Tanzanian Loans and Advances Realization Trust (LART)

In 1991, after a long period of politicized lending to state-owned businesses known as parastatals, Tanzania set out to reform its financial system by legalizing private financial institutions and cleaning up state-owned banks. As part of this effort, Tanzania established the Loans and Advances Realization Trust (LART) to acquire nonperforming assets from state-owned banks in exchange for government bonds. Following these transfers, the Tanzanian government then recapitalized the transferring institutions. LART’s mandate was to recover outstanding amounts on nonperforming assets and to help debtors restructure to facilitate repayment. To enhance LART’s ability to make recoveries, Tanzanian authorities established a special LART Loan Recovery Tribunal with simplified procedures and exclusive jurisdiction over transferred assets. Tanzanian authorities initially established LART with a five-year timeframe, subject to a one-year extension. In 1996, Tanzania amended the legislation establishing LART to include private financial institutions and extend its operations to June 30, 2000, with the possibility of two one-year extensions. During its lifetime, LART acquired approximately TSh 85 billion ($96 million) in nonperforming assets—TSh 27 billion initially after its establishment and a further TSh 58 billion in 1996. By the time LART concluded its operations in January 2001, it had recovered approximately TSh 33 billion.

In 1967, the recently formed nation of Tanzania nationalized its banking system pursuant to a declaration issued by its socialist government (Nord et al. 2009).  Government ownership of both financial institutions and state-controlled businesses known as parastatals resulted in bank lending based on political considerations rather than creditworthiness (Chijoriga 2000; Nord et al. 2009). With a shift toward liberalization beginning in the mid-1980s, parastatals faced increased competition and the loss of government subsidies. This change resulted in mounting losses at the state-owned banks that the government had directed to lend to the parastatals (Nord et al. 2009). According to a report on Tanzania’s banking system released in 1990, nonperforming loans comprised up to 45% of the total loan portfolio at the primary state-owned commercial bank, the National Bank of Commerce (Chijoriga 2000). A 1991 estimate put that figure as high as 70% (Johnson et al. 1999).

Against this backdrop, Tanzania in 1991 set out to reform its financial system by legalizing private financial institutions and cleaning up state-owned banks (Nord et al. 2009). To accomplish this goal, Tanzanian authorities sought and received technical and financial assistance from the World Bank, the African Development Fund, and other international donors (ADF 2000). In pursuit of its goal of cleaning up state-owned banks, Tanzania established the Loans and Advances Realization Trust (LART) in 1991 as an autonomous government-owned institution (Johnson et al. 1999; LART Act 1991). Under its authorizing legislation, LART directed financial institutions to transfer their nonperforming assets to LART at a price it determined (LART Act 1991). Institutions received government bonds in exchange for the transferred assets. Following these transfers, the Tanzanian government then recapitalized the transferring institutions (ADF 2000).

LART’s mandate was to recover outstanding amounts on nonperforming assets and to help debtors restructure to facilitate repayment (LART Act 1991). To enhance LART’s ability to make recoveries, Tanzanian authorities established a special LART Loan Recovery Tribunal with simplified procedures and exclusive jurisdiction over transferred assets (LART Act 1991; Nord et al. 2009).

The legislation establishing LART created a board of trustees that was responsible for governing it. The president of Tanzania appointed the chairman of this board, who was joined by four to six other members appointed by the minister of finance. An “administrator” appointed by the minister of finance had authority over the day-to-day operations of LART, subject to oversight from the board (LART Act 1991).

Tanzanian authorities initially established LART with a five-year timeframe, subject to a one-year extension. In 1996, Tanzania amended the legislation establishing LART to include private financial institutions and extend its operations to June 30, 2000, with the possibility of two one-year extensions (LART Act 1996).

During its lifetime, LART acquired approximately TSh 85 billion ($96 million)^FNExchange rate of approximately 888 TSh to $1 provided by World Bank 2001. in nonperforming assets—TSh 27 billion initially after its establishment and a further TSh 58 billion in 1996 (Johnson et al. 1999). The National Bank of Commerce accounted for around 70% of these assets, with the remaining assets coming from other state-owned financial institutions including the Tanzania Investment Bank, the Tanzania Housing Bank, and the Cooperative and Rural Development Bank (Chijoriga 2000). By the time LART concluded its operations in January 2001, it had recovered approximately TSh 33 billion (Johnson et al. 1999; World Bank 2001).

While there has been little evaluation of LART, a report by the World Bank (2001) concluded that “LART’s strong management, professional staff, operational autonomy, and the ability to move collection cases rapidly through a dedicated court, which was funded by the Government, enabled LART to effectively and satisfactorily carry out its mandate.” Tripp (1997) argues that bureaucratic infighting between LART and the Parastatal Sector Reform Commission, a separate government body established by Tanzanian authorities to promote the divestiture of state-owned businesses, hampered privatization efforts.