UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF FINANCE

FN201: Introduction to Financial Services

Godsaviour Christopher
(Bcom – Udsm, MA Economics – Udsm)
 TOPIC 2 – Part Two

FINANCIAL
INSTITUTIONS
REGULATION
FRAMEWORK
2
 Introduction
Bank regulations refers to the written
rules, laws and policies that defines the
acceptable behaviour for banks and
financial institutions.
Banks and FIs are traditionally supervised
very closely by the central banks and
other state agencies worldwide.
Limitations are imposed on:
 the way they raise funds,
 costs that can be incurred in doing so,
 assets choice,
 product and on geographical coverage and many more.

3
 Introduction ….Contd…
• The regulations in FIs reflect the historical
role of banks in accepting deposits and the
provision of the credit to the households,
businesses and the government.
• The initial justification is to protect the
safety and soundness of the economic
system.
• Regulations provide a room for the
government to channel its monetary and
fiscal policies and at the same time
fostering the development of the economic
sectors.
• Financial services industry – politically
sensitive and relies on public confidence.
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 Why regulations?
Fundamental objectives of banking
regulations.
To ensure safety and soundness of banks and
financial instruments.
To transfer the monetary and fiscal policies towards
the financial system.
To provide an efficient and competitive financial
system – avoid monopolistic exploitation.
To protect consumers from abuse by credit granting
institutions (caveat emptor) – protecting their
deposits.
To maintain the integrity of the nation's payment
system.
Banks are interconnected (bank contagion) and
failure of one bank may lead to “bank run” due to
systemic risk.
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Types of Regulations
1. Systemic Regulation – dealing with
safety and soundness of financial system.
This minimize the risks of “bank run” by
government safety net.
The government safety net include:
Depositors Insurance – to guarantee that,
part of the deposits will be repaid in the
event of bank fails.
The lender of last resort (LOLR) – provide
fund to the banks which are in financial
difficulty and they have no any other source
of credit (during crises).
Types of Regulations
2. Prudential Regulation – concerned with
consumer protection.
 Agency problem and lack of enough information, put
consumers in the position of not being able to judge
the safety and soundness of financial institutions.
 Focus on the asset quality and capital adequacy.
 The regulation covers standards covering risk
management.
3. Conduct of Business Regulation – regulate
how banks and other FIs conduct their business.
 Relates to information disclosure, fair business
practices, competence, honesty and integrity of FIs
and their employees.
 Financial Institutions Regulations in Tanzania
The regulation of financial institutions in
Tanzania had a remarkable history, in
1965 after the enactment of the Bank of
Tanzania (BOT) act.
In 1991 the Banking and Financial
Institution Act (BAFIA) was enacted and
then new BOT Act (1995) came into
operation .
The Foreign Exchange Act 1992 came
into operation as a guide to regulate
financial institutions in forex trading.
The BOT Act and BFIA was repealed in
8 2006. The BOT’s power to regulate the
Financial Institutions Regulations in Tanzania

The BOT issues from time to time,

regulations, circulars and other directives
to banks and financial institutions which
aim at ensuring that the banking system is
safe and sound and banks and financial
institutions operates in a prudential
manner.
 Laws in the Financial Sector in
Tanzania
Banking and Financial Institutions Act
(BFIA) 2006
The BFIA, 2006 consolidates the law
relating to business of banking.
Aims at:
harmonizing the operations of all FIs in
Tanzania.
to foster sound banking activities
to regulate credit operations
provide for other matters incidental to or
connected with those purposes.
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 The Bank of Tanzania Act, 2006
The BOT Act of 2006, is designed to take
into account the most up to date
developments in the central banking
theory and practice as well as the need
for the economy after the liberalization
of the financial sector, which was set up
by the BFIA, 1991, 2006.
The Act empowers the Bank of Tanzania
to supervise the banks and FIs and to
supervise the macro economic variables
in the economy.

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 BOT Regulations and Circulars
[PREVIOUS…NO NEW RELEASES]
• Banking and Financial Institutions
Regulations, 1997
• The Credit Concentration and Other
Exposure Limits Regulations, 2008
• The Management of Risk Assets Regulations,
2001
• The Capital Adequacy Regulations, 2001
• The Liquidity Assets Ratio Regulation, 2000
• The Publication of Financial Statements
Regulations, 2000
• The Independent Auditors Regulations; 2000
• The Money Laundering Control: Circular no. 8
• Instructions of Filling Reports Under the BFIA,
1991
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• Circular No. 5 Foreign Exchange Exposure
 Bank Supervision in Tanzania
The Basel Committee (formed in 1974 by
G10 central bank governors) on Banking
Supervision says that effective banking
supervision is important because weakness
in the banking system of one country can
easily threaten the stability of the financial
system worldwide. This argument can be
supported by the recent credit crunch in
USA (2008) which caused panic worldwide.
Therefore, Bank Supervision refers to the
process followed by the supervisors of the
banking sector to ensure that all banks and
FIs are operating within the established
legal framework and comply to all laid
13 down prudential regulations.
 Banking Supervision
Methodology
The Bank uses the following techniques to
discharge its regulatory obligations;
1.On- Site Supervision
2.Offsite supervision
3.Regulatory meeting
 1. On-site Supervision
A full scope examination is done by
physical visit of the financial institutions,
where the supervisors review the five key
components of the institution under
consideration. These are:-
Capital adequacy
Assets quality
Management quality
Earnings capability
Liquidity
The on-site supervision under usual
business environment takes place once a
year.
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 2. Off-site Supervision
The assessment of financial soundness
through analysis of the statistical and
other returns covering the key areas of
the institutions is attempted.
The analysis based on the call reports
submitted by the banks and FIs to the
BOT.
These reports are submitted weekly,
monthly, quarterly, semi annually and
annually.
The offsite supervision enable the bank
(BOT) to timely identify emerging
16 problems in the bank performance and
 3. Regulatory meeting
Bilateral and trilateral meeting are held
between BOT, the supervised banks and
financial institutions and the external
auditors.
Issues such as compliance with laws and
regulations, audited financial statements,
management letters, new bank products
and business strategy are discussed.
END OF TOPIC 2

Any Question??
 ASSIGNMENT

Please make sure that you read regulations

and circular issued by BOT to guide the
commercial banks (daily activities).