This paper explores the political economy of banking regulation in Tanzania. It traces the evolving approach to global banking regulations and shows how these changes are linked to shifts in the institutions and distribution of power between key actors as well as shifting ideological approaches to the role of the banking sector in supporting economic development. Tanzania’s banking sector went through extensive privatization and liberalization since the end of the 1980s. Despite the intentions of the reform programme, Tanzania has remained one of the least-banked countries in the world. Yet simultaneously, its cash-based economy had one of the highest number of banks and most profitable banking sectors on the continent. Tanzania was quick to adopt global banking regulation in the early stages of liberalization but the pace of implementation was very slow in the 2000s. In the 2010s, the pace and approach changed in significant ways and in recent years there are signs of a return to development lending that was off the table for a long time. Tanzania’s approach to international banking regulation has gone through two distinct phases. From 1995 to 2008, the enormous institutional shifts going on within Tanzania’s banking sector led to a period of regulatory hiatus. This was evident from the significant disjuncture between its formal commitment to adopt Basel and the actual pattern of implementation and enforcement.
During the first period, Tanzania had a predominantly policy-driven approach to adoption that was shaped by the decisive victory of pro-liberalization politicians and the high level of influence of the IFIs on Tanzania’s emerging regulatory system. Nevertheless, lack of records and official monitoring mean that the actual practices of enforcement there were important differences between formal and informal practices in the sector. These were revealed in part by a number of grand corruption that involved senior figures within the state and banking sector. In addition, the domestically-oriented commercial banks were powerful compared to regulators and politicians. Foreign and domestic banks retained very highly profitability during this period of regulatory hiatus and they had no interest in pushing for faster implementation of global banking regulation.
During the second period, from 2009 to 2017, the speed of implementation increased and a more tailored approach was established that brought the informal practices of enforcement into closer alignment with the formal regulatory framework. This shift was a result of changing strategies of regulators, politicians and the banks themselves. The changing approaches to banking regulation in the 2010s were also driven by changing approaches to the economic management as the commitment to deep liberalization faltered and demands for policy based lending returned. This resulted in a move away from blanket adoption of Basel towards an attempt to tailor regulation for different segments of the banking sector and the creation of new development finance institutions. Despite these changes, important questions about the nature of risk and banking regulation in the context of economic transformation have not yet been sufficiently addressed.