Table of Contents CHAPTER 2 : LITERATURE REVIEW........................................................................................3 Theme 1 : Current condition of interest rate in commercial banks in Tajikistan........................3 Theme 2 - Theory behind fluctuation of Interest Rates in Tajikistan..........................................7 Theme 3. To analyse the impact of interest rate liberalisation in the financial system of Tajikistan....................................................................................................................................17 Theme 4: Relative factors behind the cause of fluctuation of interest rate.............................25 Theme : 5Comparing the interest rate liberalization of Tajikistan with the neighbourhood countries.....................................................................................................................................28 Theme : 6 : Benefits and challenges of accession to WTO in the banking sector of Tajikistan33 3.1 Selection of research methods.............................................................................................41 3.2 Research Philosophy............................................................................................................42 3.3 Justification for the research paradigm and methodology..................................................43 3.4 Research approach...............................................................................................................45 3.5 Pilot Study............................................................................................................................46 3.6 Research design, Strategy and Procedures..........................................................................46 3.6.1 Quantitative Questionnaire..............................................................................................47 3.6.2 Qualitative Structure........................................................................................................48 3.6.3 Secondary Data................................................................................................................48 3.7 Data Collection....................................................................................................................49 3.7.1 Primary Data Collection...................................................................................................49 3.8 Ethical Considerations.........................................................................................................49 ..................................................................................................................................................49 3.9 Limitations and Delimitation of Study...............................................................................49 3.11 Summary...........................................................................................................................50 REFERENCES..............................................................................................................................52
CHAPTER 2 : LITERATURE REVIEW Theme 1 : Current condition of interest rate in commercial banks in Tajikistan According to Mogilevskii and Asadov (2018), banking system in Tajikistan is segregates into two parts namely, National Bank of Tajikistan and second one is commercial banks.The National Bank of country is the body which is responsible for performing all the regulatory functions in the nation while the second tier of banking system which is commercial banks are required to adhered to the rules and regulations ofmade by National Bank and to grant loans and accept deposit to/from the public which is their prime function. In the view of Mehrotraand Yetman (2015), the system of banking of Tajikistan is relatively weak and under-developed. The banking sector of the nation experienced a setback in the year 2014 when economic crisis hit Russia due to which it faced many systemic challenges. The country consists of about 16 commercial banks and about 80 micro-finance companies operating and have just one western bank named as “Access Bank” which is a German bank. The author says that due to lack of big and renowned banks across the world, the growth of banking system of the country is relatively lower as compared to other Central Asian countries. Essl and et.al., (2019) provides that interest rates are of two types such as borrowing interest rate and lending interest rate. The rate at which commercial banks lends money to the public or organisations is termed as lending interest rate while the rate which commercial banks accepts deposits of public is known as borrowing interest rate for banks. Maxfield, Wang and de Sousa (2018) stipulates that interest is considered as cost for one person while income for the other person. It is basically taken as an opportunity cost wherein the borrower pay for grabbing the opportunity now instead of foregoing the same which might costs it higher. Commercial banks borrows which in other words, accepts deposit from public for which they pay some interest to them, for the purpose of increasing the scope of their activities related to the investments and earn higher profits for themselves. Singh and Singh (2016) provides that bank's lending rate in the year May, 2019 was 25.351% which was observed to be less than the previous month's rate i.e., 25.389%. The author states that changes in the interest rates can affect the market in both favourable and unfavourable ways. When the National bank which is the central bank of Tajikistan changes the interest rate at
which commercial banks borrow money, it has a ripple effect on the country's economy. Interest is basically taken as a reward for mitigating the risk which is associated with the non payment of the money borrowed by people. When the interest rates at which banks lend the money is lower, people are encouraged to take more loans and spend on big purchases like homes, cars etc. This is because people have to pay less interest on the amount they have borrowed which increases their capacity of spending higher money. This have a positive impact in the economy as its creates a ripple effect on country's economy. Liquidity tends to increase and money is transferred from household sector to investment sector at a good pace. The ultimate effect of such lower interest rate is reflected on the higher output of the nation which in turn accelerates the economic growth of Tajikistan. Kasenov (2017) in its studies stipulates that farmers and businesses are the major beneficiaries of such lower interest rates instead of other section of society as stated above. This is because lower interest rates allows the farmers and businesses in acquiring capital assets which involves huge costs for which financing is required. The ultimate effect of such low interest rate results into higher productivity through which the total output of the economy increases. Also, it is seen that Tajikistan's rate of interest at which commercial banks lends money to people has decreased over the month has a positive impact on the business and agriculture sector which are the two highlycontributing sectors of the Tajikistan's economy. Igonina and et.al., (2016) in its research study stated that the country has witnesses as high interest rate as possible in May 2017 when the lending interest rate was 32.530 % which in a way significantly affected the entire economy. The disposable income of the people in such condition decreases and they are discouraged from getting loans or spending more.The author also stated that the country has seen lending interest rate as low as possible in May 2002 when the rate of interest was just 13.097%. Unit (2015) stated that the lending interest rate of Tajikistan is highly fluctuating as interest rate in June 2018 was 28.940which increased to 30.210 in July 2018 which went as low as 20.511 in November 2018 which again increased to 25.351 in May 2017. This reflects the instability in the credit supply and demand in the country. Donou-Adonsou and Sylwester (2017) argues that higher interest rates is an opportunity for the commercial banks their profitability increases in such scenario. This is because financial such as retail or commercial banks, insurance companies, investment banks etc., holds huge cash in the form of customer
balances and businesses transactions. The author further explains this by stating that rise in the rate of interest immediately results into increase in the earnings on such huge cash holdings. The mechanism of profit making by such commercial banks is explained by theMartin and et.al., (2018) in its studies that commercial banks holds the balances of their customers at which they some amount of interest which is obviously lower than the interest rate they charge from their customers while lending the money. Increase in the rate of interest rates widens this gap due to which banks becomes more able to enhance their profitability.For instance, the one of the commercial bank in Tajikistan has balance of about 50 million Tajikistani Somoni on which 1% interest is given by the banks to its customers. However, the same money have been invested by it in short term notes or bills on which bank is earning 3 %. This gap of 2 % is termed as the profitability for the company. Sheremenko, Escalante and Florkowski (2017) disagree with the view of above author and says that just because the profitability of the banking sector is one of the benefit of high interest rates, it shall not be forgot that high interest rates decreases the capital which is needed by the business organisations that reduces their productivity. It also induces the household sector to save more money instead of spending it. This higher savings and lower expenditure decreases the liquidity and money movement which eventually slows down the growth rate of an economy. The same thing was experienced by the Tajikistan when interest rates in the country crossed the mark of 30 % wherein people limit their expenses and hold back their money as savings. The money rotation from household to expenditure to investment hindered because of that, which ultimately led to slower economic growth of the country. As per the studies ofAl-Harbi (2019), Central Bank of the country greatly affects the interest rates. In fact it is this organisation which lays down a guiding rate around which commercial banks and their financial institutions have create their borrowing and lending interesting rates. It is the body in the country which is also responsible for maintaining the stability of financial system within the nation. National Bank in Tajikistan is embedded with this responsibility in the country. One of the most significant power which the National Bank have, which is to increase or decrease thediscount rate in the country. Shift in the increase or decrease in such interest rate have a massive impact on the building blocks of country's macroeconomics, like spending and borrowing power of consumers.
MIRAZIZOV and et.al., (2017) states that discount rate is the cost which have to paid for borrowing money from the central bank. When commercial banks borrow money from the National bank of Tajikistan, they have to pay interest at the discount rate for the purpose of shoring up the short term liquidity needs of the banks. For instance, the National Bank of the country may increase or decrease this rate depending uponthe circumstances and condition related to economic pace and growth prevailing in the country. The authors provides that discount rate of Tajikistan as on March 2017 was 16 % which is lower as compared to 18 % in December 2016. The National Bank of Tajikistan exercised it power and lowered the discount rate in the year 2017 because of the stagnant or slow pace of country's economy.This decision was taken by the National Bank as it wanted to make the borrowing of the funds affordable for the commercial banks so that economy does not get affected significantly.Khatat (2016) articulates that when the retail banks or commercial banks borrows from National Bank at cheaper rate, they are enabled of passing the savings to their customers by the way of lower interest rates imposed on personal or mortgage loans etc. This leads to development of such economic environment wherein the customers are encouraged to borrow which subsequently leads to rise in consumer spending. However,Bougatef (2015) argues that decrease in the interest rate have a negative impact on the investment earnings of the customers. The author says that although reduction favours spending culture in the economy but it also lowers down the income which the customers are earning from their investments in bank. This sometimes discourages the investors or household sectorto put their money as investments in the bank. In the view ofMUKANOV and BEGALIEV (2018), when the economy is progressing at such a rate which might result into hyper-inflation, the National Bank rises the interest rates. This is done to lower down the excessive demand of credit in the economy. The author explains the mechanism that when the discount rate is higher, it will be a costly affair for the borrowing banks to acquire funds from National Bank which in turn will squeeze the demand from customer relating to the loans. Lower demand would help the country in bringing down the inflation rate to a desired level so that economic growth of the nation does not hindered. Also, this action is required for maintaining the stability of money credit and inflation rate in a country. This was the reason why National Bank of Tajikistan increased the discount rate in the year 2017 to 18 % from the previous year in which it was 17.5 % since the economy was growing at good rate wherein for taking control over the possibility of hyper-inflation, the National bank chose to
increase the rate so that demand for credit is lowered down for the purpose of stabilizing the economy.Geraets (2018) In a good economic conditions, people tends to save less and spend more which in turn increases the demand of the money credit in the economy. The demand gets so high that commercial banks are unable to meet it and for controlling such situation, the National Bank of Tajikistan rise the interest rate so that people gets discouraged in demanding excessive credit or borrowing from the commercial banks. The subsequent effect of such higher interest rate is that prices of goods and services in the country is balanced which favour the banking system and economic growth of the country. Hernandez and Vadlamannati (2017), through its studies suggests that financial system of Tajikistan is quite shallow. This is because of the fact that country does not higher financial intermediation. The deposit and credit penetration rates of Tajikistan is lower than other regional economies because ofcountry's disturbed history of banking system and government's legacy of interfering in the operational decision making which has resulted into ineffective resource allocations throughout the country. The policies related to lending of funds are weak in Tajikistan, there is lack of effective risk management in the banking system and weak corporate governance has altogether resulted into lower productivity from the financial sector in the country. Moreover, with the beginning of recession period in Russia 2014-2016 made the situation worse for Tajikistan wherein many of the commercial banks became insolvent. World's major financial organisations such as International Monetary Fund (IMF), ERBD andWorld Bank are offering all the possible assistance to the authorities of Tajikistan for resolving its problems and issues in the financial sector. Theme 2 - Theory behind fluctuation of Interest Rates in Tajikistan According toHolston, 2017, Interest Rates are the cost for borrowers which they give to lender of loans in order to give benefits to lenders. Interest rates are basically set by central bank in every country by keeping in mind all the aspects of economy. There are mainly three forces which leads in determination of interest rates in country and by same process it is also determined in Tajikistan. First force which help in determining interest rates are Federal Banks who sets Fed Funds Rate and that specifically affects short term and variable interest rates. Second force is investor demand for U.S. Treasury notes and bonds which mainly affects long- term and Fixed interest rates. The third force is banking industry which offers loans and
mortgage loans who changes interest rates depending on business needs. These are three main forces which determines interest rates in any country. As perAnandan, 2018, the first force which affects short term interest rates are due other factors involved in this force. There are other short term interest rates involved such as LIBOR, Prime Rate etc. LIBOR is the rate banks at which is provided overnight loans to meet the Fed's reserve requirements. It is generally a few tenths higher than the fed funds rate and is a small amount rate charged. Prime rate are those charged by banks to their best customers. This rate is generally above than the Fed Finds rate but it is blow than variable interest rate. It is in between both the rates and it effects slowly to economy. When Federal Bank changes interest rates than it takes approximately 12 months to 18 months for bringing change in whole economy. In this case when rates are been increased than banks starting lending slowly and less and it directly affects expansion of businesses. Even the decrease of 0.25 point in rate leads to stock market higher because decrease in rates stimulates to the economy. On the other hand, when there is increase of 0.25 point in rate than the growth of market slowly declines. Thus, various types of interest rates leads to different type of driven forces in market. Hefeker, 2018, said that the second force in determination of interest rates are Treasury Bills which affects long term rates. Longer term loans are of 15 to 30 years fixed interest mortgage loans. These loans are generally for customer loans who wants to borrow loans for purchasing auto mobiles, education, purchasing large furnitures etc. Interest rates on Long term loans are generally higher than prime rate but lower than revolving credit rates. These interest rates are not fed funds rate but rather they follow every time change in Treasury Notes Rates. Treasury Notes rates are set by bidding process by U.S. Treasury department. In which they take highest yield rate and it depends on notes i.e. if notes are high in demand than yield can be low and vice- versa. In this way Treasury Notes Rates are been determined for Long term loans. Cochrane, 2016, claimed that there are several types of interest rates which are only affected by banks. For example, housing boom in year 2000 increased with the increase in Fed Funds Rate. It is set target rates which are directly controlled by booming of houses. Other interest loans were interest only loan in which borrowers used to pay only interest but never reduced Principle. Credit card interest rates were usually higher than the LIBOR rates and were required in order to maintain credit card facilities for clients. Interest rates are very important in order to control the flow of money supply in any country. Increase in interest rates and decrease
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