The Determinants of Interest Rate Spreads in Developing Countries: Evidence on Tanzania, 1991-2009
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Date
2011
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Abstract
The now market based financial system in Tanzania is characterized by relatively
high interest rate spreads. This paper sought to establish relative importance of
macroeconomic and regulatory factors in explaining persistence of interest rate
spread in Tanzania during the period 1991:I - 2009:IV. A Cointegration and Error
Correction Model (ECM) was used to fit the data for Tanzania. The results revealed
the interest rate spreads in Tanzania were strongly influenced by net government
borrowing from commercial banks, development of the banking sector, statutory
minimum reserve requirement and the discount rate. Among others, the results
suggest the importance of low discount rate and reduced or total dispense with
reserve requirement as a monetary policy strategy to reduce interest rate spreads in
Tanzania. Importance of price stability in financial deepening is also underscored by
the results.
Description
Keywords
Interest Rate Spread, Bank Efficiency, Monetary Policy, Tanzania
Citation
Aikaeli, J., Mugizi, F.M. and Ndanshau, M.O., 2011. The Determinants of Interest Rate Spreads in Developing Countries: Evidence on Tanzania, 1991-2009. University of Dar es Salaam Department of Economics Working Paper, (02/11).