Trading in Non-Performing Loans

Trading in non-performing loans What is a non-performing loan (NPL)? It is a loan in which the borrower is in default because they have not made the scheduled payments for a specified period. How to protect against NPL? At least each bank in Tanzania struggles with NPLs which can be caused by various factors. The steps taken to protect against NPL are: (a) making sure the loan is insured so that when there is a breach, the bank can claim from the insurer after proving that all measures have been taken to recover the loan to no avail; (b) taking security on immovable property as security for the loan; (c) disbursements of the loan in tranches – to the extent possible whilst reviewing the use and progress for the previous tranch(es); (d) sound lending policies and strict implementation of such policies. Can NPLs be traded? Yes. NPLs can be traded just like any other property.

Banks can trade of the NPLs at a discount and free up capital to further lending to more promising borrowers. The discount is normally on interest or forgoing a portion of the principal amount. What does Tanzania law provide on trading of NPLs? There is no express prohibition on trading of NPLs and such contracts are treated like any other disposition/purchase contracts. That is, there will be tax consequences for such transfer of NPLs, a merger approval from the Fair Competition Commission may be required and approval from the Bank of Tanzania (BOT) may be necessary. Does Tanzania have specialized firms focused on purchasing NPLs? If such firms exist, they are not many or heavily marketing their presence. Most sell and purchases of NPLs are done privately between banks/financial institutions. Is there a market for such specialized firms? Of course.

There is plenty of business to be done on NPLs in Tanzania and I believe international companies with specialization in dealing with NPLs will be a warm welcome to the Tanzania banks, particularly for banks and financial institutions. What registration(s) does such specialized firms need to have? Incorporation of a business entity in Tanzania will be a necessity. The next step will be to have a tax identification certificate, value added tax certificate and a general business licence. Whilst these firms are not going to be ‘lending’ to the public and are not a ‘microfinance’, there is likelihood that a licence from the BOT under the new microfinance regulations will be required. How does Go2Experts assist in such transactions? We are very knowledgeable and helpful in all steps involved in disposition and acquisition of NPLs.

We assist with legal due diligence and drafting of the relevant legal documents. Also, we get the necessary approvals for such disposition/acquisition. Separately, we provide debt recovery services at very affordable rates. Disclaimer The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory or interference of any legislation, laws or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without our express written consent. It should not be considered as a legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper.