Fear of increased cost of borrowing grips market

What you need to know:

The rate at which banks borrow from each other has increased, prompting the pressure that the access of credits will be more expensive, meaning the interests rates may go higher.

Dar es Salaam. Borrowers might expect increased costs of borrowing, following the dramatic increase of interbank money market rate to more than five per cent from less than three per cent last year.

Interbank rate are interest rates charged on short-term loans made between banks.

The rates increased to higher than 5 per cent in the past two weeks, sending shivers down the spines of potential borrowers that lending rates could soar.

Investors generally expect higher returns from riskier investments. When they make a low risk investment, the return is also generally low. Investors, particularly novices, are often advised to adopt a particular investment strategy and diversify their portfolio.

The Bank of Tanzania’s daily financial market reports show that from February 6 this year, the rates of interbank transactions have been ranging from 5 to 8 per cent.

Analysts say the increase in the rate of borrowing between banks instils fear that credit to private and public sectors will be more expensive. The pressure grows because commonly commercial banks use interbank rates as one of the factors to determine interest rates on the credit market.

“When the rate increases it poses the risk of credit to the general public and/ or private sector to become more expensive meaning the cost of borrowing increases as these banks will pass the additional cost to customers,” said economics professor Amon Mbelle, of the University of Dar es Salaam.

The rise in the interbank rates also signals liquidity pressure in the market, because banks borrow money from and lend to each other through the interbank lending market when they seek to manage liquidity as well as to satisfy other financial regulatory requirements including having the required reserve levels.

The overnight volume traded in the last two weeks also hit record high on February 8, when Sh76.5 billion was tabled.

The highest rate was 8 per cent and the lowest being 4.2 per cent giving a weighted average rate of 4.72 per cent.

Prof Mbelle said the situation might affect negatively the economic activities in Tanzania.

He said: “This may lead to a slowdown in economic activities as would-be investors may not be able to ultimately pass the burden to consumers of their goods and services.”