Tanzania's Central bank has taken yet another liquidity-easing measure, reducing banks' minimum reserves requirement to seven per cent, from eight per cent, effective July 1.
Tanzania does not usually set interest rates conventionally using a benchmark. Instead it uses the statutory minimum reserve (SMR) requirement to influence credit growth. The SMR is set as a percentage of deposit liabilities of banks collected from the public.
The Bank of Tanzania (BoT) said that the lowering of the SMR) aims at accelerating the growth of credit to the private sector and thus stimulate economic growth.
"Despite stabilising the banking sector, BoT realised that there is a need for further growth of credit to the private sector in order to support economic growth. This led to the current review of SMR consistent with the current monetary policy stance," the BoT said in an e-mail response to The EastAfrican.
"The SMR review is calculated for both domestic and foreign-currency deposit liabilities held by banks and their borrowings from the public held in domestic currency."
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According to the International Monetary Fund, banks and financial institutions are obliged to hold minimum reserves, for the purpose of protecting against significant withdrawals or other adverse actions.
Section 44(1) of the Bank of Tanzania Act (2016) requires banks and financial institutions to maintain minimum cash balances with the Bank as reserves against the deposit and other liabilities of the banks and financial institutions.
The latest central bank's Monthly Economic Review shows that total domestic credit for both private and public sectors grew by 6.9 per cent in the year ending March 2019, compared with 1.1 per cent in the year ending March 2018, mainly driven by the private sector.
"Credit extended by banks to the private sector grew by 9.6 per cent in the year ending March 2019, compared with 1.2 per cent in the corresponding period of 2018," said the BoT.
The credit growth was 10.6 per cent as of April this year.
"The Bank has been pursuing liquidity easing measures to support the growth of credit to private sector and other economic activities; the accommodative policy stance has contributed to significant improvement in the growth of credit to the private sector," said the BoT.