Current Problems Faced by the Banking System

Despite the great deal of reform that has occurred within the Tanzanian banking industry, challenges and problems still exist for banks operating in the country (Finscope, 2007). The challenges faced by banks exist in three areas: (1) the macro-environment, (2) management related barriers and (3) customer related barriers (Lwiza and Nwankwo, 2002).

2.6.1 Macro-Environment Related Barriers

The macro environment refers to the conditions that exist in the economy as a whole, rather than in a particular sector or region (Kotler, Bowen and Makens, 2010).

The macro environment in which a company or sector functions will influence its performance, the extent of this influence is largely determined by how dependent the company is on the overall health of the economy (Kotler et al., 2010). Banks that do business in Tanzania are presented with the following challenges in their macro-environment: (1) socialist hangover, (2) absence of a credit rating database, (3) a weak socio-economic infrastructure, (4) lack of uniformity in specification of banking systems and (5) a legal system that unfairly protects non-paying customers through unnecessary court injunctions and long protracted court cases (Finscope, 2007;

Lwiza and Nwankwo, 2002).

Firstly, despite Tanzania’s decision to no longer follow socialist economic doctrine;

there remain individuals in the country that are still supportive of the doctrine.

Individuals that follow socialistic economic principles hamper efforts to deepen the market-orientated culture of the banking industry (Lwiza and Nwankwo, 2002).

Secondly, banks in Tanzania often lack information about the credit history of their clients due to the lack of a credit rating bureau and a national identification system such as social security numbers. The lack of such information has exacerbated the caution exhibited by banks and financial institutions in lending (Lwiza and Nwankwo, 2002).

Thirdly, attempts to modernize and improve the operations and services of Tanzanian banks to better meet the needs of their customers are hindered by the poor and inadequate socio-economic infrastructure in Tanzania (Vermaas, 2012).

Tanzania is characterized by poor telecommunications systems; road networks and power supply system. The poor infrastructure makes even basic operations difficult for banks and leads to an inefficient and costly organization (Lwiza and Nwankwo, 2002).

Fourth, in Tanzania each bank is at liberty to establish its own system of operations, which leads to incompatibility between banking systems (Lwiza and Nwankwo, 2002). The incompatibility between banks slows down the pace of inter-bank transactions and forces customers to utilize the services of several banks, which is costly, inconvenient and time consuming (Lwiza and Nwankwo, 2002).

Last, banks in Tanzania lack protection from unscrupulous customers as court injunctions give a high leeway to defaulting borrowers, even when securities are legally and correctly perfected (Lwiza and Nwankwo, 2002). Banks are therefore forced to be overly cautious in extending credit services.

2.6.2 Management Related Barriers

Apart from the external challenges that Tanzanian banks are faced with in the macro-environment, internal hindrances are also present. These internal hindrances manifest themselves in the form of managerial related barriers and can be identified as: (1) centralized decision-making, (2) existence of a culture of mistrust between supervisors and subordinates, (3) supervisors’ lack of appreciation for customer relationships, (4) a tendency to view customers from a forgery perspective, (5) mistakes are not allowed at all in operations and (6) banks do not have marketing departments. (Vermaas, 2012; Finscope, 2007; Lwiza and Nwankwo, 2002)

A culture of centralized decision-making exists in most Tanzanian banks and leads to slow, unresponsive organizations (Mariotti and Glackin, 2011; Lwiza and Nwankwo, 2002). Long lead times are frustrating for many customers, who travel long distances to bank branches, and are unable to gain feedback and results the same day (Mariotti and Glackin, 2011; Lwiza and Nwankwo, 2002).

Supervisors at Tanzanian banks have indicated that they do not trust employees that work at branch level (Lwiza and Nwankwo, 2002). The lack of trust leads to less delegation and decision-making at branch level and necessitates the centralized decision-making culture, which leads to a slow unresponsive organization (Mariotti and Glackin, 2011).

Building customer relationships begins with an understanding of customer needs, which is lacking in Tanzanian banking operations (Vermaas, 2012; Kotler and Keller, 2012). Tanzanian banks follow a short term approach when making decisions and have little regard for the effect the implications of these decision will have on existing banking clients (Lwiza and Nwankwo, 2002; Vermaas, 2012).

Customer relationships at Tanzanian banks are not personalized and there is a tendency to view customers from a foreign perspective and not in terms of the benefits that they can bring to the bank (Vermaas, 2012; Lwiza and Nwankwo, 2002). The culture can be described well by the Swahili saying “Nyuki anang’ata haletti asali” which describes customers as stinging bees that bring no honey.

A zero risk policy prevails in Tanzanian banks, which results in employees adopting a risk avoidance culture (Mariotti and Glackin, 2011 and Lwiza and Nwankwo, 2002).

The risk avoidance culture adopted by employees limits innovation at the banks and impedes the improvement of services (Lwiza and Nwankwo, 2002).

Marketing functions in Tanzanian banks are often diffused in different departments or units within the banks (Lwiza and Nwankwo, 2002). The diffusion of marketing functions leads to poor and inefficient planning and an unified, confusing marketing message for consumers (Lwiza and Nwankwo, 2002; Kotler et al., 2010)

2.6.3 Customer Related Barriers

In services, marketing mutual responsibility and benefits are at the core in an exchange situation (Gronroos, 1990). In order for banks in Tanzania to effectively implement a market orientation, mutual responsibility between the organization and consumers exists. Thus, whenever consumers cannot participate fully and in a responsible manner, it becomes difficult for an organization to implement practices with a market orientation. The following customer related barriers exist for banks operating in Tanzania: (1) low income customers, (2) lack of knowledge of banking procedures, products and services, (3) irresponsible customers, (4) lack of transportation and (5) customer attitude and culture towards banking services.

(Finscope, 2007; Lwiza and Nwankwo, 2002)

The majority of the population in Tanzania, as with most African countries, is comprised of individuals that have very low levels of income (Finscope, 2007). Many individuals in Tanzania live off less than a dollar a day (Vermaas, 2012). The low-income level of Tanzania’s population makes it difficult to successfully offer products and services at a profit to individuals (Finscope, 2007). The majority of banks in Tanzania have a quality not quantity approach to offering services, which leads to the exclusion of the majority of the Tanzanian population (Lwiza and Nwankwo, 2002).

Many customers in Tanzania are not aware of the appropriate procedures to be followed when transacting with banks (Finscope, 2007). The lack of knowledge about appropriate procedures often leads customers to complain about poor service, when the fault is rather that of the customers (Lwiza and Nwankwo, 2002). Many customers, when presented with modern products, are not aware of how to correctly use the products due to a lack of technical skills and this leads to poor customer satisfaction (Finscope, 2007).

Tanzanian customers often wilfully decline to fulfil their obligations arising from services rendered to them by banks (Vermaas, 2012). Some customers in the past have attempted to defraud banks by colluding with unscrupulous employees. Loan default is also a common problem in Tanzania, which leads to banks being overcautious when issuing loans (Lwiza and Nwankwo, 2002).

The socialist legacy that prevails in Tanzania from the period when all financial institutions were owned and controlled by the government has led to inappropriate customer attitudes towards banks (Lwiza and Nwankwo, 2002). Credit that was offered by financial institutions during the socialist system was often seen as

“government hand-outs” or gifts to banking customers and consumers did not have an urgency to pay back the loans (Vermaas, 2012). The mind-set still exists among many consumers in Tanzania and makes the granting of loans risk prone for banks.

Similarly, some customers still have the mind-set that they need to bribe employees in order to receive efficient service (Lwiza and Nwankwo, 2002). Many consumers are also reluctant to keep their money in formal bank accounts and prefer to keep

their money under mattresses, which is due to negative experiences with loan sharks and the low saving culture that exists in Tanzania (Vermaas, 2012). Many customers are equally reluctant to utilize modern, cheaper banking services such as plastic cards and prefer to use more traditional expensive passbooks (Lwiza and Nwankwo, 2002).

As can be seen, the Tanzania banking industry has experienced a troublesome history and currently faces many challenges posed by the macro-environment, their management structure and policies and barriers that influence customers. One of the most notable barriers listed for consumers when attempting to open a formal bank account is that of negative attitudes and culture towards banks. It would appear that a group of consumers exist that are able to open formal bank accounts but do not do so due to poor attitudes and culture towards banks (Lwiza and Nwankwo, 2002;

Finscope, 2007). Consumers that hold poor attitudes and culture towards banks form an attractive market segment as banks can alter their attitudes through marketing communication and acquire their business.

Finscope (2007) have identified a number of drivers that allow Tanzanians to gain access to the formal banking sector. By defining market segments that have access to these drivers, individuals can be studied that most likely have the ability to open a formal bank account but do not do so due to poor attitudes and culture towards banks.