The Parliament of Tanzania has recently passed the Written Laws (Miscellaneous Amendments) No. 1 of 2018 an Act that amends certain written laws. The Act amends Section 45 and 120 of the Land Act, 1999 (“Land Act”) and introduces new sections 120A, 120B, 120C, 120D and 120E.
The amendments introduce new restrictions on borrowing by land owners from financial institutions both locally and internally. The introduced restrictions cover the usage of funds borrowed by land owners. Prior to these amendments land owners were allowed to use the proceeds of the loan obtained from financial institutions by mortgaging their land these amendments introduce some restrictions in that respect.
First, they provide rights for land owners to mortgage their lands for purposes of obtaining loans from bank or financial institutions both locally and internationally, second the restriction on the usage of the obtained loans; the amendments provides that land owners can only use their loans out of mortgaged land for (i) if the land is already developed for further developments or any other investment purposes, (ii) where the land is underdeveloped or undeveloped be used to develop part or whole of such mortgaged land. The terms undeveloped and underdeveloped is defined in the law to mean “in respect of land, means land which is not developed in accordance with the conditions of relevant rights of occupancy and underdeveloped means land without improvements in, on, under or over such land or without any change of substantial nature in the use of such land”. This provision means that borrowing using the land as a security should be for the purposes of developing the mortgaged land only and not otherwise. One might say that this restriction is another way of protecting banks and financial institutions and to ensure that the borrowed money is not invested to other businesses which might create difficulties on recoveries by banks by finding themselves with securities which are not liquid enough to absorb the liabilities of the mortgagors.
On the other hand, the provisions might be the government’s move to ensure that people are not using their properties just as a conduit of getting quick money without developing the mortgaged property. In addition, this provision intends to give a chance to mortgagees to increase the value of their mortgaged property with the requirement that after having obtained the money from the issuing bank, the mortgagor is required by law to inform the Commissioner for Land on how the money has been invested to develop the mortgaged land.
The law under the new Section 120B restricts the geographical location of where the money obtained from a mortgage can be utelised in the sense that it should be invested in Tanzania only not other places by requiring mortgagees to submit to the Commissioner of Lands a declaration that the money obtained is in fact invested in Tanzania. All these restrictions can be interpreted as one of the Fifth government’s initiatives and efforts to build a strong national economy by restricting investment of funds obtained from mortgaging land within Tanzanian territory to be used in developing Tanzania’s economy only.
The rationale of putting the scope of application of sections 120A (2), (3) and 120B (1) is first to ensure that the money borrowed is, if not in its entirety then partly used to develop the mortgaged land but also to give a wider room to local Tanzanians (who most of already possess land) to utilize the loaned money in other economic undertakings. The holders of the right of occupancy and investors have to adhere to the amendment as failure to comply with amounts to breach of conditions of the Right of Occupancy which ultimately can lead to the revocation of the right of occupancy. The amendments further provide that the whole procedures and applicability of the conditions related to mortgage of land under section 120A and 120B will be regulated by Regulations to be issued later.
The amendments introduced aim at reducing the financial risk for banks on defaulted loans by ensuring that loans taken are actually injected in the projects intended for. Although the law has good intentions for the banks it still does not help to tackle the issue of defaulting loans because this is determined by various factors including economic, market and proper implementation strategies among other things.