New Liquidity Boost in Tanzania Banking Sector

…As BoT Lowers Statutory Minimum Reserve Rate From 10% down to 8%. 


By TZ Business News Staff.


Three weeks after a 25% reduction of  the Discount Rate to ease commercial banks access to finance to spur lending, the Bank of  Tanzania has now lowered the Statutory Minimum Reserve rate to increase liquidity in the banking sector, also to spur lending.

A Bank of Tanzania statement made available to TZ Business news says BoT has revised the Statutory Minimum Reserves (SMR) requirement for deposit taking banks in Tanzania from the current rate of 10 per cent down to 8 per cent, explaining that the decision, effective from April 20, 2017, aims at enhancing the lending base of banks.

This is the second steps the central bank  has taken within March, 2017  to boost liquidity in commercial banks. On Monday, March 6, 2017, BoT issued a circular to commercial banks informing them it had reduced the discount rate from 16% down to 12% to help spur lending and boost economic growth.  The circular marked the first time BoT had lowered borrowing costs since 2013.

The central bank also said the revised discount rate took into account the prevailing 91 and 182-day weighted average yields and the monetary policy stance geared towards sustaining price stability, adding that the drop would also be used to discount Treasury securities.

Bank of Tanzania Governor, Prof. Benno Ndulu

The Bank of Tanzania Governor, Prof. Benno Ndulu, has announced in a March 21, 2017 letter to all banks, the amendment of clause 2.1 of the Bank’s Circular No. 1 issued on December 2, 2016 concerning revision of the Statutory Minimum Reserve level.

“This is to inform all deposit taking banks in Tanzania – Mainland and Zanzibar that… the Bank has reviewed the Statutory Minimum Reserves (SMR) requirement on the domestic and foreign currency deposit liabilities of the non-central government and lowered it from the prevailing rate of 10 percent to 8 percent,” Prof. Ndulu said.

The decision has been made in accordance with provisions of Section 44 of the Bank of Tanzania Act, 2006. The section partly states that: “the Bank may require banks and financial institutions to maintain minimum cash balances with the Bank as reserves against the deposit and other liabilities of the banks and financial institutions and may, in that respect, prescribe the currency or the currencies in which such balances shall be held”.

SMR requirement are legal balances which banks are required to keep with the Bank of Tanzania, determined as a percentage of their total deposit liabilities and funds borrowed from the general public.

SMR requirement serves as a safeguard against a sudden and inordinate demand for withdrawals (as in a run on a bank), and as a control mechanism for injecting cash (liquidity) into, or withdrawing it from, an economy.

Early March 2017, the Bank of Tanzania reduced the discount rate from 16 to 12 percent, a move which was hailed by players in the banking industry as important intervention to promote credit growth to the private sector.

All these measures aim at providing liquidity to banks which will in turn expand their lending base and contribute to the growth of credit to the private sector. It is expected that banks will use the additional liquidity to extend more credit to the private sector at reasonable interest rates that will support various activities in the economy and hence contribute to growth.  Also Read our earlier report here.