Abstract
This paper analyzes the main trends and patterns of nominal lending interest rates and lending-deposit interest rate spreads in emerging markets and developing economies. Using data from 140 emerging markets and developing economies, analysis shows that nominal lending rates and spreads declined between 2003 and 2017, with regional heterogeneity. In addition, it finds that less economically and financially developed countries tend to exhibit higher lending rates and spreads. These higher rates tend to be driven by higher spreads, not deposit interest rates. Also, illustrative regressions suggest that relevant correlates of nominal lending rates include inflation, public debt, and policy interest rate (macro-fiscal conditions); overhead costs, nonperforming loans, and non-interest income (banking characteristics); and credit bureau coverage and time to resolve insolvency (business environment). Finally, illustrative decompositions of the level and 10-year change between 2007 and 2017 of nominal lending rates find relative differences across regions. On the decline of nominal interest rates in that decade, rising public debt and nonperforming loans have pushed rates up, which was counterbalanced by a reduction in inflation, the policy interest rate, and overhead costs and a better business environment. Since the global financial crisis, a common global factor has increased in importance and has contributed to the downward trend in nominal lending rates.
Highlights
Banks dominate credit intermediation and savings mobilization in most Emerging Markets and Developing Economies (EMDEs)
Using data from 140 EMDEs, we show that the country median nominal lending rate and spread declined in EMDEs in the 15-year period between 2003 and 2017
The analysis shows that rates and spreads have been consistently higher in Latin America and the Caribbean (LAC) and Sub-Saharan Africa (AFR) and are a policy challenge in many countries in Europe and Central Asia (ECA), including Turkey and the Russian Federation
Summary
Banks dominate credit intermediation and savings mobilization in most Emerging Markets and Developing Economies (EMDEs). This paper quantitatively analyzes the main factors that are correlated with lending rates and spreads in EMDEs. The empirical literature suggests that rates and spreads are driven by three factors: macro-fiscal conditions, banking sector characteristics, and the business environment. The empirical literature suggests that rates and spreads are driven by three factors: macro-fiscal conditions, banking sector characteristics, and the business environment These affect four components that make up the spread: bank operational costs, risk premia, quasi-taxes, and returns. Illustrative regressions suggest that relevant correlates of nominal lending rates include: inflation, public debt, and policy interest rate (macro-fiscal conditions), overhead costs, non-performing loans, and non-interest income (banking characteristics), and credit bureau coverage and time to resolve insolvency (business environment).
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