The Determinants of Commercial Bank Interest Margin and Profitability: Evidence from Tunisia

Abstract

This paper investigates the impact of banks' characteristics, financial structure and macroeconomic indicators on banks' net interest margins and profitability in the Tunisian banking industry for the 1980-2000 period. First, individual bank characteristics explain a substantial part of the within-country variation in bank interest margins and net profitability. High net interest margin and profitability tend to be associated with banks that hold a relatively high amount of capital, and with large overheads. Second, the paper finds that the inflation has a positive impact on banks' net interest margin while economic growth has no incidence Third, turning to financial structure and its impact on banks' interest margin and profitability, we find that concentration is less beneficial to the Tunisian commercial banks than competition. Stock market development has a positive effect on bank profitability. This reflects the complementarities between bank and stock market growth. We have found that the disintermediation of the Tunisian financial system is favourable to the banking sector profitability.