High demand keeps interest rates high

High demand keeps interest rates high

The Bank of Tanzania (BoT) Monthly Economic Review of August shows that average overall lending rate in the said month increased to 15.65 per cent compared to 15.33 per cent in June.

However, on year-to-year "overall lending rate slightly declined to 15.65 per cent from 15.71 per cent recorded in July 2011."

Money market analysts have it that the interest rates remained high due to the fact that in the second quarter, banks reduced the lending amount in comparison to the first quarter.

"Remember, since late last month the market experienced liquidity squeeze which substantially reduced money in circulation to affect leading amount," Mr Moremi Marwa, Chief Executive Officer of Tanzania Securities said.

He said the measure taken by BoT reduces banks' deposits to affect the ability to lend, hence increasing demand for loans to push borrowing prices across the board. To attract deposits some banks embarked on promotions campaign while others increased deposits rate to push up interest rates in the last 12 months to 10.92 per cent from 8.03 per cent registered of July, 2011.

"In line with these developments, the spread between 12- months deposit rate and one-year lending rate narrowed to 3.45 per cent in July 2012, compared to 6.81 per cent in July 2011," BoT said in the report. Banks, according to experts, are using treasury bills as their yard stick to peg lending and deposits interest rates instead of inter-banking placing rates. T-bills overall weighted average yield declined in July to 13.39 per cent from 13.81 per cent of June.

Barclays Bank Tanzania Managing Director Kihara Maina said though the country does not have London Interbank Offered Rates (LIBOR) like benchmark it is heading toward that direction. "I am sure (Libor-like benchmark) will come. Its not there yet but eventually you will have some formal benchmark rates driven by banks," Mr Maina told the 'Daily News' recently.

The MD said revolutionary things starts by having interbank which at the end of the day require a lot of controls from the government, market, central bank and the like. "It calls for great transparency," Mr Maina said, "at some point you will expect banks (in Tanzania) starts sharing information about what kind of rate they are using in lending to each other and on that basis you will be able to strengthen and deepening the market because of greater transparency."

However, in absence of Dar Interbank Offered Rate (DIBOR) that takes a number of variables to compute it, commercial banks have in place interbank placing rate which are not used to benchmark loans and deposits interest rates.

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