Abstract:
This study sought to decipher the causes of very high interest rate spreads and also examine the causal
effect of very high interest rate spreads on savings mobilisation in Zimbabwe. The random effect
estimator was used for statistical inference. Results suggest that interest rate spreads in Zimbabwe are
mainly driven by macroeconomic fundamentals. Bank specific factors were found to be weak explanatory
variables. Contrary to theory, a positive relationship was established between interest rate spreads and
savings. Based on these findings it was suggested that policy makers should address several factors that
are affecting the economy. As the economy stabilises interest rates spreads are likely to come down.
Furthermore, there is need for policy makers to address the country’s risk profile in order to attract
cheap and abundant foreign funds for investments. Due to the country’s perceived high country risk,
the cost of borrowing has remained significantly high. On the other hand, the fact that interest rate
spreads were found to be positively related to credit risk, there is need for bankers to prudently manage
their loan portfolio in order to reduce defaults. This will significantly reduce lending costs, hence
interest very high rate spreads can be addressed.
