Government Securities Trading and Liquidity Dynamics of Commercial Banks in Tanzania

This study investigates the effect of government securities trading on the liquidity dynamics of commercial banks in Tanzania. Motivated by persistent liquidity challenges among banks and a growing shift toward government securities investment, the study is guided by Modern Money Theory and Social Intermediation Theory to explore how fiscal instruments influence liquidity and financial intermediation. Adopting a pragmatic research philosophy, the study used a mixed-methods approach with a cross-sectional design. The population included key financial stakeholders from NMB, CRDB, and Equity Bank, with a purposive sample of 94 respondents comprising bank managers, regulators, and academics. Data were collected through structured questionnaires, interviews, and documentary analysis. Quantitative analysis employed Chi-square tests, Pearson correlation, and multiple linear regression, while qualitative data were examined thematically. Findings revealed a statistically significant relationship between government securities investment and liquidity tightening (Chi-square p < 0.001). Regression analysis confirmed that government securities trading is a major predictor of liquidity challenges (R² = 0.510, β = 0.743, p < 0.001). Respondents consistently identified the Treasury Single Account, attractive government security yields, and limited access to public deposits as key drivers of liquidity constraints. The study concludes that excessive reliance on government securities has structurally weakened the private lending capacity of Tanzanian banks, undermining financial intermediation. Theoretically, the findings reinforce MMT's assertion that centralised fiscal operations impact liquidity supply and validate Social Intermediation Theory’s focus on risk-balancing by banks. Policymakers are advised to revise liquidity management frameworks, re-evaluate the operational impacts of the TSA, and introduce incentives for private-sector lending to ensure economic resilience and inclusive growth.