banking operations. Additionally, the development of digital financial services can further promote financial inclusion and improve access to credit for SMEs.

Have we captured all the key milestones in the past 20 years and the challenges that persist in the banking industry? What else needs to be done to address the persistent challenges? Please share your thoughts by commenting below, we would love to hear from you.