Dismiss Notice
You are browsing this site as a guest. It takes 2 minutes to CREATE AN ACCOUNT and less than 1 minute to LOGIN

Dar banks face post-IPO liquidity crunch

Discussion in 'News & Current Events' started by BAK, Sep 21, 2008.

  1. BAK

    BAK JF-Expert Member

    #1
    Sep 21, 2008
    Joined: Feb 11, 2007
    Messages: 50,118
    Likes Received: 9,824
    Trophy Points: 280
    Dar banks face post-IPO liquidity crunch

    [​IMG]
    Traders at the Dar es Salaam Stock Exchange. The liquidity problem in banks echoes a similar situation last year when the government withdrew its deposits from commercial banks. Photo/LEONARD MAGOMBA

    By WILFRED EDWIN
    THE EAST AFRICAN

    Posted Saturday, September 20 2008 at 13:40

    Tanzania’s financial markets are going through an acute liquidity crunch caused by the massive oversubscription of the recent initial public offers by the National Microfinance Bank (NMB) and the Dar es Salaam Community Bank.

    All the money paid in by investors who applied for the shares is in the hands of the few receiving banks pending the allotment.

    The upshot is that most commercial banks have found themselves without money. The two IPOs sucked a whopping Tsh225 billion ($194 million) out of circulation, representing a large proportion of the total liquidity of the market.

    Already, the signs are being seen in increased activity in the interbank market through which banks lend each other money.

    The interbank rate is on an upward trend. The problem is compounded by the fact that the banks holding the IPO money have no credit lines with some of the small banks.

    As the IPO race heated up last month, banks started feeling the pinch as strategic investors as well as ordinary buyers moved to withdraw hefty sums to invest in the NMB and DCB shares.

    Sources in the banking sector told The EastAfrican last week that four such investors — the Unity Trust of Tanzania (UTT), the Local Authorities Provident Fund (LAPF), the Parastatal Pensions Fund (PPF) and the National Social Security Fund (NSSF) — are said to have applied for NMB shares totalling over Tsh33 billion ($28.6 million).

    The financial crunch appears to have come even after the Bank of Tanzania (BoT) tried to avert the situation by ordering commercial banks last month not to extend loans for purchasing NMB shares using depository receipts as collateral.

    Later, BoT said loans for the purpose of purchasing shares could be extended using securities other than share depository receipts.

    Now, analysts say that had the BoT not acted to bar the use of depository receipts, the oversubscription would have gone beyond the $190 million that NMB alone has experienced.

    According to the NMB share allocation plan, institutional investors are to be allocated 3.2 per cent of the IPO, equal to 16 million shares, while individuals will be given an allocation of 12.8 per cent; or 64 million shares.

    It appears that the financial sector has been so destabilised by the IPO wind that several banks have turned to their foreign reserves to fund daily banking activities like extending credit lines to customers.

    Stockbrokers say the recent IPOs, the most successful ones in the short history of stockmarkets in Tanzania, demonstrate the high liquidity as well as high appetite for investment opportunities in the country.

    At the initial price of Tsh600 ($0.51) per share, NMB’s was the highest price of any IPO at the Dar es Salaam Stock Exchange.

    According to NMB’s IPO prospectus, the announcement of the basis of allotment criteria and crediting of shares to the Central Depository System is scheduled for October 8.

    Refund distribution and distribution of depository receipts will take place on October 22 before the listing and commencement of share trading at the secondary market begins towards the end of October.

    Analysts contend that until then, banks will continue to obtain cash from their foreign reserves to finance the sector’s activities.

    Laurean Malauri, chief executive officer of Orbit Securities Ltd, a brokerage firm at the Dar Es Salaam Stock Exchange, told The EastAfrican last week that NMB had sought to raise Tsh63 billion ($55.5 million) but ended up receiving Tsh220 billion ($190 million) from subscribers — an oversubscription of Tsh157 billion ($136.3 million).

    Records show that total subscriptions for DCB reached Tsh5.2 billion ($4.5 million) in an IPO that aimed to raise just Tsh1.5 billion ($1.3 million) — 247 per cent over and above the authorised IPO share capital.

    The bank, which is jointly owned by the Ilala, Temeke, Kinondoni and Dar es Salaam Municipalities, had to revise its business plan in consultation with the Capital Markets and Securities Authority before authority to use the entire sum was granted.

    “This successful IPOs show that investors in Tanzania have a large appetite for investment opportunities; it is a challenge to the government and other stakeholders to take advantage of the situation,” he said.

    Mr Malauri said more IPOs of government shares in entities like Zain and NBC, where the government still owns shares, would give opportunities to the Tanzanian public to invest in these profitable institutions.

    Talking about weak liquidity in banks is a sensitive issue as an enterprise reveals its own weak situation, and for this reason, many bankers approached by The EastAfrican last week declined to comment.

    However, the vice chairman of the Tanzania Bankers Association, Charles Singili, said, “The trend, known as pooling of resources, whereby resources are directed towards one basket for a specific purpose, is a normal phenomenon in the banking industry.”

    “There are two options when one invests in shares — either to hold on to or resell them. If one buys them for resale so as to make a profit, then this is good for the financial sector,” he told The EastAfrican last week.

    He said the money in question is owned by only 10 per cent of the population, the proportion that keeps its money in banks, “and as such, it does not have any meaningful impact.”

    But analysts point out that strategic investors like pension funds tend to hold on to shares, and it is only individual investors who resell them for short-term financial gain.

    The liquidity problem in banks — which experts say should be resolved by the end of October when the funds of NMB subscribers are refunded to investors who will deposit them back in banks — echoes a similar situation last year when the government withdrew its deposits from commercial banks.

    The government said it would no longer deposit its funds with commercial banks because the same money was being used to purchase Treasury-bills and bonds, profiting banks at the government’s expense.

    The government had also argued that commercial banks were, by so doing, abandoning their core role of lending, as they found it riskier than investing in T-bills and bonds.

    The government thus closed its accounts with commercial banks and transferred all government accounts to the Bank of Tanzania.
     
Loading...