Finance, Forex and Investments

Why does Th Bank of Tanzania want deposits from the commercial banks. Is there a shortage of cash in the BOT?

Globalization has failed. Sir When I read the books on “The Death of Economics: Books: by Paul Ormerod ... all the ego driven, engineering models, that bore people to death of economics. ... Death of Economics , Shopped: The Shocking Power of British Supermarkets: by Joanna Blythman ... 'Shopped' takes the reader on a lively, thought ... Shopped, the super pier of the supermarkets , The World is Flat Thomas L. Friedman Chances are good that Bhavya in Bangalore will read your next x-ray, or as Thomas Friedman learned first hand, "Grandma Betty in The imaginative and, above all, practical vision for a successful and equitable world, Nobel Prize winner Joseph E. Stiglitz’s Making Globalization Work , I see all the controversies diluted . Let me elaborate. The authors have written these books having the rich countries in mind. They do understand that the poor countries do not count as the super power makes the coins roll. Hence they have always harped on the poor countries as the third grade states and never giving any remedies to these countries. The result is now in Tanzania where this letter comes from, The central, Bank Of Tanzania, wants to Commercial banks to deposits of one trillion into the BoT In other term the central bank has no liquidity and begs the commercial bank. This is reported in the local papers CITIZEN ISSN 0856-9754 no 908 A local paper managed by the Nation Media of Kenya. I thank you Firozali A.Mulla MBA PhD P.O.Box 6044 Dar-Es-salaam Tanzania East Africa

Public Comments

1. Commercial banks are required to put a fraction of the deposits they collect with the country's central bank (Bank of Tanzania). This is to ensure that the commercial banks do not lend all the moneys they collect as deposits and they are unable to meet the needs of withdral by deposits in times of their needs because the loans are yet to be repaid by the commercial banks. So, it has nothing to do with Bank of Tanzania running out of cash. There are other reasons.The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank. The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates [2]. However, Central banks rarely alter the reserve requirements due to the fact that it would cause immediate liquidity problems for banks with low excess reserves. Instead, open market operations are used. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits.An institution that holds reserves in excess of the required amount is said to hold excess reserves.Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 cash deposit can lend up to $90 of that deposit, keeping only a $10 cash deposit within the bank. If the borrower then writes a check to someone who deposited the $90, the bank receiving that deposit can lend out $81. As this fractional-reserve banking process continues, the banks can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced creation of transaction deposits.Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits such as CDs, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States This has nothing to do with globalisation which ios not only desirable but inevitable. But if the country's political leaders and economy managers are not competent and/ or corrupt, they may force the commercial banks to deposit monies to the central bank so that the Govt. can spend the money. This is like taking loans from the commercial banks by the Govt.