Benno Ndulu, Governor of Tanzania’s central bank

Test, learn, regulate, Governor of the Central Bank of Tanzania Benno Ndulu outlines his philosophies.


Tanzania Central Bank Governor Benno Ndulu is much liked in the country’s business circles for his pragmatic and rational approach and he has won considerable respect from his peers internationally.

Over a long career in public service, Governor Ndulu has quietly but very effectively brought about a raft of changes that have had a profound effect on the economic and social progress of Tanzania. Of all his achievements, however, what he is most proud of is the series of programmes instituted by the Bank that has brought a vast number of the previously financially excluded into the formal system.

His Chairmanship of the Board of Alliance for Financial Inclusion has provided him with full scope to try and achieve his dream – 100% financial inclusion for his country with a population of 60m. Thanks to electronic technology, principally mobile phones, he estimates that by the end of the year financial inclusion in Tanzania will be above 70%.

“In the first 40 years of independence we only managed to reach – in terms of the formal sector – 16.9% of adult Tanzanians. Between 2009 and 2013, we went from 16.9% to 58% coverage; and I believe, as we have targeted, we may probably get to about 70%–72% by end 2017 – in terms of the proportion of adults that are actively using formal financial services.”

Governor Ndulu attributes the success of this campaign to the Bank’s willingness to take calculated risks. “Our philosophy is that since technology is the ultimate driver that helps us to leapfrog, our attitude towards innovation, as a regulator, is to test, learn and then regulate. 

“It means taking some risk,” he says, “by letting innovation run ahead of regulation. If you always want a perfect regulatory frame, with 100% risk management deemed a priority, you can never have the kind of progress that we have had. 

“So, it is important that you allow the technological front to develop and not just platforms but also products. Then you monitor. And only then, set up appropriate regulations so that you are able to protect, not just the financial sector, but also the clientele in the financial sector from risk.”

Excessive regulation can stifle innovation

He believes that it is this approach that explains why the uptake of mobile money in East Africa has been greater than in West Africa, where financial inclusion is a lot lower. “The difference is the philosophy and the attitude towards risk management that one takes,” he explains. “We’re not mavericks, we have a reasonable balance between letting innovation lead and being cautious about setting parameters for the transitional stage before we regulate.”

Excessive regulation, he says, may stifle innovation and progress, but without financial inclusion, the central bank’s hands are tied as its levers are limited. That is why financial inclusion is now part of the Central Bank’s mandate. Greater financial inclusion enables you to expand the scope of influential agents that deal with monetary and financial services in the formal sector. 

He explains it thus: If as a central bank you issue 100 shillings and if 60% of the economy is outside the formal financial services sector, then your policies are ineffective. Your role as a central banker, he explains, is to manage responses for the whole 100 shillings but right now [across Africa] you can only reach a fraction of the economic base, which effectively limits the role of the bank.

Returning to proportion of people who are now participating in the formal financial sector, he says that the remaining 30% will require a different approach. It would require encouraging that last frontier to operate through the new platforms and that can be done through reducing even more the cost of transactions (which has gone down from over 10% to about 1%, which he still thinks is too high).

From a regulatory perspective, it also means creating frameworks that can be adapted to the realities of the market. “To have to make sure that you have developed products that are actually within the means of the lower income group.  You can’t have the same banking products that typically would require KYC [know your customer] scrutiny and related requirements. This approach would discourage most of the lower income people from even visiting the banking hub. The requirements would just be too much.”

What about the big numbers?

Tanzania has been the rising stars in East Africa, having achieved four consecutive years of 7% growth. We met in August, at a time when the government was being criticised for taking an anti-business stance and scaring away investors.

This was largely in relation to harsh penalties imposed on Acacia Mining (an agreement has since been reached). A number of banks had also pointed to a slowdown in private sector lending and a fall in FDI, all of which led to a downward review of growth projection from the IMF to 6.5%.

Ndulu appeared unperturbed by the reports; he pointed out to the country’s macro-economic indicators which he thought put the country in a strong position. Inflation has been curbed and is around the medium-term target 5%. If you account separately for exogenous components, he says, then core inflation hovers around only 2%, the lowest in East Africa over a three-year average.

Other indicators had also improved. The current account deficit side has narrowed over the last two years by more than 50% relative to GDP and is under 5% (down from 12–13% a few years ago). Fiscal deficit was also down to below 3% of GDP.

He preferred not to enter into a debate over government policy but while he did acknowledge a slowdown in economic activity, he didn’t think it was because of new government policy. Rather, it’s a combination of factors.

Banks are lending less because of a rise in non-performing loans. Public sector investment is focused on mega-projects such as roads and energy projects which take longer to trickle down to the wider economy, and a tax clampdown has reduced profit margins of smaller businesses curtaling their spend. Although he qualifies that this is the environment they should always have been operating under.

Dutch disease

Tanzania burst onto the world energy map in 2011 with a series of very large gas discoveries, both onshore and offshore. Ndulu thinks that to date, the government has handled the situation well and that these discoveries will only become a “resource curse” if mismanaged.

The cost of power has been reduced considerably, from 42 cents per kilowatt hour when Tanzania relied on heavy oil to generate power to around 10 cents today with its new gas-to-power solution.

Previously, utilities had been selling power at around 15–20 cents with the government subsidising the shortfall. Thus, since the unit cost of power is now globally competitive, the subsidy savings domestically as well as future earnings from exports can well become a powerful engine for economic growth.

Once Tanzania starts exporting its gas, he hopes that the country will follow the Norwegian model and avoid some of the well-documented pitfalls elsewhere. The solution he says are known, so it is a simple matter of proper management of these resources.

Coming to development funding, would the country raise a Eurobond to tap international markets as is being speculated over the past year?  His hunch is that the country will be getting a credit rating before going to public markets. The credit rating is imminent he hints but in any case, he points out, there have been a number of private placements, the latest in June with Credit Suisse.

He thinks Tanzania will liberalise its market, but in a way that is controlled and that will not add excessive volatility. “We are small relative to the world,” he says, “if we don’t manage the traffic, we can easily get destabilised”, a position he says the investment community and international partners are in agreement and comfortable with. The message is: take risks, manage change, but in a measured and controlled way.

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