Supervisory Methodology and Tools

Risk Based Supervision framework is a supervisory approach used by Bank of Tanzania in supervising licensed banks and financial institutions operating in Tanzania. Under the RBS approach, focus is mainly on areas of greatest risks and concerns in individual banks or financial institutions aimed at ensuring effective and efficient supervision. The approach enables Bank of Tanzania to prioritize the use of its resources by allocating them according to risk profiles of banks and financial institutions. Specifically, Bank of Tanzania assesses risk profile of each bank and financial institution and ascertain the effectiveness of the systems and procedures in place in identifying, measuring, monitoring and controlling at minimum six types of risks.

Bank of Tanzania uses both on-site and off-site inspection in supervising banks and financial institutions. The Bank performs bank inspections to assess each bank's or financial institution’s activity, based on the large amount of information received from banks through daily, weekly, biweekly, monthly, quarterly, semi-annually and annually returns or through ad hoc information request and through onsite examinations. Purposes of assessing bank’s stability and business situation, is to prevent banks from taking excessive risks, and to ensure the observance of the directives relating to the proper management of banking business issued by the Bank from time to time.

Bank of Tanzania applies the following tools to effectively execute its mandate of supervising licensed banks and financial institutions: -

Onsite Surveillance

Onsite Examination involves full scope or targeted onsite examination on individual bank or financial institution, specifically targeting at minimum six risks namely Credit, Liquidity, Market, Compliance, Strategic and Operational Risks.

Examination procedures focus on developing appropriate documentation to adequately assess management’s ability to identify, measure, monitor, and control risks. In performing full scope examination, the Bank uses core assessment to assess whether the risks within each institution are appropriately identified and managed. The core assessment covers procedures to review the following areas; Asset Quality and Credit Risk; Liquidity and Liquidity Risk; Market Risk; Operational Risk; Strategic Risk; Compliance Risk; Audit and Internal Control; Capital Adequacy; Management; and Earnings.

In addition, Bank of Tanzania applies Capital adequacy, Asset quality, Management quality, Earnings capability, Liquidity and Sensitivity to market risk (CAMELS) rating system in the analysis of institutions’ financial condition and operational soundness. Under CAMELS analysis, all banks and financial institutions are evaluated in a comprehensive and uniform manner, and that supervisory attention is appropriately focused on the banks and financial institutions exhibiting financial and operational weaknesses or adverse trends.

Evaluation of the components takes into consideration the institution’s size and sophistication, the nature and complexity of its activities, and its risk profile. In addition, the Bank do assess the effectiveness of the institutions' internal control system.

Offsite surveillance
Assessment of the financial soundness of banks and financial institutions is conducted through analysis of the statistical and other returns that are electronically submitted to the Bank periodically (i.e. daily, weekly, bi-weekly, monthly, quarterly, semi-annually and annually or on ad hoc basis if the circumstances so demand). From the analysis an Early Warning Report is produced that enables the Bank to make an informed decision relating the soundness of the financial sector at an individual level and at an aggregate level.

Other Supervisory Tools
In effecting its responsibility of ensuring soundness and safety of the financial sector, Bank of Tanzania also uses the following supervisory tools: -

  1. Planned meetings with management of banks and financial institutions for the purpose of discussing the financial performance, risk profile, strategies, and any other supervisory issues that might impact the safety and soundness of a bank or financial institution;
  2. Ad hoc meetings with management of banks and financial institutions for the purpose of discussing business developments or plans that arises from risk management process or offsite analysis;
  3. meetings with external auditors of banks and financial institutions for the purpose of discussing supervisory issues; and
  4. Liaison with home/host supervisors.