Assignment on Commercial Banks

Added on - Feb 2021

Trusted by 2+ million users,
1000+ happy students everyday
Showing pages 1 to 8 of 63 pages
Dissertation (Chapter 1,2, 3
Modification)
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
Desklib Logo
You are reading a preview
Upload your documents to download or

Become a Desklib member to get access