A macroeconomic analysis on the factors influencing changes in bank deposits in money markets: a case of commercial banks demand deposits in Tanzania

The role of commercial banks is greatly decisive in the development of a country's economy. In Tanzania the financial system is still highly constituted of the banking system i.e. that is banks are the major actors in the system. Banks composing a lion's share of financial markets carry out the complex task of allocating resources (funds) to the economic system. Financial markets are the heart of the financial system, determining the volume of credit available, attracting savings and setting interest rates and security prices. Financial markets are supplied with funds mainly from savers (depositors) who receive only promise in return for the loan of their money. These promises are packaged in the form of attractive financial claims and financial services, stocks, bonds, current accounts, savings deposits, insurance policies, retirement plans etc. Among the financial claims, current accounts (demand deposits) are a distinguishing product in commercial banks. Traditionally this banking product facilitated the making of loans especially those of short term nature; with the drastic changes in the banking environment there is likelihood that commercial banks will face a shortage of loan able funds. The question to be raised at this juncture is: Is it possible for commercial banks to lend profitably without substantial amounts of demand deposits holdings? The study carried out indicates that demand deposits have been in a declining trend while other interest-bearing deposits have been increasing. This phenomenon called for a study that will validate the factors influencing demand deposits in commercial banks. This is to be conceivably explained in a functional relationship that changes in demand deposits can be explained by some selected explanatory variables. Model specification in the form of a demand function was developed. To measure the relationship, a statistical technique, multiple regression analysis was used and a formulation under SPSS computer programme estimated the research results. Principally the statistical tests revealed that there is a strong explanatory power of the independent variables; Gross Domestic Product, interest rate and number of banks are said to be linearly related to changes in demand deposits as their respective elasticities are positive. Statistically the relationship is significant at 10.1 and 5 per cents respectively. However the relationship of demand deposits to bank credit availability (short term) and number of banking products cannot be statistically explained.