The Impact of Financial Liberalization: Interest Rates and Lending Behaviour 1984 - 1997 Experience of Tanzania.

Abstract

The experience with financial liberalization is rather mixed. There are success stories and there are cases of failure. However financial sector liberalization school predicts improved performance if there is right sequencing of the reform programme. Increased savings following from increased positive interest rates, increased efficiency in the allocation of credit and financial integration in the economy are some of the expected outcomes. Tanzanian experience and that of other countries show that the expectations about financial sector liberalization are not attainable even where there is the right sequencing of the reform process. In particular capital rationing under financial sector liberalization is not explained by this school. This paper studies the Tanzanian experience in light of the experiences form other countries and finds out that the expected results on interest rates and lending behaviour are not as predicted. These contradictory outcomes are explained using the new institutional school. The timing and sequencing of the reform programme is also analyzed to check whether it might have influenced the results. African Journal of Finance and Management Vol.9(1) 2000: 31-42