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BANK OF TANZANIA (BOT): REVOCATION OF BANKING BUSINESS LICENCE AND COMPULSORY LIQUIDATION

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History of the Bank of Tanzania

Monetary Arrangements in Tanzania Prior to the Establishment of the Bank of Tanzania

In this Section, a brief account will be presented on the monetary arrangements in Tanzania prior to the establishment of the Bank of Tanzania. For that purpose, two periods will be distinguished:

the period before the establishment in December 1919 of the East African Currency Board (EACB) and

the period until the opening of the Bank of Tanzania in June 1966.

Monetary arrangements in Tanzania prior to l919 were different on the Mainland from those for Zanzibar, since the former was under German rule, while the latter had its own government. The currency on the Mainland was the German Rupee, made of silver, while the subsidiary coin was the Heller, which was 1/100 of the Rupee. In Zanzibar, the Indian Silver Rupee and its subsidiary coins were in circulation. In addition, shells and cattle used to serve as a store of value, and, to a certain extent, even as a medium of exchange. Commercial banking was introduced in the country in 1905, when the Deutsch-Ostafrikanische Bank opened its office in Dar es Salaam. This bank had a concession from the German Government to issue its own notes and coins, which helped the bank to meet the demand for coins in exchange for its notes. A temporary mint was set up in Tabora. In 1911, another German bank, namely the Handelsbank fuer Ostafrika, opened a branch in Tanga. There also was an official savings bank.

After World War I, the Mainland became a mandate territory of the United Kingdom (UK) and its monetary system was aligned to that of Kenya and Uganda, mainly in two aspects:

through the establishment of the EACB in December 1919 and

by auctioning off the assets of the German banks and permitting British banks to open their offices.

The regulations defining the Constitution, Duties, and Powers of the EACB stated that it had been constituted to provide for, and to control the supply of, currency in the East African Protectorate, the Uganda Protectorate, and any other dependencies in East Africa, which might be added by the Secretary of State, to ensure that the currency was maintained in satisfactory condition, and generally to watch over the interest of the dependencies as far as currency was concerned. Originally, the EACB operated in Tanzania Mainland, Kenya, and Uganda. Zanzibar adopted its currency in 1936. Other occupied countries joined the Board later, but withdrew from it again after some time. The Board itself stopped functioning in 1966, when Central Banks came into existence in Tanzania, Kenya, and Uganda.

The Board was authorized to issue its own currency notes and mint coins according to the designs approved by the Secretary of State for circulation in its area of operations. The rate of exchange between the Board's currency and the pound sterling was fixed by the Secretary of State. Board currency was essentially issued in exchange for pound sterling, indicating that the EACB's currency was backed predominantly by pound sterling.

The Establishment of the Bank of Tanzania

Following the decision to dissolve the EACB and to establish separate Central Banks in Tanzania, Kenya, and Uganda, the Bank of Tanzania Act, 1965, was passed by the National Assembly in December 1965, and the Bank was opened by the first President of Tanzania Mwalimu Julius K. Nyerere on June 14, 1966.

The Act empowered the Bank of Tanzania to perform all the traditional central banking functions. However, within eight months of the inauguration of the Bank, in February 1967, the Arusha Declaration was proclaimed, and, with it, the Bank had to reorient its policies. Most of the traditional instruments of indirect monetary policy stipulated in the Act became inoperative, as there was no longer an environment of the type which exists in a competitive system, where indirect instruments are effective. The Annual Finance and Credit Plan (AFCP), supported by a system of administered interest rates, was devised as the main instrument of monetary policy from 1971/72. Similarly, the Foreign Exchange Plan (FEP) was devised to control the use of foreign exchange in accordance with national priorities. The plans were formulated in the Ministry of Development Planning, in consultation with the Bank. However, the Bank and the banking system were responsible for their implementation. A system of direct controls was used for this purpose, as stipulated in the Exchange Control Ordinance and the Import Control Ordinance.

During the same period, several other developments occurred, e.g., a radical transformation of the rural economy, as a result of the villagisation programme, industrialisation, and persistent weaknesses in the Balance of Payments. In order to enable the Bank to better address these developments, the Bank of Tanzania Act was amended in 1978, with the result that additional developmental functions were vested in the Bank. As stipulated in this amendment, the Bank established four special Funds:

the Rural Finance Fund;

the Industrial Finance Fund;

the Export Credit Guarantee Fund; and

the Capital and Interest Subsidy Fund.

These funds were formed to provide refinance and to offer guarantee facilities to banks and other financial institutions against their loans and advances to specified sectors of the economy.

The amendment of the Act also incorporated the following changes:

The responsibility of financial planning was shifted from the Ministry responsible for Planning to the Bank, with the effect that the Bank became responsible for the preparation and implementation of the AFCP and the FEP. It empowered the Bank to inspect and/or supervise banks and other financial institutions, which had not been the case previously