1.0               INTRODUCTION

You should be familiar with the following areas

  • Meaning of Central Bank
  • Historical Background of Central Bank and Currency Board System
  • Laws governing Central Banking
  • Tools used to control Money
  • Principle of Central Bank
  • Central banks and Multilateral Financial Institutions
  • Functions of Central Bank

1.1               Meaning of Central Bank

Is an institution which does an activity which involves the exercise of public power to affect the behavior of commercial banks one of the functions of the central bank is to acting as banker to the commercial bank. Section 4 of the Bank of Tanzania Act, (Act No.4 of 2006) establishes Bank of Tanzania with primary objective as to formulate, define and implement monetary policy directed to the economic objective maintaining domestic price stability conductive to a balanced and suitable growth of the national economy.

1.2               History of Central Bank

The history can be traced back in 1919 when the British took control of the Banks of Tanganyika all commercial Bank operating in East Africa were extensions of Europeans commercial banks. They were established purposely of serving colonial capital that was brought into East Africa countries by colonial master as result these banks operated by using colonial currencies. The commercial banks themselves were not mandate to issue currencies because that said power vested to the central bank of England. Therefore, in order to deal with the adequate supply of currencies the colonial government in European particular Britain established what was known as currency Board System. Currency Board was established in colony and given power to issue local currency. Also the Board was empowered to conduct exchange of currencies between the local currencies of metropolitan currencies at prescribed rate.

The currency board system was established into categories; the East Africa currency board system and West African currency board

The East Africa Currency Board was established in 1919 and its major mandate was to create and supply the East Africa shillings in East Africa territories ruled by British in particular the Board was supposed to transfer the rupee based economies which was dominant in East Africa Shilling into Pound. The Board together with commercial Bank which operates in East Africa constituted the East Africa Banking the Board was not able to either supervise the commercial banks in East Africa. The Commercial bank were given power to extend credit to commercial banks to finance selected projects particularly those of Agriculture in which this gave the ability to cover application of all bank and by that time the board were transferred from being only a money issuer to being only a money issue to a banker for commercial banks as well as provide of credit and these were given as channel of central bank. The board operates in Africa until 1965 when Africa countries started processing to establish their own central bank and by 1966 East African currency had its Central Banker.

2.2.1 Functions of East Africa Currency Board

  • The function of E.A.C Board was to organize the charge from Rupee based currency to Shillings in East Africa by buying up all the rupee in circulation.
  • To issue EA notes and coins
  • To link E.A economy to Britain
  • To stabilized the monetary and financial structure in E.A
  • To see to it that cash base of East Africa Banking System was the British Sterling

2.2.3 Duties of East Africa Currency Board

(a) Controlling the supply of currency to the East Africa Protectorate

(b) To maintain currency in the good manner

2.2.4 Relationship between East Africa Currency Board and Central Bank before 1955

(a) Banker of Commercial Banks the board began to call upon commercial banks to open accounts with it. The commercial banks refused to open account with the board were refused credit facility by the board.

(b) Controller of bank rate. Fix and credit of domestic interest rate.

Generally E.A.C Board was not a central Banking because it lacked some of essential power; to compel commercial banks to maintain specified minimum reserve requirement and the Board operated until the East Africa country established central Bank of for their respective by Act of Parliament. The board use commercial bank as its agents in distribution of currency therefore did not have fiduciary issue consequences of money supply in East Africa.

2.3 Laws governing Central Bank

  • Bank of Tanzania Act, Act No.4 of 2006

Act provide for the supervision of banks and financial institutions and formulation and implementation of monetary policy.

  • Banking and Financial Institutions Act, Act No.5 of 2006

The purpose of this Act is to regulate and supervising activities of saving and credit co-operative societies with view to maintaining the stability, safety and soundness of the financial system. Aimed at reducing the risk of loss to depositors

  • The Foreign Exchange Act [Cap 271 R.E 2002]

The Act provides efficient administration and management of dealing and others acts in relation to gold, foreign currency, securities, payments, debts, imports, transfer or settlement of property.

Tools used to

  • Rules and Regulations
  • The Microfinance Savings and Credit Cooperative Societies Regulations 2019
  • The Microfinance Community Microfinance Regulations, 2019
  • The Foreign Exchange (Listed Securities) Regulations 2003
  • The Foreign Exchange (Bureau De Change Regulations) 2019
  • The Banking and Financial Institutions (Prompt Corrective Actions) Regulations, 2014
  • The Banking and Financial Institutions (Mortgage Finance) Regulations, 2015
  • Intraday Lombard Credit Facility Rules
  • Bank of Tanzania Central Depository System Rules, 2012

1.3               Tools used to control Money

  1. Bank rate

Is referred as official rate in which is set and annual by a central bank which indicates the interest at which the commercial bank and other financial institution will access the advertisement of discounting facilities for central bank. If the rate is high then central bank can access bank at higher price the vice versa is true when the rate is low and from then we can say that, when the rate is higher other than commercial bank are discounting from applying for adventure for credit from the central bank.

  1. Open Market Operation

Deal in certain government secrecy. If there is too much money to purchase then the money in that had of purchase goes to the central bank. The money may either goes directly from public or from bank account in commercial bank with which the public movement account.

  1. Minimum Reserve Requirement

All commercial bank are required by the central bank to maintain a certain prescribed a minimum reserved of both cash and liquid assets that minimum reserved required must enable to meet day and day demand of customer when central bank prescribe a higher ratio and reserved it minimum that commercial bank are supposed to keep in their believe unit the central bank higher.

  1. Selective and direct Credit Control

The fourth tool which does not directly affect value of money in the economy but affects availability of money in certain sectors of the economy. It is a tool which allowed the central bank to direct control bank to use fund obtained from the central bank to any finance select sector in the economy by doing so the central bank affects the flow of funds to other sector by making money unavailable in which this creates inadequately in those sectors, thereby reducing circulating activities to those sector.

  1. Moral Suasion

This is tool which does not involve any form of compulsion rather negotiation between the central bank and other financial institution in which the central bank required commercial bank to act for acceptance banking standard.

2.4 Principle of Central Bank

The principles of Central banking relay with powers of Central Banking

1. To act as a lender of last resort of an economic rate

2. To engage in open market operations

3. To fix reserve commercial banks

4. To act as a bank to the government

5. To act as custodian

6. To act as administrative of foreign exchange restriction

7. To deal foreign commercial and goals

CENTRAL BANK AND MULTILATERAL  FINANCIAL INSTITUTIONS

CENTRAL BANKING

The law governing  the Central Bank in Tanzania are of Bank of Tanzania  and Financial  Institution Act 2006.The Bank of Tanzania wa established by the Bank of Tanzania  Act of 1965 no.12 of 1966 and the Act was replaced by the Bank of Tanzania Act of 1995 Act No. of 1995.

REASONS TO WHY ACT WERE

1. So as to allow consistent between the B.O.T Act and the new banking and financial  Institution Act of 1991

2. To allow consistent between  the B.O.T and new Banking and Financial  Act 19991

3. Also to reflect the control function  under new economic atmosphere

Act was repealed by the Act of 2006 the Act No.4 of 2006. Then 1995 Act was repealed by the Act No.4 of 2006.

REASONS

1. To provide for more response regulatory law of Bank of Tanzania in relation to the formation and implementation of monetary policy

2. To provide for the supervision and regulation  of commerce installation

3. To provide related matter on move system

THE BANK OF TANZANIA ( B.O.T)

The B.O.T Act under section  2 provides that the Bank  of Tanzania Act is the Union law  The Acr is divided into five

i) The Preliminary  part it has got three sections

ii) The bank this party has got 21 sections

iii) Current it has six section

iv) Other operations ofbte Bank in which it has 31 sections

v) Miscellaneous part it has 10 section.

THE BANKING AND FINANCIAL INSTITUTIONS ACT

It divided into four parts

i) Part I preliminary sections

ii) Part II licensing Regulation

iii) Part III Licensing owners and structure and financial institutions

FUNCTIONS OF CENTRAL BANK IN TANZANIA

Section 4 of Tanzania provides for the establishment of Bank of Tanzania. Section 5 of the Act deals with the general  finance of Bank of Tanzania such as formulations.

Also section 6(1) of the Actvgiven the Bank of Tanzania power as well as function to regulate also to formulation clearance and settlement system of the country. Section7 recalls the 5 of repealed Act of 1965 to facilitate and implement money policy. Section 16 deals with the duty of secrecy which means the Bank is not allowed to resolved own the service intact of its customs. Section 17-22 given with capital reserved.

CRIMINALIZATION

These are different offences regarding Bank

i)  Issuing wrong Currency; If person wrongful issue currency in Tanzania and if such a person convicted under section 352( a) such person will be for imprisonment not exceeds five years.

ii) Tempering with Bank note

iii) Counter felting of Coin; this is also an offence under section 354 of Penal Code if convicted a person  will be liable for life imprisonment.

iv) Clipping of Coin. Section 356 of Tanzania Penal Code

v) Offence of melting down or break up

MULTILATERAL FINANCIAL INSTITUTIONS

( I.M.F) and World Bank( W.B); These are tow separate institutions which operates between nations. These institutions were formed after second World War in 1945. At the early of 20th Century  the world witnessed the great economic  depression which affected the world from 1929-1933

The Great Economic Depression result countriee recognised misery and suffering  which caused by massive unemployment. During the World War II there were an Anglo American discussion Germany known as BRETTON WOODS CONFERENCE. The Bretton Woods Conference on 1st July 1944 ti 22nd July q944 730 Delegates from 44 moment countries met at the moment Wigton Hotel. The Hotel is located in Bristol Woods State of New Hampshire in USA. USA delegates wants that all Nations should have an access to borrow money for all kinds of purposes such money should borrowed as loan and will be paid on specified time. Finally idea of USA accepted hence formation of IMF and W.B

International Monetary Fund was found on 27th December 1945 the day called the agreement was signed by 29 countries in Savannahs State of Georgia in U.S.A.

PURPOSES OF THE MEETING

1. To elect Directors

2. To decide permanent headquarter of the International Monetary Funds

3. Draft by Laws

AIMS OF IMF

a) To promote monetary cooperation

b) To facilitate the balanced growth and expansion of Global trade

c) To promote the exchange stability

d) To assist members states in the establishment  of states

FUNCTIONS OF IMF

a) To act as a short term credit institution

b) To provide machinery for the ordinary adjustment of the exchange rates

c) To act as the reserve of the currencies of all member states from which borrower nation can borrower the currency of the other nation

d) It is short of lending instructions in foreign exchange however it grant loan for financing current transaction only and not capital transaction

e) It providing for the machinery of altering the value of currency on member nation

f) To provide for the machinery for the consultations

REASONS FOR THE ESTABLISHMENT

i) To gain economic strength and avoid being absorbed by the communalism

ii) To eliminate the restrictions in exchange and trade it advocate to the open door policy in trade and self determinations of colonies.

iii) To ensure International currency  stability by establishing institutions to enforce rules governing international relations

iv) To consider putting together in place mechanism of multinational system

v) The Havana meeting proposed the formation of an international trade Organization

vi) Discount the economic and financial arrangement