Determinants of interest rate spread in a deregulated financial system: a case of Tanzania Francisco Mugyabuso Paul Mugizi

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University of Dar es Salaam
The deregulated Tanzania’s financial system is still characterized by relatively high interest rate spread. This not only discourages savings and investment but also raises concerns about the efficiency of the bank lending channel. This study seeks to establish the market and macroeconomic factors that could better explain the persistence of wide interest rate spreads in the post-deregulation era. Quarterly time series data (1991-2009) sourced mainly from the BOT are used. OLS estimation technique is employed in estimating the model. The test for unit root is done by using DF, ADF and PP, while co integration test is performed using Johansen test procedure, and then, a general-to specific modeling approach is applied to develop a parsimonious model. The study establishes that both market and macroeconomic factors are attributed to higher interest rate spread. Nevertheless, the most significant factors that were found to be positively related to interest rate margin are net government borrowing from commercial banks, banking sector development, statutory minimum reserve requirement and discount rate. Policy measures which should improve efficiency in the financial sector are suggested; extend financial sector reform, and enhance the establishment and development of substitutes to banking products which would increase competition. Monetary policy using indirect instruments rather than reserve requirements should be a priority and the central bank should consider avoiding the use high discount rates as a means of controlling the money supply, the discount rate should be kept as moderate as possible.
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Mugizi, F. M.P.(2010) Determinants of interest rate spread in a deregulated financial system: a case of Tanzania. Master dissertation, University of Dar es Salaam. Available at