Kenya Commercial Bank (KCB) set up a subsidiary in Tanzania a good decade ago, but only managed to turn a profit in 2008. Rachel Keeler explores how other Kenyan banks are now gradually entering the neighbouring market, but Tanzania remains a challenging business environment with potential in very specific niches.

Off to a Slow Start

After more than 10 years of operation, KCB's Tanzanian subsidiary has finally begun to turn a profit: USD500,000 in 2008. "The first few years didn't really work as we anticipated," says the bank's new Managing Director, Heri Bomani. Bomani arrived in 2006 when KCB-TZ was recording the same amount as a trading loss. He has since led a USD5m "grass roots" restructuring campaign to expand KCB's nationwide branch network and introduce a slew of new services for retail and corporate customers.

The fresh start complements Tanzania's own. The country's economy has been growing quietly yet steadily by 5% to 7% a year since 2000, following the liberalisation in the 1990s. KCB now wants to capitalise on the emerging middle class, use its regional network to facilitate growing cross-border business, and possibly take a shot at the nascent mortgage market. And even as the global crisis hit – growth estimates are 4-5% for the next few years – managers like Bomani are looking forward to a homecoming of skilled Diaspora who could help fill Tanzania's labor gap.

Retail banking is at the heart of KCB's expansion strategy in Tanzania. The bank has opened six new branches since 2006, with a total of nine now spread across the country. Bomani says the banking sector is highly under-penetrated in Tanzania compared to Kenya's near-saturated market. While Kenyan banks must go poaching to find clients, the focus in Tanzania is on creating new ones. KCB is looking to rural areas and new hubs: tourism continues to inspire growth in Arusha and Zanzibar, while Mwanza – just a four-hour drive from Kigali – could become an important trading center if infrastructure were improved.

The bank is also offering new products to help urbanites graduate from what Bomani calls “vanilla” banking – limited to a deposit account and ATM card. KCB offers more than 10 kinds of cards in Kenya, and Bomani wants to do something similar in Tanzania, targeting the upper class with actual credit cards (without cash-backing) and promoting prepaid cards for middle class shoppers. “Tanzania's middle class is where Kenya's was 10 to 15 years ago” – and coming up fast, Bomani says. “I think people don't appreciate how the economy has grown. The opportunity for the country is tremendous.” KCB is also the first retail bank in Tanzania to offer Islamic banking to the country's large Muslim community.

Market Segments and Potential

Other banks see similar opportunities. Kenya's NIC Bank recently acquired a majority stake in Tanzania's Savings & Finance Commercial Bank, as part of its regional expansion plan. NIC is reluctant to talk about the move just yet, but press releases are full of ambitions like “enhancing the bank's market share, capacity and geographical outreach”, “organic growth” and “branch expansion”.

Unfortunately, much of the current research on Tanzania's growth story is less optimistic. A new household budget survey released in 2008 shows that absolute poverty levels are rising, incomes have seen little improvement, consumer spending has only gone up 5% since 2001, and overall asset ownership remains static. Money is concentrated in Dar es Salaam: poverty rates there have decreased by 43% since 1991, and the numbers show the rich getting richer. But the masses are finding it hard to keep up, and financing for the country's large agricultural sector is rudimentary Africa Agenda: Standard Bank Ventures into Smallholder Agricultural Financing. Similar GDP growth in Uganda has translated to more egalitarian income creation than in Tanzania.

Part of the problem is that a significant portion of Tanzania's GDP growth comes from the capital intense mining sector, which has not created much employment. Manufacturing and services have also failed to penetrate the larger economy, still dominated by agriculture, which has grown by less than 5% since 2000. If the middle class is to emerge, as it has in Kenya, the government will need to dig up more proactive employment and income-creation policies.

What has grown with less uncertainty in Tanzania is business banking. KCB entered the country in 1997 with an eye on cross-border transactions – an approach that NIC also seems to be targeting. This side of the business has been very successful. KCB has since expanded from its Kenyan base to Uganda, Rwanda and Southern Sudan, and is considering setting up in Burundi, which would make it the only bank operating in all five East African Community (EAC) states.

This network along with KCB's big balance sheet has attracted corporations, businessmen, government agencies and even students who do cross-border business. Regional EAC trade has been increasing since the customs union was launched in 2005, and should continue to rise as internal tariffs come down to 0% next year. And many companies have moved into Tanzania to take advantage of its port access and borders with growing markets such as Malawi and Zambia. KCB is also targeting SMEs in Tanzania with its Biashara Club banking that provides business advisory and capacity building services.

What could stymie more progress here is Tanzania's rather vocal reluctance to join the EAC integration party. Non-tariff barriers are higher in Tanzania than any other EAC state. Grumblers within the EAC question whether Tanzania will chose to opt out of the trade block all together, rather than open its borders to regional goods and workers, and allow foreigners to buy up Tanzanian land Tanzania: Slowing Down EAC Integration over Land Concerns?

Perspectives

New land laws including the Mortgage Act of 2008, which allows for mortgage finance institutions, were introduced in Tanzania in late 2008. These should help break open the mortgage market that KCB has been eyeing. KCB operates a large mortgage arm in Kenya, and would be happy to apply that expertise in Tanzania's untapped market.

“What we've seen is most Tanzanians don't own their own homes,” says Bomani. Tanzania once had a housing bank, but it collapsed in the 1980s and the sector has been stagnant ever since. The Commercial Bank of Africa (CBA) is now offering 15-year mortgage loans of up to USD300. But the bank estimates only 1% of current investment in Tanzanian real estate is financed through bank loans, and an enormous housing deficit persists.

The housing market remains quite risky for banks. The government has yet to address problems with foreclosure law, which is highly biased in favor of the borrower. Contract enforcement is also a burden. “There has been an improvement in the commercial court,” Bomani says, but banks are still frustrated with long lead times and protracted settlement periods. More accountability is also needed from judges. These issues are endemic to the Tanzanian bureaucratic system, notorious for being generally slow, often corrupt, and most always inefficient.

Part of that inefficiency stems from the country's lack of skilled labour, which has traditionally restrained private sector growth as well. But Bomani believes the business environment is changing: “I think today that skill deficit is being reduced,” he says: 10 years ago it was hard to find good junior managers in Tanzania, but today there are plenty. Tanzania's workforce has been slowly obtaining better education and professional skills, spurred on by the arrival of multinational corporations to the market. KCB itself has hired 140 new employees since 2006, who each receive five days of training a year. The bank employs nearly all Tanzanians – only four expatriates out of 200 employees today.

Bomani admits it has not been easy to grow that fast, and that it is still hard to find qualified candidates for higher level positions. But Bomani hopes that a combination of downsizing in the UK and US, and increasing opportunities in Tanzania will bring skilled workers from the Diaspora home in coming months. A forum was held in London last year where Tanzanian bankers and business leaders met with Diaspora groups in an attempt to lure them back.

From the outside, it seems slightly ironic that Tanzania is doing everything to keep out competition from Kenyan and Ugandan workers while welcoming home Tanzanians with western experience. But nationalism and distrust of foreigners - especially Kenyans - in the country run deep. And despite its political benefits, this may be Tanzania's greatest economic weakness.

As banks like KCB and NIC increasingly cast growth in regional terms, Tanzania's often outright protectionism can only continue to hold the opportunities back, sometimes to the extent of questioning its commitment to regional integration. And rebutting their neighbours and other foreigners also means that skill imports and knowledge transfers necessary to overcome Tanzania's socialist legacy are blocked.

This article was first published in Ratio Magazine  www.ratio-magazine.com