Efficiency and the problem of excess liquidity in commercial Banks in Tanzania

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University of Dar es Salaam
The main objective of this study is to investigate efficiency, and to establish determinants of excess liquidity in commercial banks in Tanzania. The study is motivated by the fact that little is known about efficiency status; and on excess liquidity, the policy concern is that banks are awash with liquidity despite the high demand for credits. Monthly data (for 1998-2004) sourced from the bank of Tanzania are used. Data Envelopment analysis is utilized in estimation of technical and scale efficiency. X-inefficiency is estimated using mult –product translog cost function, while Tobit model analyses the factors driving it. The causes of excess liquidity are examined by autoregressive distributed lag model. From the main conclusions, banks performed fairly well during the period; nevertheless, they have a scope for improving their performance. Technically, they could produce the same amount of outputs with 3-4 percent fewer resources than they employed. Technical inefficiency arose from ineffective use of labour, fixed assets and equipment rather than underutilization of deposits. The overall estimated technological innovation of 6 percent was directly proportional to improvement in banks’ factor productivity. Operational or x-inefficiency was less than 10 percent but steadily on increase. Inadequate spending on capital goods, poor labour compensation, and excess liquidity precipitated x-inefficiency. Excess liquidity in banks was influenced by cost of funds, credit risk, cash preference volatility, and the rate of required reserves. Policies encouraging competition, products diversification, risks minimization and proper supervision are recommended.
Available in print form, East Africana Collection, Dr.Wilbert Chagula Library, (THS EAF HG1656.T34A37)
Liquidity (Economics), Efficiency, Banks and banking, Tanzania
Aikael, J (2006). Efficiency and the problem of excess liquidity in commercial Banks in Tanzania, Doctorial dissertation, University of Dar es Salaam, Dar es Salaam.