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Foreign banks control Dar’s T-bill market

Discussion in 'Jukwaa la Siasa' started by BAK, Apr 6, 2008.

  1. BAK

    BAK JF-Expert Member

    Apr 6, 2008
    Joined: Feb 11, 2007
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    Foreign banks control Dar’s T-bill market


    The large foreign-controlled banks operating in Tanzania have literally cornered the Treasury-bill business and are, through cartel-like bidding, dictating the movement of interest rates in the country.

    This is the conclusion of a recent study by staffers of the International Monetary Fund who looked at recent trends in the market for T-bills and T-bonds in Tanzania.

    The finding by the researchers is a classic case of how multinational banks mint millions from trading in government paper in developing countries.

    The T-bill rate is the benchmark interest rate upon which other commercial banks peg lending rates to consumers. High T-bill rates also cause the government to pay too much to service the external debt.

    Indeed, the phenomenon of consistently high rates on T-bills in Tanzania has been puzzling many economists.

    Despite the fact that Tanzania’s domestic debt has remained reasonably low, T-bill rates in the country have consistently remained high though volatile in recent years.

    The rates had risen from a low of 3 per cent in late 2002 to an average of 15 per cent by the end of 2005, becoming extremely volatile thereafter, with successive peaks and troughs.

    The large foreign-owned commercial banks have made a killing by engaging in oligopolistic bidding and influencing prices upwards.

    The phenomenon has confounded many analysts because T-bill rates are usually influenced by factors such as the riskiness of public-sector debt, exchange-rate depreciation and inflationary expectations.

    In the past three years, the Tanzanian government has been aggressively issuing T-bills both to raise money to fund the budget and to sterilise the impact of foreign-exchange flows on the money market.

    The study by the IMF staffers says that while this may be a contributory factor to the puzzling pattern of volatility of interest rates in the country, the evidence they had suggested that “market power and strategic bidding” by the large foreign-owned banks were at play.

    Tanzania is clearly paying the price for deregulating and privatising its banking sector too hurriedly.

    Another significant finding in the study is that local players in the T-bill market, mainly pension funds, do not have the same sophistication as the multinationals in Treasury operations and are therefore unable to effectively compete with the latter, who not only control half of the banking system’s assets, but have a major influence in the foreign-exchange market where they have the ability to borrow funds abroad and deploy them in the T-bill market.

    The study found that, last year, several multinationals channelled hard currency into the T-bill market to circumvent restrictions on direct ownership of government securities. Banking sector deregulation and privatisation has been going on in Tanzania since the early 1990s and gained momentum between 2000 and 2005.

    Subsequently, many big foreign banks entered the fray. However, the entry into Tanzania of more foreign players came with completely new challenges both in terms of supervision and the conduct of auction-based sale of government paper, mainly T-bills and T-bonds.

    These challenges became particularly daunting when, in the second half of 2005, a substantial share of banking systems assets passed into the hands of highly sophisticated foreign bank managers.

    Titled High and Volatile Treasury Yield In Tanzania: The Role of Strategic Bidding and Microstructure, the study was conducted by Ali Abbas and Yuri Sobolev of the IMF’s monetary affairs department.
  2. Mtanganyika

    Mtanganyika JF-Expert Member

    Apr 11, 2008
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    T-bills is one of the liquidated asset provided in government. The main reason to establish this kind of investment is to control money supply into the system, also to provide cash flow to those institutions which requires cash on daily basis, institutions like insurance and Banks.

    However, i worry Tanzania government use this kind of vehicle as copy cat, and not as important asset which can benefit majority of people. Remember, government is number leading in consumption. So, they always need money while some citizen have extra cash set somewhere in the banks with little return, so they can always channel those extra cash to the government and at the same time government can use it.

    T-bill rate is the base line of all interest rates in the country, so if you have 15% on T-bills then i wounder banks provides loan with 31%. T-bills suppose to be risk free investments because government can always print more money and back up its promise.

    Many model use T-bills rate, things like CAPM