Introduction

Capital adequacy is an indispensable requirement for operation of any commercial bank or financial institution in Tanzania. The Bank of Tanzania (BOT) as the regulator of the financial system in Tanzania is mandated to ensure, inter alia, that all banks and financial institutions maintain an adequate level of capital to enable them to perform their daily operations and to protect the interests of depositors and other financial consumers. This is important because banks and financial institutions play a major role in the stability of the economy and financial system of any country. It is intended to deal with economic crises that may affect capital and liquidity adequacy of banks, such as the COVID-19 pandemic that shook the world economy. To sustain financial stability and help all stakeholders navigate challenging times, the BOT has laid several regulations and guidelines in governance and operation of banks and financial institutions.

In any financial system, banks and financial institutions always battle various challenges to survive potential risks and maintain capital and liquidity adequacy pressures. Over the years, in Tanzania we have witnessed several banks which were critically undercapitalised being placed under compulsory liquidation by the BOT. For example, in 2017, when FBME Bank Limited was placed under compulsory liquidation or, similarly in 2018, when the BOT issued a notice to the public of revocation of banking licences and compulsory liquidation of several financial institutions including Efatha Bank Limited, Covenant Bank for Women (Tanzania) Limited, Njombe Community Bank Limited, Kagera Farmers’ Cooperative Bank Limited and Meru Community Bank Limited. To this end, the BOT is always set to ensure that no registered banking or financial institution is at any time undercapitalised or performing in a detrimental manner which could pose risks to the financial system and/or depositors.

In an effort to lay down proper rules of procedure for compulsory liquidation, on 16 February 2024, the BOT published the Banking and Financial Institutions (Compulsory Liquidation) Regulations, G.N. No. 98 of 2024 (the Compulsory Liquidation Regulations). Prior to these Regulations, the Banking and Financial Institutions Act provided guidance to the effect that BOT may seize and take possession of any bank or financial institution whose capital has fallen below the statutory minimum capital requirements and determine whether the institution in question should be restructured or liquidated, thereafter appointing the Depository Insurance Board (DIB) as the liquidator where appropriate.

The newly published Compulsory Liquidation Regulations have removed the role of the DIB as the only BOT-appointed liquidator and have instead laid the following procedures in compulsory liquidation.

Appointment of a liquidator

Where the BOT has determined that a bank or financial institution is undercapitalised and should be liquidated, the BOT will prepare a resolution plan in line with the requirements of the Banking and Financial Institutions Act and appoint a liquidator, with the appointment having the same effect as though the liquidator had been appointed by the High Court. Once the liquidator has been appointed under the Compulsory Liquidation Regulations, no other liquidator shall be appointed under any other law. The appointment of the liquidator will be published through a general notice published in the government gazette and at least one widely-circulated newspaper in Tanzania. During liquidation, the BOT and the liquidator will be required to put in place an information sharing agreement.

Much similar to a liquidator appointed under the Companies Act, a liquidator appointed by the BOT has powers, inter alia, to institute or defend any action or legal proceedings in the name and on behalf of a bank or financial institution under liquidation, to appoint professionals and agents to assist in liquidation, to realise assets and pay creditors, to set off mutual credits, debts, invest funds, to execute deeds, receipts and other documents, and to perform any other action as may be required and necessary for liquidation. A liquidator also has duties to take into custody and keep in control all properties and affairs of a bank or financial institution under liquidation. Other duties include preparation of a list of assets, statement of affairs, register of creditors and semi-annual returns.

Filing and publishing of notices

There are several notices that the liquidator will be required to file and publish after its appointment. First, the liquidator must file a notice of its appointment with the Registrar of Companies within 14 days in a format prescribed under the Companies Act. Also, within 30 days from its appointment, publish a notice in at least two widely-circulated newspapers whose purpose is to inform the creditors and debtors of its appointment, require creditors to submit claims within 30 days from the date of the notice, require debtors to repay their debts and surrender any property of a bank or financial institution under liquidation in their possession within 30 days from the date of the notice, and require customers with valuables held in custody by a bank or financial institution to confirm and collect their valuables.

Preparation of liquidation plan and proof of debts

Within 30 days from the date of appointment, a liquidator is required to prepare a liquidation plan which shall be reviewed on a quarterly basis by the BOT. The plan shall contain particulars including detailed background information of a bank or financial institution under liquidation, description of assets and liabilities, projected income and expenditure, classification of claims and their priority, liquidation costs and expenses, details of existing and potential litigations, and related costs together with any other necessary information. It is important to note that all liquidation expenses shall be covered by the estate of the bank or financial institution under liquidation and, where insufficient, the BOT will reimburse the deficit to the liquidator.

Notification and closure of correspondent bank accounts

During compulsory liquidation, a liquidator is required to open and maintain a liquidation account with the BOT. As such, all banks and organisations in which a bank or financial institution under liquidation held accounts must be notified that any further operations must be carried out with consent from the liquidator. The liquidator shall also instruct the banks to transfer available balances maintained by the correspondent banks to the liquidation account.

Creditors meetings, claims and payment of creditors

As mentioned above, the liquidator is required to collect all claims of creditors which must be provided in a prescribed form set out in the Schedule to the Regulations within 30 days and this period may only be extended upon submission of good reasons and by no longer than 30 days. The liquidator can admit or reject part or whole of the amount claimed by a creditor and either decision will be communicated to the creditor within seven days to the creditor. If dissatisfied with the decision of the liquidator, a creditor may apply to a court of competent jurisdiction for necessary orders within 21 days. Creditors or their authorised representatives are allowed to inspect the credit register and amend information contained therein upon request to the liquidator.

At any time after its appointment, a liquidator may convene a meeting of creditors to discuss the progress of liquidation. During the meeting, a creditors' committee may be formed by appointment of at least five representatives among the creditors to contact and assist the liquidator.

Claims of creditors realised under liquidation will be paid in accordance with priority of their ranking. All claims with the same priority shall rank equally and abate in equal proportions. The payment will follow the following order: (1) administrative expenses; (2) any deposit liability of a bank or financial institution under liquidation in excess of the protected deposits paid by the Deposit Insurance Fund as described under the Banking and Financial Institutions Act; (3) any general or senior liability; (4) any obligation subordinated to depositors or general creditors; and (5) any obligation to shareholders.

Closure of liquidation

The liquidation process is deemed complete where a bank or financial institution under liquidation has made payment against all of its claims, or there are pending claims but insufficient assets to settle them. Upon completion of liquidation, the liquidator will be required to prepare a liquidation report to be submitted to the BOT. This report will include information regarding all realised assets since commencement of liquidation; information regarding payment against claims of depositors and other creditors; valuer opinion on the liquidator's conclusion that the market price of unrealised assets is zero; details on outcome of recovery measures, if any; and information regarding unclaimed valuables under a bank's or financial institution's safe custody. The liquidator will also be required to surrender to the BOT unclaimed valuables under a bank's or financial institution’s safe custody, if any; to prepare an audited statement of income and expenses, sources and uses of funds; and publish information regarding its audited statement in English and Kiswahili in at least two widely-circulated newspapers.

The liquidation report and the audited statement must contain the correct state of affairs of the liquidation to the satisfaction of the BOT. If the BOT is satisfied, then the liquidator will be released from its duties and a certificate of release will be issued. The certificate of release must be filed with the Registrar of Companies for the name of a bank or financial institution under liquidation to be struck off the companies register. However, if the BOT is dissatisfied with the information in the liquidation report and audited statement, the certificate of release will be withheld and the liquidator will be required to furnish such additional information or take such other steps as necessary. Additionally, the BOT may enquire and take any necessary actions where the liquidator has not performed its statutory duties.

Our corporate team at Dentons EALC East African Law Chambers will be pleased to address any queries that you may have and help you to ensure compliance.