The experts’ predictions are based on the growing banking industry that has led to the increasing competitions among financial institution in pricing lending against each other. There are about 50 banks in the country.Barclays Bank Tanzania Managing Director Kihara Maina says although the country does not have London Interbank Offered Rates (LIBOR) like benchmark it is heading toward having one.
"I am sure (Libor-like benchmark) will come. It’s not there yet but eventually you will have some formal benchmark rates driven by banks," Mr Maina told the Business Standard in Dar es Salaam recently.He said revolutionary things starts by having interbank which at the end of the day require a lot of controls from the government, market and the central bank.
"It calls for great transparency," Mr Maina said.This transparency at some point would lead to lending information sharing regarding kind of rates banks are using to lend each other and to customers.“…And on that basis you will be able to strengthen and deepen the market because of greater transparency," Mr Maina said.
The LIBOR started in 1986 after it become apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options and forward rate agreements. This came after UK bankers were worried of bleak future unless some sort of uniformity was introduced in the market. The British Bankers' Association (BBA)—working with other parties, such as the Bank of England—established LIBOR.
The benchmark, LIBOR is calculated using 10 difference currencies and 15 borrowing periods ranging from overnight to one year and is published daily by Thomson Reuters. It is the primary benchmark, along with the Euribor, for short term interest rates around the world.
According to the Bank of Tanzania (BoT) total volume of transactions in the Interbank Cash Market this July has increased considerably to 1.07tr/- compared with 733.6bn/- transacted in June, and 642.0bn/- traded in the corresponding period in 2011. “Overnight transactions accounted for about 86 per cent of total placements,” BoT says in Augusts’ Monthly Economic Review.
The overall weighted average interbank cash market rate declined to 12.24 per cent in July from 14.74 per cent recorded in the preceding month. The rate was 5.68 per cent in July 2011.However, in the absence of Dar Interbank Offered Rate (DIBOR) that takes a number of variables to compute it, commercial banks have in place interbank placing rate which is not used to benchmark loans they lend each other.
“You can see how all of this converges to each other but you cannot just jump from zero to ten…you have to go through a painstaking process to build up your market and I know it’s something the central bank is focusing on,” Mr Maina said.The DIBOR is of paramount importance as it regulates lending interest rate while at the same time bridging the gap between loan and deposit yield rates.
The lending interest rates remained high in July ranging between 14.38 and 16.32 per cent, with money market analysts attributing the trend to high demand. "In line with these developments, the spread between 12-month deposit rate and one-year lending rate narrowed to 3.45 per cent in July 2012, compared to 6.81 per cent in July 2011," BoT said in the report.
Chief Executive Officer of Tanzania Securities Moremi Marwa said lending interest rates remained high due to the fact that in the second quarter, banks reduced the loaning amount in comparison to the first quarter."Remember, since late last month the market experienced liquidity squeeze which substantially reduced money in circulation to affect leading amount," Marwa said.
He said the measure taken by BoT reduces banks' deposits to affect the ability to lend, hence increasing demand for loans to push borrowing prices across the board.To attract deposits some banks embarked on promotion campaigns while others increased deposit rates to push up interest rates in the last 12 months to 10.92 per cent from 8.03 per cent of July, 2011.
Among the banks that went into promos were the National Microfinance Bank, the leading bank in terms of profitability, as well as Eco Bank and National Bank of Commerce (NBC).