Banks enjoy low transaction costs as lending rates fall
What you need to know:
- Essentially, banks borrow and lend money in the interbank lending market in order to manage liquidity as well as to satisfy other financial regulations such as having the required reserve levels.
Dar es Salaam. A drop in last week’s interbank lending rates lowered the cost of transactions among financial entities compared to a week before.
Interbank lending rates dropped to 6.22 per cent compared to 6.54 per cent a week before, Bank of Tanzania (BoT) figures showed. Analysts said the drop could have been the reason behind increased liquidity in the banking sector.
“A decline in interbank rates may have increased liquidity in the economy. It is an indication that there is a high availability of money in circulation,” said a business analyst from Tanzania Security Limited, Ms Brenda Messay.
Essentially, banks borrow and lend money in the interbank lending market in order to manage liquidity as well as to satisfy other financial regulations such as having the required reserve levels.
“If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover for the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market and receive interest on the assets,” explained Ms Messay.
The interest rate charged, however, depends on the availability of money in the market. Other factors that determine the rate include prevailing market tariffs as well as specific terms of the contract (whether overnight or up to seven days).
The interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate also called the overnight rate if the term of the loan is overnight.
