The Determinants of Interest Rate Spread in Developing Countries: Evidence on Tanzania 1991-2009
The now market based financial system in Tanzania is characterized by relatively high interest rate preads. This paper sought to establish the relative importance of macroeconomic and regulatory factors in explaining persistence of interest rate spread in Tanzania during the period 1991:I-2009:IV. A comtegration and Error Correction Model (ECM) was used to fit the data for Tanzania. The results revealed the interest rate spreads in Tanzania were strongly influenced by net government borrowing from commercial banks, development of the banking sector, statutory minimum reserve requirement and the discount rate. The results, among others, suggest the importance oflow discount rate and reduced or total dispense with reserve requirement as a monetary policy strategy to reduce interest rate spreads in Tanzania. Importance of price stability in financial deepening is also underscored by the results .
IEL Classification: E44, E58, 016
Keywords: interest rate spread, bank efficiency, monetary policy, Tanzania