By Moremi Marwa
2016/17 is the first year of implementing our Five-Year Development Plan (FYDP-II) themed: “Nurturing Industrialisation for Economic Transformation and Human Development”. As it is, in order to succeed, the national industrialization and economic transformation strategy must be underpinned by transformative changes in the country’s financial institutions whereby the creation of indigenous systems of capital formation goes hand-in-hand with efforts to industrialize. So far there have not been strong indications that we are pursuing efforts to transform our financial markets ready for industrialisation. I am of the opinion that our focus on creating a set of institutional factors and policy tools that will encourage and enable the culture of savings and capital formation in our country is very fundamental.
As I opine, I clearly understand that there are multiple challenges and opportunities in financing our industrialisation. It is also obvious that there are several factors that should be taken into consideration in order to elaborate on how the country can transition and galvanize further support for promoting the financing of its industrialisation. We need to: (i) encourage and motivate adequate flow of FDIs into the industrial sector, diverting from the tradition where most of the FDIs were directed towards natural resources; (ii) enhance our domestic financial resources mobilisation for sustainable capital formation as well as for the allocation of capital sourced; (iii) enhance our ability to finance infrastructure that is critical to industrial development; (iv) improve our business environment conduciveness in order to attract more flow of domestic and external finances into productive sectors of the economy; (v) increase our coordination capacity so that resources from individuals, pensions funds, and other institutional investors can be intermediated better for sustainable financing of industrial sectors and its embedded infrastructure requirements; and (vi) strengthen our public policies and develop financial products that can leverage remittances from Tanzanians in the Diaspora.
Hence, the second obvious: the process of capital formation requires us to consider key reforms and transformations in the banking sector (i.e., a good mix of commercial, investment and development banks) and capital markets. Today, Tanzania has over 50 banks and non-banking financial institutions with combined balance sheets size closer to 27 per cent of Gross Domestic Product (GDP). However, the majority of these are commercial banks mainly focusing on providing short- to medium-term working capital funding to businesses. Lending activities are highly geared towards supporting trading activities and personal loans. A mix of banks including those that will provide financing to industries is therefore urgently required, and the government has to champion this by way of an appropriate ownership and governance model, as suggested below.
The government and private sector should champion introduction of financial instruments that will be used as investment platforms and vehicles for mobilization of investable funds i.e., common stock (for common ownership), specialist instruments and institutions (real estate investment schemes [REITs] for real estate’s; industrial development banks for industries; infrastructure bonds for infrastructure projects; municipal revenue bonds for local government projects); and micro-savings bonds. Such financial instruments should be linked to practical industrialization projects and entities that will need such funding. This will require a strong coordination among various ministries, agencies, and the private sector and other supporting institutions.
Commercial banks should be encouraged and motivated to get involved and align themselves with the country’s industrialisation and transformation goals. By building their capacity to finance long-term projects and enterprises under the industrialization and infrastructure development program, banks should be able to extend their credit tenure to long-term, especially if they can also match their long term lending activities with capital finances that can be sourced via capital markets (i.e. by issuance of long-term debt instruments and shares). Banks should be able to match their lending with sources of capital that can be obtained from the capital markets via issuance of corporate bonds.
The Government should create a conducive regulatory framework that will motivate commercial banks to participate in the investment banking space, providing deal sourcing transactions and corporate financing advisory services as well as arranging syndicated credits.
Banks have to be motivated to participate in the risky industrialization programs – this can be in the form of credit guarantee by the central government (or other institutions created for such mandates), interest rate subsidy, etc. Banks should also be encouraged to build their capacity to provide long-term soft loan schemes for pre-selected industries such as textiles and garments, construction and furniture, cement, sugar, special engineering industries, and so on. With proper incentives, banks can also be instruments for financing modernization, replacements and renovation of industries necessary to achieve economic level of production as envisaged in the FYDP-II.
We should also think of establishing specialist banks/financial institutions such as: (i) industrial development bank (targeting the manufacturing component of industrialization with mandates to also coordinate and integrate activities of various financial institutions providing finance to industries i.e. arranging syndication lending for industrial projects, etc.); (ii) infrastructure development bank, as is the case with Tanzania Agricultural Development Bank (TADB) that provides wholesale lending for agricultural projects; (iii) construction industry focused banks lending to building materials manufacturers; and (iv) banks lending to small and medium (SME) industries.
These specialist banks/institutions should be tailored to support industry-led projects and enterprises. Ownership and governance of such financial institutions should be strategic so as to enable accountability and efficiency. They should be public-private owned with clear mandates, among others, to provide direct and indirect financing to industrialization projects. These financing facilities and mandates will include seed capital, long-term credits at subsidized financing costs for pre-selected projects as identified in the FYDP II, rediscounting bills, providing guarantees, underwriting of and direct investment to industries issuing financial securities. The government and private sector should see this as a backbone of the modern industrial economy. In this undertaking, the government should be willing and ready to take risks that cautious entrepreneurs would tend to avoid by providing heavy capital investments in pre-selected priority industrial sectors.
To facilitate establishment of these institutions, the government can provide seed capital, while private sector (local and foreign) could participate via a combination of private placement and Initial Public Offerings (IPOs). With IPOs and listing, these institutions will be able to efficiently raise future capital by way of rights issues and/or bonds issuances.
It is therefore recommended that in addition to the government’s equity financing, banks such as TIB Development Bank and TADB should consider to pro-actively access other sources of funds i.e., public funds from the local capital markets as well as strategic partnerships with international financial institutions that have shared interest like AfDB, IDC and PIC of South Africa, EIB of Europe, or China Industrial Development Bank. This will allow these banks to continuously access public money and other such sources whenever substantial funds are required, via rights issuances, issuing of corporate, infrastructure, industrial, or revenue bonds at competitive and efficient cost of funding set by market forces. Furthermore, this will increase these banks’ (or other established specialist financial institutions’) institutional capability to lead or arrange syndications with both local and international financial institutions.
Non-availability of credit and other forms of financing on easy terms has been one of the major handicaps of small industries in Tanzania. At different moments and capacities, the government and other financial institutions have conducted various schemes to assist industries in this sector by obtaining credit facilities, SME Credit Guarantee scheme is among these efforts. As it is, these efforts have not resulted into meaningful outcomes; therefore, the need for the economy to have financial institutions that will finance small industries on comparatively liberalized terms with long-term repayment periods i.e. 5-15 years and long-term moratorium 12-18 months, cannot be over-emphasized. With the view of providing speedy flow of institutional finance to this sector, institutions such as those providing insurance and credit guarantees to cover major part of the risk on such schemes will be necessary.
To fast-track the process, there can also be Small Industries Development Bank(s) – such bank(s)’ role will be to promote, finance and develop industries in small scale sectors as well as to coordinate activities of agencies which provide finance to small enterprises. Such financing and assistance can be in the form of equity type assistance by way of seed capital, or via direct discount and rediscount of bills arising out of sale of capital equipment in small scale sector.
The government may also consider to provide capital subsidy to a certain percentage of fixed investments (such as land, building, machinery, equipment, etc.) units for expansion, diversification and modernization programs and expansion in order to promote small scale industries –such as furniture-making, sports goods, or writing materials, can be reserved specifically for small industries.
A good mix of banks, sometimes sourcing their finances from the capital market provides an opportunity to finance our industrial development, as we continue to attract and motivate FDIs and other sources of foreign capital.
Moremi Marwa, Chief Executive Officer