Interbank rate increases to 11-month high

Dar es Salaam. The interbank rate increased to an 11-month high last Friday prompting concerns that the cost of borrowing could soon go up. The Bank of Tanzania (BoT) daily financial markets reports have shown that the rates at which commercial banks borrow from one another (overnight interbank rates) increased to the Weighted Average Rate (WAR) of 2.98 per cent on Friday last week, the highest since December 15, 2017 when the rate was three per cent. On Friday the highest rate was 3.5 per cent while the lowest was 2.3 per cent giving the WAR of 2.98 per cent.

Despite that last week had only four days of transactions, as Tuesday was a Muslim religious holiday, and despite a higher WAR the overnight volume traded totaled Sh123 billion compared with Sh105.85 billion and Sh86 billion in the weeks that ended November 16 and November 9, respectively.

Analysts and banking stakeholders say an increased WAR could be a result of inadequate liquidity in the commercial bank system that triggers demand and supply issues.

A finance manager at the People’s Bank of Zanzibar Limited, Mr Musa Juma, told The Citizen that there is increased demand of cash among banks, and so the demand has triggered a higher rate.

“Banks deposits have dwindled in many commercial banks causing liquidity issues,” he said explaining that to cover these costs they are forced to borrow from other banks.

College of Business Education (CBE) economics and finance lecturer Dickson Pastory said it seems banks do not have many borrowing options. “This will affect borrowers in the near future, because in order for banks to reduce cost of borrowing they will shift the burden to borrowers (depositors) by either reducing borrowing rate from deposits or increase lending rates,” he said.