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The Effect of the Statutory Reserve Ratio on Bank Interest Rates: Evidence from Commercial Banks in Zambia

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Abstract

his study investigated the effect of statutory reserve (SRR) on the interest rates in commercial bank, with focus on setting the deposit and loan interest rates and also the effectiveness of SRR in managing the commercial banks general interest rate. Using a mixed method approach, more than five different commercial banks were engaged in this study. The findings of the study revealed that a continuous increase in the central bank SRR has no significant effect on bank deposit interest rates. (p-value-0.1484, χ²= 13.32, 9 df). However, moderate changes in interest rate had influence on the adjustment of the deposit interest rate. This implies that while banks submit to changes in SRR, the elasticity is limited at some point as they consider other factors such as liquidity and competitor offers rather than the rate of SRR. In the similar way, the statutory reserve ratio was found to have a significant effect on Commercial Banks Loans and Advances. The study found that 60% of the commercial banks increase loan interest rates when SRR increases. Hence the study established a significant positive relationship between Commercial Banks Loan rates and SRR changes (p-value- 1.32e-05, S.d -0.966, R2 0.063). The study revealed that  SRR is an effective monetary tool policy only at a certain range of rates for regulating the commercial banks (p-value-0.0032, χ² =24.79 at df = 9). The study therefore concluded that statutory reserve ratio has significant effect on both loan and deposit rates changes but a continuous increase in the ratio tends to become non responsive to both deposit and loan rates due to other considerations such as availability of liquidity and competition in the industry. The study recommended that central bank should know the appropriate SRR corridor that would control banks rates and to increase the trading and banking book, banks should develop strategies to attract private sector deposits, to fill the void created by the implementation of the SRR and also come up with innovative solutions. The study further recommended that the Ministry of Finance and the regulator should consider allowing Commercial Banks involved in revenue collection from other sources apart from traditional banking services.

Keywords:

Central Bank Commercial Banks Deposit Interest Rates Loan Interest Rates Monetary Policy Statutory Reserve Ratio

Article information

Journal

Journal of Economics, Business, and Commerce

Volume (Issue)

2(2), (2025)

Pages

330-338

Published

07-12-2025

How to Cite

Munkombwe, D., & Silwimba, P. (2025). The Effect of the Statutory Reserve Ratio on Bank Interest Rates: Evidence from Commercial Banks in Zambia. Journal of Economics, Business, and Commerce, 2(2), 330-338. https://doi.org/10.69739/jebc.v2i2.1096

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