1. Majority of deposits with these banks are subject to withdrawal on demand and short-term notice hence cannot be lent long-term.
2. Commercial banks are subject to sudden credit squeeze imposed by the Central Bank and as such they have to keep their investments in short-term investments to meet the requirements of the Central Bank.
3. Short-term forecasts are usually accurate and also short-term investments are less risky which is thus preferable to commercial banks.
4. Short- term investments are usually more profitable to the banks for example, overdrafts which carry higher rates of interest than long-term loans.
5. Usually short-term investments are not secured for example overdrafts and thus are easier and more flexible to give.
6. The liquidity ratio and cash reserves ratio of the Central Bank reduces commercial banks long-term lending and as such they resort to short-term investments and lending.
7. Long-term investments lose value with time, that is both interest and principal depreciate due to inflationary tendencies and this forces commercial banks to lend short- term as inflation will have little or no effect on the value of such loans.
Dullayo answered the question on May 6, 2018 at 18:49
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