Almost half of Tanzania's banks are at risk of undercapitalization in a high-risk scenario, according to the International Monetary Fund's latest financial system stability assessment.
The asset quality of lenders has deteriorated, and the country's banking system will show significant fragility in the event of a financial crisis, the Dec. 6 report shows.
In the IMF's tail risk scenario, 22 of the country's 45 banks — representing 32% of Tanzania's banking assets — would face capitalization shortfalls. This IMF scenario consists of an extreme but possible combination of external and domestic shocks.
"These assumed shocks trigger a sharp slowdown in domestic growth, a currency depreciation, spikes in domestic inflation and interest rates, and a credit squeeze," the fund said.
The IMF's baseline scenario, which assumes stable growth and favorable conditions, shows that 11 banks would be undercapitalized between 2018 and 2020.
The fund suggested that the Tanzanian government implements measures to reduce nonperforming loans and increase provisions.
But the IMF cautioned against the Bank of Tanzania providing excessive regulatory relief for loan classification and restructuring.
Authorities should also provide guidance to prevent banks from overstating capital ratios and earnings, increase surveillance, monitor liquidity risks in foreign exchange and introduce measures to tackle them, according to the report.