SECTION 1 Market overview
1.1 Please provide an overview of the cross-border financing market in your jurisdiction.
The Bank of Tanzania's (BOT) Monthly Economic Review Report June 2017 is indicative of a vibrant cross-border financing market. Generally, cross-border financing is biased towards government projects. That said, cross-border financing for the private sector is growing. As of May 2017, external debt stock for both the public and private sectors was $17.9 billion.
Dominant lenders in the market include: World Bank organisations such as the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA) and International Finance Corporation (IFC); the African Development Bank (AfDB); the OPEC Fund for International Development; foreign banks; and other institutional lenders.
Common financing structures include debt financing, equity financing and hybrid financing structures, such as loans and bonds and mezzanine financing. There is also an increasing interest in public private partnerships (PPP). Crowd funding and venture capital for start-ups is also on the increase.
Due to the country's political stability and its geographic location, cross-border financing plays an important role in the market. For example, the Tanzania route was selected over other routes for the East African Crude Oil Pipeline Project running from Hoima, Uganda, to Tanga, Tanzania. The oil pipeline project is expected to attract substantial cross-border financing for both the pipeline project and related projects. Also, Tanzania's Dar es Salaam port is the port of choice for several countries in the African hinterland. These include Rwanda, Burundi, the Democratic Republic of the Congo, Uganda, Zambia and Malawi. It follows that cross-border financing for trade in the above countries depends on the efficient handling of goods at the Dar es Salaam port.
1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months?
The East African Crude Oil Pipeline Project and related projects will attract substantial cross-border financing in the next 12 months.
Tanzania is also in the penultimate stages of commencing construction of the Standard Gauge Railway. The first phase of construction, covering approximately 207 kilometres and linking Dar es Salaam to Morogoro and the second phase, covering 336 kilometres and linking Morogoro to Dodoma, will attract cross-border finance.
The recent amendments to legislation regulating the mining sector have also created potential for cross-border financing opportunities due to anticipated associated M&A transactions.
We have also witnessed an increased interest in loan transactions between local financial institutions and foreign institutional lenders during the last 12 months.
Additionally, the recently concluded initial public offering by Vodacom Tanzania attracted cross-border finance. We anticipate that subsequent IPOs issued by other telecommunication companies will attract cross-border finance.
1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction?
Yes, there are new entrants such as Guaranty Trust Bank. There have also been a number of new foreign lenders, including impact investment funds that have lent money to financial institutions.
BOT has recently taken over a local bank that failed to meet capital adequacy requirements. Also, BOT revoked the licence of a bank on the grounds of money laundering.
BOT also recently issued new rules requiring banks and financial institutions to maintain a capital conservation buffer of 2.5% of risk-weighted assets and off-balance sheet exposure.
SECTION 2: Financing structures
2.1 Briefly outline some recent notable transactions involving your jurisdiction, highlighting any interesting aspects in their structures and what they might mean for the market.
We recently advised on a cross-border financing transaction involving an impact investment fund and a financial institution in Tanzania. The investment decision and financing structure of this transaction hinged on the social impact of the borrower's business, as opposed to the borrower's business performance and collateral provided by the business. This was the most important consideration of the lender.
The increased participation of impact investment funds in Tanzania will require investors and existing companies to review their social impact.
We have also witnessed increasing cross-border financing through term loans. These are usually supported by cross-corporate guarantees.
Transactions in the mining sector are largely structured through equity and debt financing.
2.2 Have there been any significant developments in the way cross-border financing transactions are structured or in the way borrowers and/or lenders are participating in the market?
Increasingly, lenders prefer to transact directly with local subsidiaries as principals and not third-party beneficiaries of loan agreements executed with foreign holding companies. This may be attributed to averting the risk of failed enforcement of the loan agreement or decrees and orders arising from dispute resolution proceedings against local subsidiaries, as well as BOT regulations that require the registration of foreign loans.
Initially, the recent Vodacom Tanzania IPO had been ring-fenced for local investors. However, IPO rules were revised to permit foreign firms and citizens to participate. We believe subsequent IPOs in the telecommunications sector will be opened to both local and foreign investors.
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that govern cross-border financing in your jurisdiction.
The pre-eminent piece of legislation that regulates cross-border financing in Tanzania is the Banking and Financial Institutions Act Cap 342. This Act regulates banking and financial activities in Tanzania. The Bank of Tanzania Act 2006 regulates BOT and BOT is the regulatory body charged with the supervision of banks and financial institutions in Tanzania. Although BOT does not regulate foreign financial institutions, local borrowers are required to register all foreign loans with BOT.
The Anti-Money Laundering Act Cap 423 is also relevant in regulating cross-border financing in Tanzania. The Act prohibits money laundering. As such, cross-border financing transactions must comply with provisions of this Act. The Act also underpins a regulatory body: the Financial Intelligence Unit.
The Capital Markets Authority (CMA) is another important regulatory authority in cross-border financing in Tanzania. It is established under the Capital Markets and Securities Act, Cap 79. The authority regulates all trade in securities in Tanzania.
Other relevant pieces of legislation include the Electronic and Postal Communications Act, 2010 as amended by the Finance Act 2017. These Acts require all licensed firms operating network facilities and services, among others, to offer shares to the public and list on the stock exchange. The Tanzania Communications Regulatory Authority (TCRA) is charged with regulating electronic communication in Tanzania.
Pursuant to the Mining Act 2010, the Minister for Mining is charged with enacting appropriate regulations for minimum shareholding and share sales to Tanzanians. The Mining (Minimum Shareholding and Public Offering) Regulations 2016 were enacted to implement provisions in the Mining Act. The Ministry responsible for mining and the Capital Markets Authority regulate minimum shareholding and public offering.
The Companies Act No 12 of 2002 and its attendant regulatory body, the Business Registration and Licensing Authority and the Land Act Cap 113, are relevant in the registration of securities.
3.2 Have there been any recent changes to regulations or regulators that may impact the cross-border financing market and what impact do you expect them to have?
The recent amendment (Finance Act 2017) to the Bank of Tanzania Act, which requires all government and public authorities to open accounts with BOT and to deposit all their monies on these accounts, may increase cross-border financing between foreign lenders and local financial institutions as they will require funds to boost their lending capacities and to fill the void left by government deposits. This amendment was enacted to control the amount of public funds in commercial banks.
The Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act 2017, the Natural Wealth and Resources (Permanent Sovereignty) Act 2017 and the Written Laws (Miscellaneous Amendments) Act 2017 may have an impact on the number of cross-border financing transactions in the mining sector. The conditions in the new laws may encourage new entrants to invest in the market and also lead to some companies exiting the market. This may increase M&A activity in the mining sector in Tanzania.
3.3 Are there any rules, legislation or policy frameworks under discussion that may impact lenders or borrowers involved in cross-border financing in your jurisdiction?
We are not aware of any rules, legislation or policy framework under discussion that may impact lenders or borrowers involved in cross-border financing.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions that exist about the financing market in your jurisdiction.
Foreign lenders often assume that they require local licences to lend in Tanzania. This is not true. Licensing under the Banking and Financial Institutions Act 2006 and the Banking and Financial Institutions (licensing) Regulations 2008 is only required where the foreign lenders intend to establish local presence in Tanzania.
Foreign lenders assume that foreign judgements and arbitration awards are not enforceable in Tanzania. This is also not true. Under the Reciprocal Enforcement of Foreign Judgments Act 2002, the procedure for the enforcement of foreign judgements is provided. Also, under the Arbitration Act Cap 15, the High Court will recognise and enforce foreign arbitral awards without re-examining the merits of the decision.
4.2 Are there frequently asked questions or often overlooked areas from parties involved in cross-border financings in your jurisdiction?
We have received various inquiries as to whether licences are required for investment advisers in securities trade. The law requires all investment advisers to obtain appropriate licenses from the Capital Markets Authority.
Foreign lenders also often assume that the debt record number will be obtained by the borrower/borrower's bank in less than two weeks. This process in our experience takes about 30 days.
4.3 Are there any classes of assets over which security cannot be taken or regulations specific to your jurisdiction governing the taking of security over certain classes of assets that lenders should be aware of?
Security can be taken over all classes of assets. These include: shares; bank accounts; receivables; contractual rights; insurance policies; real property; plant and machinery; intellectual property; debt securities; future/after acquired property; and floating charges over all assets.
4.4 What measures should be taken to best prepare for your market idiosyncrasies?
It is important that both lenders and local borrowers appoint good legal counsel to advise on the financing agreements and local laws. It is also important that lenders and local borrowers consider all licences and registrations that may be required in structuring financing transactions.
SECTION 5: Practical considerations
5.1 Briefly explain the downstream, upstream and cross-stream guarantees available in your jurisdiction, with reference to any specific restrictions or limitations.
Downstream guarantees are usually granted by the parent company to assist a subsidiary to obtain financing or guarantee the performance of an obligation. These guarantees are common in Tanzania. Parties should ensure that there is consideration for the guarantee.
Upstream guarantees are usually provided by the subsidiary to guarantee the obligations of the parent company. These are less common. Similarly, the parties should ensure that there is consideration for the guarantee.
Cross-stream guarantees are often provided by related entities to guarantee enforcement of their respective obligations. Similarly, the parties should ensure that there is consideration for the guarantees.
5.2 Are there any specific issues creditors should be mindful of regarding a bankruptcy and restructuring situation?
It is important that debts are secured as generally in bankruptcy matters, the secured debts rank above unsecured debts.
5.3 Do foreign debt quotas apply in your jurisdiction and is offshore financing to domestic entities monitored?
Tanzania does not operate foreign debt quotas. However, offshore financing to domestic entities is monitored as all foreign loans have to be registered and debt record numbers acquired.
5.4 Describe your jurisdiction's relationship with non-performing loans (NPLs), including volume of outstanding NPLs and techniques/challenges in managing them.
The acceptable threshold of NPLs in Tanzania is 5%. All banks with NPLs above 5% are required to submit NPL regularisation plans with clear timelines to Bank of Tanzania.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for cross-border financing in your jurisdiction? How do you expect legal practice to respond?
We expect an increase in the volume of cross-border financing for financial institution businesses, telecommunications firms and the mining sector in Tanzania.
We expect that the law firms will advise local and foreign investors and financial institutions, telecommunications firms and mining companies on the requirements for issuing IPOs and listings on the stock exchange.
|About the author|
Saidi Othman Yakubu
Advocate Saidi Othman Yakubu is a leading authority on cross-border finance in Tanzania and has published widely on the subject. He has acted for both lenders and borrowers on various finance transactions in various sectors in Tanzania, including: oil and gas, financial institutions and transport.
He is a fellow of the Chartered Institute of Company Secretaries and Administrators (ICSA) and a founding partner of the ICSA Tanzania branch. He is also a member of the Association of International Petroleum Negotiators. He is an advocate of the High Court of Tanzania.
|About the author|
Dr Timothy Kyepa has advised clients on cross-border financings in East Africa. He has acted for clients in various financing transactions involving various sectors such as: energy, transport, oil and gas and financial institutions.
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