THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF INSURANCE AND BANKING

DEPARTIMENT OF BANKING AND FINANCE

BACHELOR OF BANKING AND FINANCE
ACADEMIC YEAR 2023/24
SUBJECT NAME: PRINCIPLES OF BANKING
SUBJECT CODE: BFU_07201
GROUP ASSIGNMENT
STREAM A

STUDENT NAMES REGISTRATON NO.

1 WILLFRED MACKIE MGUHI IMC/BBF/2324557
2 ROMANUS NAZARETH CHENGULA IMC/BBF/2324551
3 SWAUM SAID MKOJERA IMC/BBF/2315005
4 JAMES JUNIOR MRISHA IMC/BBF/2324993
5 NOREEN VICTOR KIMAMBO IMC/BBF/2315228
6 ANNAH NAFTAL ALUTE IMC/BBF/2311727
7 LEONARD S. SAMWEL IMC/BBF/2327135
8 ANASTAZIA OMARY ATHUMAN IMC/BBF/2310764
9 LAURA MICHAEL SWAI IMC/BBF/2316236
10 SHERIDAN SOLOMON MOLLEL IMC/BBF/2314677
QUESTION ONE
what are the monetary policy instruments in Tanzania?
Monetary policy refers to measures adopted by the government through the central bank to
regulate the amount of money in circulation as means of influencing the level of economic
activities in the economy. monetary policies aimed at reducing the volume of credit (money
supply) and solve inflation problems in the economy. In accomplishing this monetary policy
use it’s tools that explained below.
i. Open market operations.
This refers to the buying and selling of securities of government or private financial
institutions through the central bank. Securities are financial assets such as stocks, bonds,
treasury bills or more precisely the documents to establish ownership of these assets. When
the government sales its securities, means it withdraws money from the public and
commercial banks and thereby reduces money supply in the economy. Conversely, when it
buys the securities from the public means it injects more money in the economy leading to
increase in money supply.

That process of reducing and increasing money in the circulation it have some effects to the
commercial banks, the decrease in the supply of bank money through the sale of securities
will raise the market interest rate while increase in the supply of bank money through the
purchase of securities will reduce the market interest rates. That will affect the interest rates
charged by commercial banks.

ii. Reserve requirements.

The central bank sets the percentage of deposits that commercial banks must hold in reserve,
which they cannot lend out, by adjusting reserve requirements, the central bank can influence
the amount of money banks can lend, thus affecting the money supply. The amount of money
that remains with the commercial bank over and above these minimum reserves is known as
the Excess reserves, the larger the size of the excess reserves, the greater is the power of a
bank to create credit, and vice versa.
 iii. Discount rates.
This refers to the rate of interest charged on commercial banks when commercial banks
borrow money from the central bank. It is sometimes called bank rate when the central bank
lends cash to the commercial bank as last resort. the central bank lowers the bank rate so as to
encourage commercial banks to borrow more since the cost of borrowing from the central
bank becomes cheap and easy. This will in turn make commercial banks to advance loans to
customers at very low interest rate. And when central bank increases the bank rate it makes
commercial banks to borrow less since the cost of borrowing from the central bank becomes
higher and this will make commercial banks to charge higher interest rates to the loans that
they offer to their customers.
QUESTION TWO
Explain why commercial banks are not authorized to invest in fixed investments such
hotels, schools, hospitals, etc.?.
Commercial bank is a financial institution that provides a range of services to individuals,
businesses, and governments. These services includes accepting deposits, making loans,
facilitating payments, and they play a crucial role in the economy by channeling funds from
savers to borrowers, thereby facilitating economic growth and development. From that
commercial banks are not authorized to invest in the fixed investments for the following
reasons.
Liquidity: one of the reasons why commercial banks are not authorized to invest in fixed
investments is this liquidity factor, commercial banks operate on a model where they
primarily deal with short term deposits and provide short to medium term loans. Investing in
fixed assets ties up a significant amount of capital for the long term, which can limit their
liquidity and ability to meet short term obligations, such as customer withdrawals.
Risk Management: Also commercial banks not authorized to invest in fixed investments
because of the risks, fixed investments, such as hotels or hospitals, are often associated with
higher risks compared to traditional banking activities like lending. These ventures may
require expertise and resources beyond the scope of banking operations, exposing banks to
risks they may not be equipped to handle.
Regulatory compliance: Also due to comply with regulations banks are not authorized to
invest in the fixed investments, banking regulations often makes limitations on the types of
assets banks can hold to ensure financial stability and protect depositors’ interests. Investing
in fixed assets can expose banks to risks that regulators may deem as inappropriate for
institutions primarily focused on banking activities.
Expertise and Management: Managing fixed assets like hotels, schools, or hospitals
requires specialized knowledge and expertise in areas such as real estate development,
hospitality management, or healthcare administration. Commercial banks may not possess the
necessary skills or infrastructure to effectively manage such ventures they expertise more in
financial activities so this will be hard for them to manage the assets that they will hold in the
investment.
Conflict of Interest: Engaging in fixed investments may present conflicts of interest for
commercial banks, particularly if they lend to businesses or individuals operating in the same
sectors as the fixed assets they own. This could raise concerns about preferential treatment,
insider lending, or unfair competition.
In conclusion while commercial banks play a vital role in the economy, their primary focus
on banking activities and regulatory constraints typically discourage them from venturing
into investments in fixed assets like hotels, schools, or hospitals.
REFERENCES
Damian,S.Foka,(5th April, 2006). Banking and Financial Institutions Act, Cap.342 . Special Gazette
of United Republic of Tanzania Government Printer, Dar es Salaam.

Paul F. Smith, (1964) Commercial banks. Princeton University Press.

https//www.nber.org/chapters/c1722