Determinants of Excess Liquidity in Tanzanian Commercial Banks
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SSRN Electronic Journal
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Among the current concerns of policymakers, economists, and analysts in Tanzania is that banks are awash with liquidity despite the high private sector credit demand. On one hand, excess liquidity constrains banks' productivity/efficiency; while on the other hand, it strangles the share of credit allocated to the private sector therefore upsetting economic growth. To determine the causes of excess liquidity, autoregressive distributed lag model is employed in this study. The findings suggest that high cost of funds, credit risks, volatility of deposit holders' cash preference, and the rate of required reserves perpetuated accumulation of excess liquidity in commercial banks in Tanzania. The main empirical findings and conclusions have important policy implications on price stability, risks minimisation, proper supervision and optimal liquidity management by the commercial banks.
Keywords
Excess liquidity, Commercial Banks, Tanzania, Efficiency, Autoregressive distributed lag