Dar es Salaam. The cost of overnight borrowing among banks fell significantly early this week as the circulation of cash improved in the market.
The interbank weighted average rate fell to 4.40 per cent on Tuesday from an average of 20 per cent early this month.
Liquidity improvement in the market has been contributed by the fact that commercial banks and corporate clients have finished to fulfill annual tax obligations.
Increased money circulation also means that the government expenditure normalised after the new financial year began.
“Now we are seeing more deposits from government agencies, meaning the government has started to release funds and pay its loans to various institutions: private and public,” said CRDB Bank trader Evarist Maganga.
He said by having liquid in the market appetite of borrowing among banks has decreased as every bank has enough cash in circulation.
The cost of borrowing among banks increased drastically starting June reaching to an average of 27.97 per cent, the highest since April 2012.
Stakeholders were worried that if the increase was sustained banks would have opted to pass it on to consumers, increasing interest rates.
Banks borrow money from and lend to each other through the interbank lending market when they seek to manage liquidity as well as satisfy other financial regulatory requirements including having the required reserve levels.
The interbank rates are one of the factors that determine interest rates on the credit market as commercial banks use them and those of the Treasury bills for benchmarking.