The Impact of Interest Rates on Financial Savings

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The Impact of Interest Rates on Financial Savings

By | May 2012
Page 1 of 9
TITLE: “The impact of interest rates on financial savings in Tanzania” (a case study of Dar es Salaam region)

CHAPTER ONE
1.1 Introduction and Background
Most economists agree that economic development and growth of a country economy largely depends on the rate of domestic capital accumulation. In developing countries like Tanzania the central importance of savings rates is quite recognized. Thus, economic development plans of most less developed countries (LDC’s) place special emphasis on domestic savings mobilization. The task of domestic savings mobilizations rests on financial intermediaries which include banks and non-banks financial institutions in a country. Financial intermediaries channel funds from surplus spending economic units to deficit spending units to facilitate capital formation and even trade. In order to provide for an environment that would increase the mobilization of saving for investment, a number of LDC’s have practiced financial Liberalization as a part of their structural adjustment programs (SAPs). The financial liberalization has included the deregulation of interest rates, with the aim of achieving positive real interest rates. Some have complemented the positive Interest rates strategy with institutional reform, which allows free entry of private financial institution in the mobilization and channeling of savings into productive investment. In 2003/2004 total deposits in commercial banks increased by 16.2% compared to an increase of 26.6% in 2002/2003. The decrease in the rate of growth was mainly accounted for by low interest rates offered by commercial banks, which discourage depositors. The proportion of foreign currency deposits to total deposits was 37.1%, demand deposits 29.6%, savings deposits 19.9% and time deposits 13.4% (The economic survey 2004). Further more interest rates are the basis for the transformation and distribution of risk and maturities in financial savings....

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