Determinants of excess reserves in Tanzania’s commercial banks

The main objective of this study is to investigate on the determinants of excess reserves in Tanzania's commercial banks. Excess reserves or in other words excess liquidity refers to the amount of reserves held by commercial banks in excess of its reserve requirements and required clearing balance. The study is motivated by the fact that banks are flooded with excess reserves in the face of high demand for credits. Quarterly data (for 1996-2007) sourced from the Bank of Tanzania are used. The main approach used, is the test for cointegration where the Engle and Granger (1987) two-step procedure is applied where error correction model is applied for short run relationship. The study finds that the increase in the demand deposits and increase in the total deposits will influence the excess reserves positively. Also, when the government sector and private sector borrows from commercial banks will tend to run down the amount of excess reserves. The previous excess reserves tend to boost up the excess reserves to the commercial banks. Contrary to the deposits family the study finds that time deposits run down the amount of excess reserves from the commercial banks. In addition, the rise of the spread between the market interest rates and the discount rate lowers the amount of excess reserves. The main policy recommendation for this study is that, the monetary authority should deal with the reserve requirement as an instrument of controlling the excess reserves and also price stability should remain one among the major objectives of the monetary authority. This will enable it to control money in circulation as well as the other variables which may influence the amount of excess reserves to the commercial banks.