Explaining banking spread

Abstract

Purpose

The paper aims to explain bank interest spread from 2000 to 2014. Design/methodology/approach

The study used the ordinary least square panel corrected standard errors (OLS-PCSE) estimation. Generalised least squares results (unreported but available on request) are consistent with the OLS-PCSE results. This is done for 110 developing countries, 50 Europe & Central Asia countries, 33 Latin American countries, 21 Middle East and North African (MENA) countries, 46 Sub-Saharan African (SSA) counties and 8 South Asia countries. The developing countries are further grouped into small, medium and large-size banking markets. Findings

The study finds consistent results which indicate that the bigger a bank the less margin charged. The results further show an ambiguous relationship between concentration and net interest margin. The authors find strong evidence to show that less competition leads to inefficient banking market. The study finds lower operational efficiency can lead to higher or lower margin depending on the region or market size. General growth in the economy can lead to a more efficient banking market. The results allude to the fact that inflationary shocks do pass on to deposit and loan rates at different extent and speed. Little evidence show that higher presence of foreign banks leads to higher margins. Practical implications

The study recommends Central banks to encourage banks to grow/expand either through mergers or acquisitions. This could be done by increasing minimum capital requirements. When this is done, it is most likely that economies of scale among the merged banking entities will be materialised, potentially causing a sizable reduction in overhead costs that could eventually also increase the intermediation efficiency. While at this, further efficiency should be ensured through stirring up competition. Originality/value

This study is the first to give new evidence of banking spread using country level data for developing countries and across different continents.