20th October 2000

ABSA gears up for Africa

Key News: The Economist magazine - Exclusive

Edited by: Maxwell Pirikisi
Consultant: ABSA Group
Corporate Affairs & Communications

 

Taking over the biggest bank in Tanzania, the government-owned National Bank of Commerce (NBC) (1997) Ltd. which had 60 percent of the market, was never going to be easy. The South African and African banking giant, Absa Group Ltd., understood that. In fact, it was certainly one of the most difficult ventures Absa has undertaken outside the South African borders in its history.

 

The initial stages of the take over were not without controversy. At the close of the bidding process the Tanzanian government asked preferred bidder Absa to run the bank on a management contract basis before the deal was finalized. That sparked outbursts from many quarters. The press picked up on this and many other issues such as potential retrenchments, and rained a barrage of criticism on the South African bankers. The generally hostile press also complained that the government had got itself a raw deal with the $18.8 million sale of NBC, the biggest of Tanzania's 22 commercial banks. The trade union didn’t make things easier either. As in many takeover situations, the labour movement adopted an adversarial stance and even tried to stall if not block the privatisation of the Tanzanian bank altogether. It was obvious from the beginning, the battle had just begun.

 

With years of socialism behind them, Tanzanians on the whole have been hostile to privatisation which immediately invited problems with the unions over the privatisation of such a key "family jewel". An early due diligence exercise, carried out at the end of 1998 ahead of putting in a bid for the majority stake, showed NBC to be technically insolvent.

During the bid process, the Government of Tanzania asked Absa to run the bank "immediately". Although this was unusual, Absa reluctantly agreed and signed a Memorandum of Understanding (MOU) with the Government of Tanzania even while undertaking a more extensive due diligence exercise. Later, Absa was selected as the preferred bidder and the South African bankers paid the required deposit upon signing the MOU. Absa then produced a business plan for NBC Ltd.

 

In August 1999, Absa started managing NBC Ltd. at the request of government but at their cost, with the understanding that if they did not buy it, they would be compensated for the costs incurred. If they bought it, all the costs would be for their own account. That was not a cheap exercise. The cost factor has since been pushed up by the fact that extensive training is required to boost skills levels and to replace the bank's hardware.

 

Absa's computerisation of the bank's network, via satellite rather than ISDN lines which do not stand up well to the heavy rains in Tanzania, will mean real-time banking for customers who have become used to Cheque clearances taking up to 28 days. Absa has also been busy installing UPS and standby generators in all branches as a precaution, following erratic distribution of electricity and the increasing power shedding in the East African region.

 

The deal to buy the 70 percent stake was finalised in March this year. The government retains a 30 percent stake.

 

All the directors appointed by government resigned at the takeover, and the board currently comprises three government members and six members from Absa, as well as two Tanzanians.

 

One of the problems raised by detractors of the deal was the possibility of retrenchments. Initial speculation in the local press was that two-thirds of the staff would be retrenched. As the new management continued negotiations with the union, an agreement on the retrenchment exercise was reached in June this year. The first phase of the retrenchment exercise was to be voluntary, and at the end of September this year, less than 100 people were voluntarily retrenched with full benefits. The second phase of the exercise is expected to be implemented at the end of October this year, with fewer people expected to leave the bank's employment, or be retrenched if you like, involuntarily.

 

The whole retrenchment exercise has been and will continue to be carried out in full consultation with the union. Other investors had warned of problems with the unions. Absa was not prepared to wait until the problem arose but decided to deal with it head on. However, the union disrupted the process for several months by bringing a court order to prevent the privatisation of the bank, which subsequently failed. Meanwhile, the government, as the party that had initiated the process of privatisation, adopted a policy of non-intervention.

 

The central bank was concerned that the failure of the banking system in the rural areas could disrupt the economy. NBC Ltd. is key as it is the only bank in the country with more than 10 branches and representation in these areas.

 

The successful privatisation of NBC Ltd. should be viewed as an opportunity from both sides - from the bank's side as an investment and from the Tanzanian government side as a benefit to the economy, to be gained from upgrading a key sector in what it says is a long-term commitment. An additional benefit will be extensive training for staff including the potential of training modules via satellite to branches across the country.

 

The banking group comes to the East African country with an impressive record in South Africa. It currently has about 1,200 branches and agencies in South Africa, over 2,000 automatic teller machines and 34,000 employees.

 

The World Bank was also supportive of Absa's bid because of the positive spin-off the upgrade will have for the Tanzanian economy as a whole. It's private sector arm, the International Finance Corporation (IFC), has also expressed an interest in acquiring a small stake in NBC Ltd.

NBC Ltd. is Absa's third African investment outside South Africa. The group has a 36,3 percent stake in Bank Windhoek (based in Windhoek, Namibia) through an investment 30 years ago by Volkskas Bank which was drawn under the Absa umbrella in its restructuring several years ago. It also has a 26 percent stake in the Commercial Bank of Zimbabwe (CBZ) , a large retail bank based in Harare, Zimbabwe.

 

Absa says there are at least 8 projects in the pipeline but it was too early to discuss them. Management took a strategic decision to add Africa to its "offshore" focus about three years ago. It already has operations in Asia, Europe and North America.

 

Absa’s original vision was to follow the corporates. But the question is: who do you follow and into which region?

 

However, by providing efficient real-time retail banking, Absa says that corporates in African countries will come on board anyway, particularly those with operations extending further than the main urban areas. A competitive advantage will be rural banking which Absa, via its roots in strong rural banks in South Africa such as Volkskas and United Building Society (UBS), has vast experience in. NBC Ltd. also has a wide network and is well represented in major centers as well as in remote rural areas.

 

Absa - in its efforts at establishing a comprehensive and efficient branch network - is involving itself in a large capital investment. Initial estimates may be put at about Tshs 5bn directly and indirectly as capital to be invested to improve infrastructure development and staff training over the next five years but certainly a lot more will follow. This in itself creates a barrier to entry: once established the ability to earn the required return for Absa's shareholders is enhanced as Absa will not merely have to rely on corporate business as a number of the competition already do.

 

Background:

Absa Group Ltd., which is listed on the Johannesburg Stock Exchange (JSE), is the controlling company of a major financial services group in South Africa. The Group provides a full array of integrated financial products and services, including a complete range of retail and corporate banking, insurance, financial and property services, to customers in targeted market segments. It was formed about nine years ago by merging four major South African financial services groups, namely Allied Group Ltd., Bankorp Holdings Ltd., UBS Holdings Ltd. and Volkskas Group Ltd.

Three years ago Absa decided to invest in Africa in order to take advantage of the rapidly growing trade between South Africa and other African countries following the 1994 general elections which ended South Africa's isolation from the international community. Our latest acquisition of NBC Ltd. is part of an active but controlled strategy to enter sub-Saharan Africa.

 

Jean Brown, ABSA Group executive director says: "When it was brought to our attention that the Tanzanian government intended to privatise its largest commercial bank, we saw an opportunity to invest in a country which has had a sound economic growth rate for the past three years. That's when we decided to invest in NBC Ltd. We also saw an opportunity to serve the growing number of South African businesses operating in Tanzania".

 

"Let me put something in proper perspective as regards to our negotiations with the government of Tanzania. Firstly I would like to dismiss suggestions that we had given the Government of Tanzania any extra-ordinary conditions. What we did was to negotiate terms according to the legal framework of our agreement so that we could benefit from some of the incentives which other investors are also entitled to in the country. "

 

Brown said: "Specifically we asked for incentives such as tax exemption on capital goods which is entitled to any foreign investor in the country, as well as title deeds for land of the properties which NBC Ltd. owned. In addition, we have, together with the other banks in this country, expressed our concern over the Land Act which hinders us from efficiently utilising property as collateral".

 

"There was also confusion in the local press suggesting that the Government of Tanzania got a raw deal from Absa and that it had accepted a reduced price of US$ 18.75m instead of US$ 21m. The fact of the matter is that there were no new negotiations on the price. The price was already decided before the signing of the MOU. What really happened is that Absa was supposed to buy the 70 percent stake at US$ 21m or an equivalent of 15bn/- in July 1999 when the exchange rate was 700 shillings to a dollar. By December 1999 last year the shilling value had dropped to 800 to a dollar and Absa had to pay US$ 18.75m which was an equivalent of 15bn/- then."

 

Questions were also raised regarding the National Micro-finance Bank's (NMB Ltd.) 15bn/- debt owed to NBC Ltd. and recovered by Absa in a move which seemed to suggest that Absa got NBC Ltd. for free. It was almost as if Absa had paid Tshs 15 billion shillings, to government, for NBC Ltd., only to claim an equivalent amount from Government in outstanding debts. "The fact of the matter is that this was money due to NBC Ltd. by NMB in the form of an inter-bank transaction which was caught up in the system dating back to the splitting of the former NBC into three entities in 1997 - NBC (1997) Ltd., NMB Ltd. and NBC Holdings. It was in fact discovered by the Bank of Tanzania while reconciling inter-branch account transactions between NBC (1997) Ltd. and NMB Limited", Brown said.

 

NOTES

Non-performing loans/ bad debts: I cannot comment broadly on the problem of non-performing loans in Tanzania but I can talk about this subject in so far as it relates to NBC Limited. By definition, non-performing loans are loans classified as sub-standard, doubtful and/ or potential losses. An account is classified as non-performing if the principal debt or interest is in arrears for more than 90 days. NBC Ltd., born out of the privatisation of the former National Bank of Commerce, was for some time the only commercial bank in the country and as such had the largest lending book. It was one of a few institutions one could borrow money from.

 

Over the years, the bank had carried a large debt burden up until the Government of Tanzania took a decision on its privatisation. Since then, provisioning for bad and doubtful debts on loans and overdrafts has been made according to the Memorandum of Understanding (MOU) signed between the Government of Tanzania and NBC (1997) Ltd. in October 1997. The MOU states that all loans classified as non-performing will be provided for. Non performing loans are a problem, but not one we cannot deal with. As a bank, we will do everything possible to collect outstanding debts, for the benefit of all our stakeholders. However, we cannot solve this issue alone. Every debtor must know and accept that they must pay their dues as and when they are required. Every one of us in this country needs to work towards developing a culture of living within our means and paying our debts in time.

 

It is a fact that bad debts are some of the challenges we inherited from the former NBC (1997) Ltd. Unfortunately I will not be able to quantify this for you at this stage. However, I wish to point out the following: from the time that Absa started managing NBC Ltd. for and on behalf of the Tanzanian Government, since 2 August 1999, and in terms of the then Interim Management Agreement as well as the Acquisition Agreement, Absa undertook to do its best to recover funds owed to NBC by its creditors.

 

One of the primary objectives of the new management at NBC Ltd. is to rectify certain anomalies of the past, collect outstanding debts as soon as possible, and to steer the bank towards profitability in the near future. Bad debts or non-performing loans will adversely affect the earnings of any financial institution, and NBC Ltd. is not an exception. However, management will continue to strengthen controls, particularly in areas where the bank may be exposed to fraud etc. I must point out that in terms of Tanzanian law, it is relatively easy to obtain an injunction preventing a creditor from collecting the amounts due to him, and this is often done as a delaying tactic. To some extent, this has slowed down our debt recovery process.

 

Agriculture, Mining and Tourism present huge opportunities in Tanzania. Banks, including NBC Ltd., will lend to productive sectors provided the envisaged projects are, among other things, viable and sustainable. Every bank has its own lending policies and criteria which must be met satisfactorily before any funding is considered.

As you may know, we effectively took over the affairs of NBC Ltd. in May this year. One of our primary goals as indicated earlier has been to strengthen management expertise, collect outstanding debts and to steer the bank towards profitability. We are happy with the progress in all these areas so far. We have already introduced more effective credit and risk policies and procedures. Our pricing policy has also been revised in order to make our services and products more competitive. As far as infrastructure development and staff training is concerned, we have already started a pilot project which will see all our branches fully computerised over the next 12 to 24 months. Staff training is running concurrently with this project. In the near future we expect to begin servicing the local mass market by way of providing card-based products such as debit cards, as well as ATM facilities.