oa Business Management Review - Interest rate liberalization and the saving investment process: an econometric validation of the Mckinnon-Shaw hypotheses in Tanzania

Volume 8, Issue 2
  • ISSN : 0856-2253



Tanzania adopted a program of financial liberalization after a prolonged period of financial repression. After liberalization the rate of interest on bank deposits have remained low while lending rates have increased resulting into a wide spread. This short paper argues by means of an econometric model that such financial policy that keeps deposit rates low and lending rates high is likely to drain surplus out of the informal sector to finance corporate expansion at the expense of micro-, small-, and medium -scale enterprises. Policies that stimulate bank resources (for example by raising deposit rates) should be accompanied by those that allow adequate level of self-financing and re-investment of small-scale profits in the spirit of McKinnon and Shaw. This will bring desirable effects in terms of permitting a more rational distribution of resources among sectors.

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