Banks and financial institutions (Bank(s)) are highly regulated in Tanzania. Their compliance with Tanzanian laws and regulations is of paramount importance to ensure smooth operations and transparency. Notably, an example of noncompliance with the relevant Banks laws includes operating without a valid licence which may result in significant penalties and sanctions imposed by the Bank of Tanzania (the BOT).
In this month’s legal update, we discuss various compliance requirements which are provided in the Banking and Financial Institutions (Corporate Governance) Regulations, G.N. 767 of 2021 (the Corporate Governance Regulations); the Banking and Financial Institutions (Development Finance) Regulations, G.N. 776 of 2021 (the Development Finance Regulations); and the Banking and Financial Institutions (Mortgage Refinance Companies) Regulations, G.N. 559 of 2022 (the Mortgage Refinance Companies Regulations) (collectively hereinafter referred to as the Regulations).
Key Definitions
The following key terms have been defined under the Regulations:
“Development Finance Institution” means a financial institution which carries on any activity, whether for profit or otherwise, with or without any Government of Tanzania (Government) funding, with the purpose of promoting development in the industrial, agricultural, commercial or other economic sector, including the provision of capital or other credit facility.
“Director” means any person by whatever title or designation known, carrying out or empowered to carry out functions in relation to the direction of a Bank which is substantially the same as those carried out by a member of the board of directors of a company incorporated under the Companies Act, 2002 (the Companies Act).
“Executive Director” means a person who is involved in the day to day management of a Bank or is in full time salaried employment of the Bank or any of its subsidiaries or affiliates and sits on the board of directors.
“Mortgage Refinance Company” means a non-deposit taking company established under the Companies Act and licensed by the BOT to conduct mortgage refinance business.
Corporate Governance Regulations
The objectives of the Corporate Governance Regulations are to promote and maintain public confidence in Banks by including requirements to establish standards for corporate governance processes and proper structures. The Corporate Governance Regulations also provide guidance to directors for proper discharge of their fiduciary responsibilities.
Establishment of the Board
Pursuant to the Corporate Governance Regulations, there must be an established board of directors (the Board) as the governing body for each Bank. The Board must be composed of five members, two of which must be Tanzanian citizens. In addition, two thirds of the Board must be non-executive directors who possess previous experience in banking, finance, accounting, auditing, law or economics. Furthermore, the chairperson of the Board should not be a non-executive director, a member of the audit committee or the credit committee of the Board and should not serve as a chairperson of any other Board committee.
Compliance Requirements of the Board
Banks are required to have a clear process for the identification, assessment and selection of candidates for Board membership (the Candidates). When assessing the Candidates, the Board should among other things consider their previous experiences, skills, competences, independence, honesty, integrity, financial soundness and knowledge.
Also, it is important to note that Banks must obtain prior approval and clearance from BOT before appointing any person as a member of the Board. In addition, the appointed Board members have a tenure of ten years and must not simultaneously serve as Board member(s) or in any executive capacity of more than one Bank without prior approval of the BOT.
To ensure proper governance within Banks, the Board members must act independently and objectively perform their duties. In addition, the Board is required to develop, implement, and monitor conflict of interest policies to manage potential conflict of interests that may arise during their tenure.
It is important to flag among other things that, the Board must conduct periodic assessments by themselves or through external experts with regards to the Board structure, size, composition, ongoing suitability and performance of each Board member. Once the assessment is complete Banks must submit the assessment report to the BOT within thirty days of completion.
Responsibilities and Liabilities of the Board
The Board is mandated to conduct oversight of the respective Bank’s operations, activities and undertakings.
Other responsibilities of the Board include approving the risk appetite, business strategies and policies, appointing and monitoring the performance of the Bank’s senior management.
The Board will be making their decisions through Board meetings which must be conducted on a quarterly basis. During the Board meetings, a minimum of seventy five percent (75%) of the Board members must be in attendance. Similar to the provisions of the Companies Act, the Board has a fiduciary duty to Banks and may be legally liable in the event they fail to exercise or perform their duties correctly as set out in the relevant laws applicable to Banks.
Development Finance Regulations
Application for a Development Finance Institution Licence (DFI Licence)
The Development Finance Regulations prohibits an individual or a company from engaging in development finance operations without a valid DFI Licence. To obtain the DFI Licence one must incorporate a company limited by shares in accordance with the Companies Act and make an application through a formal letter to the BOT in the format prescribed under the Development Finance Regulations (the DFI Application). Among other things, the DFI Application must be accompanied with the following:
- proposed memorandum and articles of association;
- proof of source and availability of funds for investment as capital of the proposed company;
- list of shareholders, proposed directors and chief executive officer;
- proof of citizenship of every shareholder and proposed directors and senior management officer(s);
- description of the accounting system and information and communication technology in use or to be used in the operations;
- proposed future investments; and
- a non-refundable application fee in the form of a telegraphic transfer or banker's cheque.
Upon complete submission of the DFI Application, the BOT will among other things, evaluate the application based on the applicant's financial capacity, financial soundness of business affiliates and the ability to pay its current financial obligations from income. The BOT will either approve or reject the DFI Application within ninety days. If the BOT approves the DFI Application, they will issue the DFI Licence to the applicant. Once issued with the DFI Licence, business operations must commence within twelve months from the date the DFI Licence is issued.
Furthermore, development finance institution must maintain a minimum core capital of TZS 200 billion (approximately USD 81.4 million) for the duration of their operations.
Prohibited Activities
Development finance institutions are prohibited from mobilizing or accepting demand deposits, savings deposits and operating current accounts that allow check-writing or accepting time deposits with maturity less than twenty-four (24) months. In addition, where the Government owns majority shares in a development finance institution, the institution is prohibited from opening a branch or subsidiary abroad.
Ownership of more than twenty percent (direct or indirect) of voting shares is restricted without the BOT’s prior approval.
Post Licensing Compliance Requirements
The Development Finance Regulations have provided post licensing requirements that development finance institutions should comply with. One of these requirements is for a development finance institution to establish the Board with a minimum of seven (7) directors, who are experienced in development finance, banking, finance, accountancy or related experience. In addition, the majority of the Board members must be non-executive and non-Government officials.
Mortgage Refinance Companies Regulations
Application for a Mortgage Refinance Institution Licence (the MRI Licence)
The Mortgage Refinance Companies Regulations provide the requirement to apply for the MRI Licence before engaging in such business activities. A person may apply for the MRI Licence through a formal letter to the BOT in the format prescribed under the Mortgage Refinance Companies Regulations (the MRI Application). Amongst other documents, the MRI Application must be accompanied with the following:
- non-refundable application fee of TZS 5 million (approximately USD 2,000) paid through a banker’s cheque or other acceptable means;
- authenticated legal documents or board resolution authorising the signatory;
- proposed memorandum and articles of association;
- proof of source and availability of funds for investment as capital of the proposed company;
- list of subscribers, proposed directors and chief executive officer;
- proof of citizenship of every subscriber and proposed directors and senior management officer(s); and
- audited financial statements.
Upon complete submission of the MRI Application, the BOT will amongst other things, evaluate the application based on the applicant’s financial capacity and financial soundness of the business affiliate(s). The BOT will either approve or reject the MRI Application. If the BOT approves the MRI Application, they will issue the MRI Licence to the applicant. Once issued with the MRI Licence, business operations must commence within twelve months from the date the MRI Licence is issued.
Post Licensing Compliance Requirements
It is important for mortgage refinance institutions to comply with the post licensing requirements provided in the Mortgage Refinance Companies Regulations. These licensing requirements include:
- maintaining a minimum core capital of at least TZS 30 billion (approximately USD 11.9 million);
- maintaining a minimum ratio of core capital to risk-weighted assets and off-balance sheet exposures of at least ten percent (10%);
- maintaining a minimum ratio of total capital to risk-weighted assets and off-balance sheet exposures of at least twelve percent (12%); and
- appointing an internal auditor who must report directly to the Board audit committee.
Prohibited Activities
A mortgage refinance institution is prohibited from investing more than forty percent (40%) of its financial resources in treasury bonds or equivalent instruments issued by the Government and fixed deposits in Banks. The forty percent (40%) limit will not apply during the first year of the mortgage refinance institution’s operations and the prescribed limit will be subject to periodic reviews by the BOT.
Mortgage refinance institutions are also prohibited from engaging in activities that may lead to foreign exchange, commodity, or equity risks, except as hedging instruments.
Conclusion
It is important to have adequate regulations in place for purposes of promoting stability and growth in the financial sector. Notably, the Regulations have addressed matters relating to governance, compliance, licensing, and other various matters applicable to Banks. Failure to comply with these Regulations may attract penalties that may be imposed by the BOT such as suspension or revocation of licences and management takeover by the BOT.
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