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1.0 Introduction
Banking sector plays an important role in sustaining financial markets and has a significant impact on the
success of the economy. Sound financial health of a bank is the guarantee not only to its depositors but is equally
significant for the shareholders, employees and whole economy as well. As a sequel to this maxim, efforts have
been made from time to time, to measure the financial position of each bank and manage it efficiently and
effectively (Din Sangm, 2010)
In Developing countries like Tanzania, banks play a major role in financial development. This is especially true
since stock and corporate bond markets are usually underdeveloped. Moreover, the development of the banking
system and improving of its financial performance is related to higher economic growth of a country. In
Tanzania commercial banks contribute to economic growth through their financial intermediation role. Better
performance of commercial banks is pro foundation for product innovation, diversification and efficiency of the
commercial banks (Hempell, 2002). The stability of commercial banks as whole in the economy depends on
better financial performance. Better financial performance level has tendency to absorb risks and shocks that
commercial banks can face.
Commercial banks in Tanzania have undergone immense regulatory and technological changes since financial
sector reforms in 1991. Tanzanian banks are faced with increasing competition and rising costs as a result of
regulatory requirements, financial and technological innovation, entry of large foreign banks in the retail banking
environment and challenges of the recent financial crisis. These changes had a dramatic effect on the
performance of the commercial banks in Tanzania.
Studies on bank performance in Tanzania had focused on bank efficiency [see Aikaeli (2008); Gwaula (2012)
using Data Envelopment Analysis (DEA). This study compares and evaluates financial performance of small,
medium and large Commercial banks in Tanzania for the period from 2006-2012 using financial ratio analysis.
The present study is different from earlier studies in two ways: sample coverage and methodology. The study is
motivated by the fact that, the measurement of financial performance of the banking sector is important for
several reasons. First, financial performance is a vital factor for financial institutions wishing to carry out their
business successfully, given the increasing competition in the financial markets. Second, in a rapidly changing
and more globalised financial marketplace, governments, regulators, managers and investors are concerned about
how efficiently banks transform their expensive inputs into various financial products and services. Third, the
financial performance measures are critical aspects of banking sector that enable us to distinguish banks that has
the capability to survive and prosper from those that may have problems with competitiveness. Additionally,
financial ratios enable us to identify unique bank strengths and weaknesses, which in itself inform bank
profitability, liquidity and credit quality.
1.1 Research objectives
The first objective of the study is to evaluate the financial performance of commercial banks from 2006 to 2012,
by making comparison among the peer banks group as large banks, medium banks and regional & small banks
using ratios analysis, this aims at providing an overall subjective assessment of the current status and financial
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performance of banking sector in Tanzania and distinguishes well-performing banks group from poor-
performing ones to identify better governance structure
The second objective of the study is find out if there is any significance differences of profitability means among
peer banks groups using Analysis of Variance (ANOVA)
1.2 The Hypotheses of the study
The following hypotheses were tested
Ho1 There is no significance means differences on ROA among the peer banks group
Ho2 There is no significance means differences on ROE among the peer banks group
Ho3 There is no significance means differences on NIM among the peer banks group
The rest of the paper was organized as follows. The next section provides a summary review of literature.
Section three describes the methodology of the study. Section four discusses the results of the findings and
analysis; while section five concludes the discussion.
2.0 LITERATURE REVIEW
The word ‘Performance’ means ‘the performing of an activity, keeping, in view the achievement made by it’. In
other words, ‘Performance’ means ‘the role Played by an arrangement keeping in view the achievement made by
it’. In the context of the banks, it takes into account the way of their progress. (Nirmal, 2004) According to
Albans (1978), performance’ is described as the efforts extended to achieve the targets efficiently and
effectively, the achievement of targets involves the integrated use of human, financial and natural resources.
Financial performance is the process of measuring the results of an organization policies and operations in terms
of monetary value. These results are reflected in the firm's profitability, liquidity or leverage. Evaluating the
financial performance of a business allows decision-makers to judge the results of business strategies and
activities in objective monetary terms. Normally the ratios are used to determine the financial performance of an
organization. A well designed and implemented financial management is expected to contribute positively to the
creation of a firm’s value (Padachi, 2006). Ultimate goal of profitability of a firm can be achieved by efficient
use of resources. It is concerned with maximization of shareholders or owners wealth (Panwala, 2009). Bank
financial performance evaluation is traditionally based on the analysis of financial ratios such return on equity
(ROE), return on assets (ROA), net interest margin (NIM), capital asset ratio, growth rate of total revenue,
cost/income ratio. However, regardless of how many ratios are being used, a model that would fully satisfy the
analysis of needs and bank operations’ efficiency evaluation has not been developed yet. For this reason, the
financial ratio analysis is complemented with different quality evaluations, with features such as management
quality, equity structure, competitive position and others to be included into the final evaluation (Tihomir 2001).
2.1 Studies on banks Financial Performance
Medhat (2006) evaluated the financial performance of Omani Commercial banks used multiple regression
analysis and correlations by employing ROA and interest income as performance proxies which represented as
the dependent variables, and bank size, asset management and operational efficiency as independent variables.
Found that, there is strong positive correlation between financial performance and operational efficiency and a
moderate correlation between ROA and bank size, while, ANOVA analysis; results indicated that, there exists an
impact of those independent variables on financial performance as the F-stat was significant and below the 5%.
Ahmad (2011) investigated the financial performance of seven Jordanian commercial banks; the study used
ROA as a measure of banks’ financial performance and the bank size, asset management and operational
efficiency as three independent variables affecting the financial performance. The results of the study showed a
strong negative correlation between ROA and banks’ size, a strong positive correlation between ROA and asset
management ratio, and a negative weak correlation between ROA and operational efficiency. Khizer at el
(2011) study about banks’ profitability in Pakistan, they found a significant relation between asset management
ratios, capital and economic growth and with ROA, the operating efficiency, asset management and economic
growth are significant with the ROE. On the other hand, domestic banks are determined to have a lesser capital
adequacy ratio than foreign banks. Chiaku at el (2006) examined the comparative performance of small U.S.
commercial banks, medium size commercial banks and large commercial banks for the period of 1997-2002 by
employing profit efficiency (PROFEFF), return-on-assets (ROA), interest income, non interest income and loan
loss reserve as criteria for the comparison. The results showed that between 1997 and 1999, small banks were
more profit efficient (PROFEFF) than large banks but less than medium- size banks. Abdus at el (2006)
evaluated the inter-temporal performance of commercial banks; the study was based on three categories of bank
size, large, medium and small banks in the State of Utah for the period of 5 years from 2000 to 2004, by using
two measures of performance – profits and quality of loans. T-tests and Kruskal-Wallis tests were applied to a
variety of standard bank operations measures to determine whether there are significant differences in
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performance among the three categories of banks. The performance measures used were return on assets (ROA),
return on equity (ROE), loan loss reserve ratio, and loans past due 30-89 days as a percentage of total loans. The
study results showed that, no significant difference in performance between small and large banks between the
years 2000 and 2004. However, there was a significant difference between small and medium, and medium and
large banks in their ROA; the ROA of medium banks is significantly higher than that of small and large banks.
Sanaullah (2009) compared the financial performance of Islamic and Conventional banks in Pakistan from 2006
to 2009 by employing Independent sample t-test and ANOVA to determine the significance of mean differences
of financial ratios between and among banks, eighteen financial ratios were estimated to measure the
performances in term of profitability, liquidity, risk and solvency, capital adequacy, deployment and operational
efficiency. The results of the study indicated that, Islamic banks proved to be more liquid, less risky and
operationally efficient than conventional banks.
3.0 METHODOLOGY
3.1 Research Design
This study employed quantitative research approach. A quantitative approach is relevant because it employs
statistics, which is a comparative methodological discipline that uses mathematical ideas for descriptive data
analysis, point inference, and hypothesis testing (Creswell, 2008).
3.2 Sample size of the study
The study evaluated Financial Performance of Commercial Banks in Tanzania from 2006 to 2012 focusing on
peer banks groups according to Ernst & Young (2012). With respect to sample size, the study employed 28
commercial banks; the selection of the sample size was based on the availability of the data covered by the
period of study. Table 3.1 shows the population of commercial banks in Tanzania and selected of sample size.
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3.4.1 Variables
A. Profitability Performance
Profitability is a bank’s first line of defense against unexpected losses, as it strengthens its capital position and
improves future profitability through the investment of retained earnings. An institution that persistently makes a
loss will ultimately deplete its capital base, which in turn puts equity and debt holders at risk. All the strategies
designed and activities which are operated in the bank with the aim of maximizing the profit of the for the
purpose of measuring profitability: Profitability is measured using the following criteria:
a) Return on Asset (ROA)
Return on Asset (ROA) is a financial ratio that shows the financial performance of a bank. The return on assets
(ROA) is the net income for the year divided by total assets, usually the average value over the year. This ratio
measures the ability of the bank management to generate income by utilizing company assets at their disposal. In
other words, it shows how efficiently the resources of the company are used to generate the income. It further
indicates the efficiency of the management of a company in generating net income from all the resources of the
institution (Khrawish, 2011). Wen (2010), state that a higher ROA shows that the company is more efficient in
using its resources
b) Return on Equity (ROE)
Return on Equity (ROE) is a financial ratio that refers to how much profit a company earned compared to the
total amount of shareholder equity invested o. ROE is what the shareholders look in return for their investment.
A business that has a high return on equity is more likely to be one that is capable of generating cash internally.
Thus, the higher the ROE the better the company is in terms of profit generation. It is further explained by
Khrawish (2011) that ROE is the ratio of Net Income after Taxes divided by Total Equity Capital. Return on
Equity (ROE) is an internal performance measure of shareholder value, and it is by far the most popular measure
of performance, since: (i) it proposes a direct assessment of the financial return of a shareholder’s investment;
(ii) it is easily available for analysts, only relying upon public information; and (iii) it allows for comparison
between different companies or different sectors of the economy. ROE is sometimes decomposed into separate
drivers: this is called the “DuPont analysis”, where ROE = (result/turnover)*(turnover/total assets)*(total
assets/equity). The first element is the net profit margin and the last corresponds to the financial leverage
multiplier. (EU, 2010)
c) Net Interest Margin (NIM)
Net Interest Margin (NIM) is a measure of the difference between the interest income generated by banks and
the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest
earning) assets. It is usually expressed as a percentage of what the financial institution earns on loans in a
specific time period and other assets minus the interest paid on borrowed funds divided by the average amount of
the assets on which it earned income in that time period (the average earning assets). The NIM variable is
defined as the net interest income divided by total earnings assets (Gul et al., 2011). Net interest margin
measures the gap between the interest income the bank receives on loans and securities and interest cost of its
borrowed funds. It reflects the cost of bank intermediation services and the efficiency of the bank. The higher the
net interest margin, the higher the bank's profit and the more stable the bank is. Thus, it is one of the key
measures of bank profitability. However, a higher net interest margin could reflect riskier lending practices
associated with substantial loan loss provisions (Khrawish, 2011).
B Liquidity
Liquidity indicates the ability of the bank to meet its financial obligations in a timely and effective manner.
(Samad 2004) states that ‘‘liquidity is the life and blood of a commercial bank’’ There should be adequacy of
liquidity sources compared to present and future needs, and availability of assets readily convertible to cash
without undue loss. Rudolf (2009) emphasizes that “the liquidity expresses the degree to which a bank is capable
of fulfilling its respective obligations”. For this study liquidity ratio will be calculated as total customer deposits
to total assets
4.0 EMPIRICAL RESULTS AND ANALYSIS
4.1 Banking Sector Profitability Performance
Profitability in this study is measured by three indicators; Return on Asset (ROA), Return on Equity (ROE) and
Net interest Margin (NIM).
It can be seen (Table 2 (a & b) and figure 1, that, all banks’ group are profitable under the period of study no
banks group recorded the negative return on assets. Large banks are more profitable than the medium and
regional & small banks with the average ROA of 2.33% followed by medium banks with 1.71% and the last is
small banks with 1.61%. Descriptive statistics table 4.1b shows, large banks have lower risk on ROA with the
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standard deviation of 0.61 and range of 1.86% in which the maximum and minimum are recorded as 3.51% and
1.65% respectively. Medium banks have lower risk on ROA compared to small banks with standard deviation of
0.67 and range of 1.63% in the maximum and minimum on ROA are recorded as 2.65% and 1.02% respectively.
However, small banks have shown higher risk on ROA among the three banks groups, with the standard
deviation of 1.33 and range on ROA of 3.34%, with maximum and minimum ROA of 3.64% and 0.30%
respectively. The results further more found that, medium and small banks have moderate right skewed
distribution on ROA which is approximately to symmetric with the measure of skewness of 0.5 and 0.89
respectively while large banks distribution on ROA is highly positive skewed with the measure of skewness of
1.27.
Table: 2a Return on Assets (ROA %) on Commercial Banks 2006 - 2012
Banks peer group 2006 2007 2008 2009 2010 2011 2012
large Banks 2.21 3.51 2.31 2.71 1.95 2.00 2.35
Medium Banks 1.02 2.47 2.06 1.19 1.43 1.17 2.65
Regional & Small Banks 0.86 2.09 0.86 0.30 1.34 2.21 3.64
Source: Calculated, BOT
Table 2 b: Descriptive statistics results on ROA % 2006 – 2012
Banks peer group Mean Std dev. Kurtosis Skewness Range Maximum Minimum
large Banks 2.33 0.61 1.74 1.27 1.86 3.51 1.65
Medium Banks 1.71 0.67 -1.91 0.50 1.63 2.65 1.02
Regional & Small Banks 1.61 1.13 0.57 0.89 3.34 3.64 0.30
Source: researcher
The profitability results trends on ROA indicate an increasing on ROA for all banks groups from 2006 to 2007
with a slight decrease in 2007 to 2010, from 2.51% to 1.95% for large banks, 2.47% to 1.43% for medium banks
and 2.09% to 1.34% for small banks, however all banks groups recorded an increase of ROA for 2012, in small
bank was higher rate than other banks group 3.64%, followed by medium bank with 2.65% and lastly large
banks with 2.35%. This profitability trends on ROA is clearly revealed in figure 4.1a
Tables 1c & d and figure 4.1b show the results of profitability results on ROE. The general performance
indicates that, all three banks groups performing better, large banks recorded higher average ROE with 22.3%,
followed by medium banks with 12.82% and lastly small banks with 12.82%, however, medium banks have
lower risk on ROE comparing to other two groups with standard deviation on ROE of 5.31, followed with small
banks by 5.65, while large showed higher risk with standard deviation on ROE of 6.85. The study found that,
small banks have approximately symmetrical distribution of ROE with the measure of skewness of 0.10,
comparing to large and medium banks which have highly positive skewed distribution on ROE with the measure
of skewness of 1.16 and 1.44 respectively.
The results on profitability trends indicate that, all banks groups their ROE were increased from for the first two
years of study from 25.24% to 35.35% for large banks, 15.17% to 24.44% for medium banks and 5.50% to
17.24% for small banks. However there were down trend on ROE for all banks groups from 2007 to 2010 from
35.35% to 14.90% for large banks, 24.44% to 11.80 for medium banks and 17.24% to 8.46% for small banks,
then there was slightly increased on ROE for all banks groups from 2011 to 2012. This profitability trend on
ROE for banks groups from 2006 to 2012 is clearly shown in figure 1(b)
Tables 2(e & f) and figure 1c show the results of profitability of banking sector on net interest margin (NIM).
Net interest margin measures the gap between the interest income the bank receives on loans and securities and
interest cost of its borrowed funds. It reflects the cost of bank intermediation services and the efficiency of the
bank. The higher the net interest margin, the higher the bank's profit and the more stable the bank is. Thus, it is
one of the key measures of bank profitability.
The general performance indicates that, small banks have higher average NIM compared to large and medium
banks with 20.28%, followed by large banks with 14.80% and lastly medium banks with 12.95%, however, this
high average NIM for small banks is caused by these banks charging high rate on loans facilities they are
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offering to their clients and the same offering low interest rate for deposits, sometimes no interest on deposits are
given for other small banks to their clients. The results also indicate that, large banks have higher risk on NIM
compared to other two groups with the standard deviation of 3.35 followed by small banks with 2.31, while
medium banks showed lower risk with 1.75, all banks have highly positive skewed distribution on NIM with the
measure of skewness of 0.94, 1.26 and 1.10 for large, medium and small banks respectively.
Banks peer group Mean Std dev. Kurtosis Skewness Range Maximum Minimum
large Banks 22.30 6.85 1.58 1.16 20.45 35.35 14.90
Medium Banks 14.06 5.31 1.94 1.44 15.03 24.44 9.41
Regional & Small Banks 12.82 5.65 -1.90 0.10 14.78 20.28 5.50
Source: researcher
Table 2e: Descriptive statistics on Net Interest Margin (NIM %) 2006 - 2012
Banks peer group Mean Std dev. Kurtosis Skewness Range Maximum Minimum
large Banks 14.80 3.35 -1.24 0.94 7.63 19.74 12.11
Medium Banks 12.95 1.75 0.55 1.26 4.53 16.15 11.62
Regional & Small Banks 20.28 2.31 1.03 1.10 6.62 24.57 17.95
Source: researcher
Table: 2f Net Interest Margin (NIM %) on Commercial Banks 2006 – 2012
Banks peer group 2006 2007 2008 2009 2010 2011 2012
large Banks 19.25 19.74 15.00 12.63 12.63 12.25 12.11
Medium Banks 13.15 16.15 14.39 11.62 11.77 11.70 11.85
Regional & Small Banks 18.14 19.57 24.57 21.71 20.71 19.28 17.95
Source: study
The results on NIM trends show that, all banks groups have faced the down wards trends on NIM from 2008 to
2012, the reasons is due to increasing trends of non-performing loans for banks, high operating costs and world
international financial crises occurred in 2008 had affected the financial performance of banking sector in
Tanzania. The trend on NIM for banking sector in Tanzania is shown clearly in figure 1c
Banks peer group Mean Std dev. Kurtosis Skewness Range Maximum Minimum
large Banks 50.67 3.98 -0.79 0.24 0.24 56.56 45.13
Medium Banks 50.11 6.16 1.08 -1.20 17.57 56.15 38.58
Regional & Small Banks 38.34 9.01 4.08 1.92 26.19 57.29 31.10
Source: Study survey
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Figure 2 shows the liquidity positions trends of banking sector in Tanzania, the liquidity level of small banks and
medium banks have continuously declining from 2009 and 2010 respectively, this due lower level of savings and
increasing of non-performing loans for those banks, however large banks experiencing an upward increasing of
liquidity positions, this due to higher level of mobilizing funds from savings, because large banks are
concentrated in urban areas and mostly carter to large clients
4.3 Results of test statistics
The researcher wanted to find out that if there is any significant difference regarding the profitability related to
ROA, ROE and NIM among all the three banking groups from 2006 to 2012 or not. This was tested under the
following null hypotheses
Ho1 There is no significance means differences on ROA among large banks, Medium banks and Regional &
Small banks
Ho2 There is no significance means differences on ROE among large banks, Medium banks and Regional &
Small banks
Ho3 There is no significance differences means on NIM among large banks, Medium banks and Regional &
Small banks
The results of ANOVA are shown in tables 4.a, 4.b and 4c for ROA, ROE and NIM respectively
Insert tables
The above Anova table reveals the table p-value is 0.152 which is greater than 0.05, level of significance. Hence
the null hypothesis is accepted and the alternative hypothesis is rejected. Therefore, the statistical evidence is not
sufficient to accept the hypothesis that is there is a significant means difference of ROA among large banks,
medium banks and regional & small banks. Hence the financial performance of all three banking groups
regarding this ratio is the same.
Table 4a ANOVA - ROA
The above Anova table reveals the table p-value is 0.016 which is less than 0.05, level of significance. Hence the
null hypothesis is rejected and the alternative hypothesis is accepted. Therefore, there is a significant means
difference of ROE among large banks, medium banks and regional & small banks. Hence the financial
performance of all three banking groups regarding this ratio is different.
The above Anova table reveals the table p-value is 0.000 which is less than 0.05, level of significance. Hence
the null hypothesis is rejected and the alternative hypothesis is accepted. There is a significant means difference
of NIM among large banks, medium banks and regional & small banks. Hence the financial performance of all
three banking groups regarding this ratio is different
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5. CONCLUSIONS
This paper analysed the financial performance of Tanzania’s commercial banking sector over the period of 7
years from 2006 to 2012. The results indicate that the overall banks financial performance in terms of
profitability (measured in terms of ROA, ROE and NIM) and liquidity.
The indicators of profitability of ROA and ROE demonstrate, all bank groups recorded an increase in the rate of
profit in the first two years of the study and large banks are found to be the more profitable in comparison to the
medium and small banks, banks profitability deteriorated during 2008 to 2009 as the banks’ operating
environment deteriorated due to the global financial crisis and a slowing economy and another reasons could be
increasing bank operating costs and reduced incomes amid the global financial crisis. Furthermore in these
recessionary times, when corporate and private clients find it hard to service their debts, the level of the
provision for loan losses and bad debts increased. However from 2010 all banks groups recorded an increase in
the rate of profit. In the profitability indicator of NIM the performance indicates that, small banks have higher
average NIM compared to large banks and medium banks, however, this high average NIM for small banks is
caused by charging high interest rates on loans they offer to their client and the same times offering low interest
rate for deposits while other small banks are not offering any interest for deposits.
The analysis has also covered the liquidity levels of commercial banks has reached extreme levels for small and
medium banks, the liquidity levels of these banks have continuously declining from 2009 and 2010 respectively,
this due low level of savings and increasing of non-performing loans, however large banks experiencing an
upward increasing of liquidity level, this is due to greater level of mobilizing funds from savings, because these
banks are concentrated in urban areas and mostly carter to large clients. Furthermore, the study found that, there
is no a significant means difference of profitability among of banks groups in term of ROA, however, a
significance differences among banks group were existed in profitability in term of ROE and NIM. Apart from
the turmoil experienced in international financial markets and the domestic cyclical economic developments
during the crisis period, compared to other countries bank performances as expressed by financial ratios, the
Tanzanian banks' performance is average. This is consistent with the findings of Flamini et al. (2009).
According to the Flamini et al. (2009.) the average ROA in Sub-Saharan Africa,(SSA) was about 2%. Thus, the
average ROA of Tanzanian banks is about average of the SSA. Hence, Tanzania banking sector is stable; banks
are adequately capitalized and profitable and remained in a sound position.
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ACKNOWLEDGEMENT
I would like to connvey heartfelt thanks and appreciation to all those, who in one way or another, contributed to
the successful completion of this paper. Sincere appreciation is extended to the reviewers of this paper for their
constructive comments on my paper Special thanks should also be extended to Prof. G.N Patel of Birla Institute
of Management Technology, Prof. G. Mjema (Rector) of Institute of Finance Management Prof. G. Mjema and
Prof. T Satta (Deputy Rector) of Institute of Finance Management for their continued support and
encouragement. I would like also to put on record my sincere gratitude to those who have at different stages of
this work been very encouraging and supportive.
Notes
Figure 1a Profitability Trend (ROA %) 2006 - 2012
.
Source: researcher
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Source: Researcher
Figure 1c Profitability Trend (NIM %)
Source: researcher
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world without financial, legal, or technical barriers other than those inseparable from
gaining access to the internet itself. Printed version of the journals is also available
upon request of readers and authors.
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