Determinants Of Interest Rate Spreads Research Articles

Macroeconomics Determinants of Interest Rate Spreads Among Commercial Banks in Kenya

The determination of interest rate spread in commercial banks is influenced by various macroeconomic variables, market microstructure features and the policy environment. However, studies on factors that contribute to the interest rate spreads among commercial banks in Kenya have produced mixed results that calls for further research. This study aimed to assess the determinants of interest rate spread in commercial banks in Kenya. Specifically, the study sought to establish the effect of inflation rate, domestic borrowing, credit risk and exchange rate risk on the interest rate spreads among commercial banks in Kenya. The study was anchored on fisher hypothesis, classical theory of interest and loanable fund theories. Explanatory research design was adopted to establish the causal relationship between the study’s variables. Secondary data of the study for the period between 1970 -2022 was extracted from annual financial statements of commercial banks targeted by the study and Central bank of Kenya annual reports. Data was analyzed through descriptive and inferential statistics. The study adopted the regression model to obtain results. Based on the regression results, the study found that domestic borrowing had a significant positive effect on interest rate spreads among commercial banks in Kenya. Additionally, the study found that inflation rate, credit risk and exchange rate risk had a significant positive effect on interest rate spreads among commercial banks in Kenya. The study concluded that macroeconomic variables such as inflation rate, domestic borrowing, credit risk and exchange rate risks are key determinants of interest rate spread among commercial banks in Kenya. The study made the following recommendations to regulators and policy makers. First, ensure that the central bank's monetary policy actions effectively influence interest rates throughout the banking system and also Implement mechanisms to improve the transmission of changes in the central bank's policy rates to commercial banks' lending and deposit rates. Secondly, establish a framework for monitoring key macroeconomic indicators such as inflation, economic growth, exchange rates, and fiscal policies to identify potential factors impacting interest rate spreads and use the monitoring results to formulate timely and appropriate policy responses. The study recommends that future studies should conduct studies across different countries which could provide a more comprehensive understanding of the subject matter.

Determinants of Interest Rate Spreads - A Case of Vietnam

Determinants of Interest Rate Spreads - A Case of Vietnam

Determinants of interest rate spread and the moderating role of income diversity: the case of Vietnamese commercial banks

Determinants of interest rate spread and the moderating role of income diversity: the case of Vietnamese commercial banks

Determinants of interest rate spreads in the banking industry: an empirical study in an emerging country

Determinants of interest rate spreads in the banking industry: an empirical study in an emerging country

Determinants of interest rate spread and the moderating role of income diversity: the case of Vietnamese commercial banks

Determinants of interest rate spread and the moderating role of income diversity: the case of Vietnamese commercial banks

Determinants of Interest Rate Spread of Nepalese Commercial Banks

This paper has analysed the determinants of interest rate spread (IRS) of Nepalese commercial banks. The panel data of 25 commercial banks from 2013/14 to 2020/21 was used for the analysis. The study used return on assets (ROA), management efficiency (ME), capital adequacy ratio (CAR), assets quality (AQ), and credit risk (CR, and operational efficiency (OE) as the bank specific determinants and inflation (INF) and growth rate of gross domestic product (GDP) as the macroeconomic determinants. Using the random effect model, the paper finds ROA, CR, ME, and OE as the major bank specific determinants and INF and GDP as the major macroeconomic determinants of interest rate spread. Similarly, the role of ROA, CR, INF and GDP was found to be positive while that of ME and OE was discovered as a negative role in determining IRS of Nepalese commercial banks. The findings of this study can be useful in formulating policies on the spread rate of interest.

The determinants of interest rate spreads in dollarized economies

ABSTRACT Twenty years after dollarizing, interest rate spreads remain considerably high in El Salvador and even higher in Ecuador, despite decreased deposit rates. Using panels covering the 2005–2019 period, we explore the determinants of interest rate spreads in these two dollarized countries. We find that bank-specific characteristics, such as market share and liquidity, play a significant role at accounting for the differences in spreads. Dollarization is also expected to promote the entry of international banks due to the elimination of depreciation risk. We find that the low degree of foreign bank participation in Ecuador also contributes to explaining spread differences. These findings point out to complementary reforms to extract the full benefits of dollarization.

Antecedents and Consequences of Interest Rate Spread: Case of Pakistan

Interest rate spread plays a crucial role in the monetary policies of the government and has a substantial impact on the economy. This article examines the bank-specific determinants of interest rate spread which include capital adequacy ratio, non-performing loans, and overhead expenses. To analyze the impact of Interest Rate Spread (IRS) on the economy, specifically, change in GDP growth rate, change in the inflation rate, change in industrial growth rate, change in foreign exchange reserves, and change in the stock market index, while ROA, ROE, and NIM are used as profitability measures of the banking sector. Data from 2011-2020 is collected and analyzed through a linear regression model, which gives significant results as twenty-two out of twenty-four hypotheses are accepted. These results will help policymakers to better formulate monetary policies and will provide the basis for new insight into IRS.

Determinants of interest rate spreads of conventional banks listed on the Indonesia Stock Exchange

The purpose of this study is to examine the variables that determine the interest rate spreads (IRS) of conventional banks listed on the Indonesia Stock Exchange (IDX). There are four major variables that affect a bank’s interest rate spreads, namely financial bank, macroeconomics, economic freedom and market structure variables. The study participants are conventional banks listed on the Indonesia Stock Exchange from 2013 to 2017. Data was tested by using the OLS regression model. The results of this study show that all of the financial bank variables (Liquidity Risk (LR), Return to Asset Ratio (RTAR), Capital Adequacy (CA), Cost Efficiency Ratio (CER), and Risk Aversion (RA)) can significantly affect interest rate spreads. While of the macroeconomic variables, only two can significantly affect interest rate spreads, namely Gross Domestic Product (GDP) and Inflation Rate (IR). Furthermore, all of the variables of economic freedom and market structure can significantly determine interest rate spreads. AcknowledgmentThe authors thank the Research Cluster of Governance and Competitiveness, Faculty of Administrative Sciences, Universitas Indonesia, for providing financial assistance and supporting materials related to discussion, and assistance in writing this paper.

Impact of Macroeconomic and Bank Specific Variables on Spread of Interest Rate: A Study of Listed Commercial Banks in Bangladesh

The Banking system of a country provides the lifeblood to the efficient and effective functioning of an economy. Therefore it is crucial to understand the lending and borrowing rates and hence the spread of interest rates in the banking and financial sector. The Spread of Interest rate is the difference between loan rates and the deposit rates of a bank. High-interest rate reflected in the spread of a high-interest rate will immensely disrupt and cause adverse consequences in the whole economy. Both the spread of interest rate and the interest margin show that the intermediation cost is higher in Bangladesh. High-interest margins in a banking system are indicative of deep-rooted symptoms of inefficiency, absence of competition, non-diversification of income sources, and skewed development of money and capital market in favor of banks’ lending and inflexibility of rate adjustments symmetrically in response to market changes. Moreover, a frequent financial scam in Bangladesh has added more troubles in the money market of Bangladesh. For example, Hallmark scam of almost 4000 crore taka of Sonali Bank, a financial scam of Abdul Mannan, CEO of BIFC, amounted to around 950 crore taka, around 4500 crore taka scam of Janata bank and Agrani bank have made our money market and financial market susceptible to failure. These events have some direct or indirect impacts on interest rates. Hence, I have felt the importance of identifying the determinants of the spread of interest rates. Understanding the determinants of the spread of interest rates would enable us to eliminate such unnecessary costs in financial intermediation, which would be the result in operational and administrative efficiency, resulting in financial viability, stability, and economic growth. Therefore, we need to know the determinants of the spread of interest rates. Hence, I have been motivated to study the determinants of interest rate spread and their extent of impacts on interest rate spread.

Determinants of Interest Rate Spreads In Uganda’s Commercial Banking Sector: A Panel Data Analysis

Uganda’s interest rate spreads have persistently remained high despite the financial liberalisation undertaken in the 1990s. Using data for 24 banks, we assess the determinants of interest rate spreads in Uganda’s commercial banking sector for the period 2005-2015. Results show that, among the bank-specific factors, interest rate spreads increase with increase in credit risk, liquidity risk, and capital adequacy ratio. Contrary to most studies and a priori expectations, non-interest income is shown to be positively related to bank spreads. Bank size is shown to be negatively related to interest rate spreads. For industry-specific factors, foreign bank participation in loans markets is associated with higher spreads. For macroeconomic factors, high inflation rates are shown to translate into high spreads, whilst high real GDP growth rates and broad money supply are associated with lower spreads. Contrary to theory and most literature, exchange rate volatility is associated with lower bank spreads. Going forward, banks and government should devise mechanisms to encourage loan repayment, and banks should be encouraged to reduce on holding excess liquid assets. At a macro-level, the Bank of Uganda should maintain its stance on curbing inflation. Economic growth and financial development should as well be encouraged.
 JEL Classifications: C23; E43; E44; G21; L11

Is the financial accelerator story, empirically relevant for the determinants of the interest rate spread?

One implication of financial accelerator model, is that leverage of firms should be an important determinant of the interest rate spreads. In this paper we search for empirical evidence of the operation of such accelerator, using a detailed bank supervisory data set from the Guatemalan banking system. Using a Panel-VAR approach, and controlling for the usual determinants of interest rate spreads, we explore if the riskiness of firms and banks can still convey some explanatory power over the interest rate spread, as the financial accelerator hypothesis would suggest. From the ‘loan applicant perspective’, we evaluate the extent to which leverage ratios of firms can explain the spreads between the policy rate and four loan categories. Additionally, we explore the operation of the financial accelerator from the ‘loan granter perspective’, evaluating how much of the spread between different passive interest rates and the policy rate can be explained by a measure of the leverage of banks. Results show the existence of a financial accelerator mechanism operating in the Guatemalan banking system, from the loan applicant perspective. From the loan granter perspective, evidence seems weak, but sensible.

Assessing the Determinants of Interest Rate Spread of Commercial Banks in Oman: An Empirical Investigation

This study aims to examine the factors that determine interest rate spread (IRS) of commercial banks listed on Muscat security market over the period 2008 – 2014. They are classified into four groups of financial, economic, market and legal indicators. The Spearman correlation matrix results show that all economic indicator variables have significant relationship with interest rate spread except GDP variable. No significant relationship exists between financial indicator variables and interest rate spread, but in legal indicator variables there is significant relationship with interest rate spread only in two variables the size of government and regulation. Finally, there is a significant relationship between market indicator based on market concentration measured by Herfindahl-Hirschman Index and interest rate spread. OLS regression analysis indicates a statistically significant impact on IRS by factors like return to asset ratio, liquidity risk and risk aversion within the financial group and unemployment rate, debt services ratio and principal repayment from the economic group and Herfindahl-Hirschman Index based on market concentration group. Finally, there is a significant impact of sound money and regulation within the legal group on IRS. The researchers recommend an adaptation in the monetary policy to exploit the high level of liquidity in the banking sector by facilitating easy access to debt to individuals as well as firms thus providing the margin competitive interest rate.

DETERMINANTS OF INTEREST RATE SPREAD AMONG COMMERCIAL BANKS IN KENYA

Purpose: To establish the determinants of interest rate spread among commercial banks in Kenya.
 Methodology: The study utilized a descriptive survey research design.
 Findings: The results indicated that the commercial banking sector has witnessed a gradual rise in the Interest rate spread. Results also showed that the mean of market structure has been fluctuating with year (2010) being the lowest with mean of 4 and year (2012) being the highest with mean 12. Results also showed that there was no regulation from the year (2005) to the year (2009) but it was later adopted whereas regulations shoot steadily to mean of 1.0 in the year (2009) and remained in the same level the rest of the years. The regression results indicate that there is a positive and significant relationship between market structure, credit risk and interest spread. The regression results also indicated that there is a positive but insignificant relationship between access to information and interest spread. Further, the results indicated that there is a negative and significant relationship between regulation and interest spread.
 Unique contribution to theory, practice and policy: The study is important to the management of Commercial banks as it will provide an insight on the factors influencing interest rate spread among commercial banks in Kenya. The results of this study will provide information to policy makers and other stakeholders in the financial sector (especially the banks) to come up with strategies that help in dealing with the high interest rate spread experience in the banking sector and thus improve on the financial performance of the organisations. It may be used as a tool for persuading commercial banks to reduce their interest rates spread and hence increase their volume of business, which of course would compensate the loss in the interest rate spread. The study will also be invaluable to the government and CBK. This is because the monetary policy framework of Central Bank of Kenya and its implementation will be guided by a need to ensure, among others: realistic interest rate spreads that encourage financial deepening and a safe, sound, efficient and competitive banking system through discreet risk management. These findings therefore might influence the effectiveness of economic policies. The research results will also be important to scholars and researchers as it will add to the existing pool of knowledge.

Macroeconomic determinants of interest rate spreads in Ghana

PurposeThe purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013.Design/methodology/approachThe autoregressive distributed lag bounds test approach to cointegration and the error correction model were used for the estimation.FindingsThe results indicate that exchange rate volatility, fiscal deficit, economic growth, and public sector borrowing from commercial banks, increase interest rate spreads in Ghana in both the long and short run. Institutional quality reduces interest rate spreads in the long run while lending interest rate volatility and monetary policy rate reduce interest rate spreads in the short run.Research limitations/implicationsThe depreciation of the Ghana cedi must be controlled since its volatility increases spreads. There is a need for fiscal discipline since fiscal deficits increase interest rate spreads. Government must reduce its domestic borrowing because the associated crowding-out effect increases interest rate spreads. The central bank must improve its monitoring and regulation of the financial sector in order to reduce spreads.Originality/valueThe main novelty of the paper (compared to other studies on Ghana) lies on the one hand; analysing macroeconomic determinants of interest rate spreads and, on the other hand, controlling for the impact of institutional quality on interest rate spreads in Ghana.

Macro, Industry-Specific and Micro Determinants of Interest Rate Spread in Pakistani Banks

Macro, Industry-Specific and Micro Determinants of Interest Rate Spread in Pakistani Banks

Determinants of Interest Rate Spread of Commercial Banks in Kenya

Determinants of Interest Rate Spread of Commercial Banks in Kenya

The Determinants of Interest Rate Spreads in South Africa: A Cointegration Approach

This study empirically identifies the determinants of interest rate spreads (IRS) in South Africa over the period 1990 to 2012. The study uses the Johansen Cointegration Approach and Vector ErrorCorrection techniques to identify the variables in explaining the interest rate spreads in South Africa. It considers the inflation rate, reserve requirements, Treasury bill, discount rate, money supply (M2) and gross domestic product per capita variables as they explain the movement of interest rate spreads. A significant short-run relationship between IRS and its explanatory variables was observed. These macroeconomic variables are significant in explaining the behavior of the South African IRS in the longrun. This paper has focused on illuminating on how the interest rate spreads are impacted by both exogenous and endogenous variables. If controlled, these variables are most likely to have the largest effects on reducing such spreads. In addition, it suggests that the reduction in the reserve requirements prescribed by the South African Reserve Bank would help to reduce the interest rate spreads. Based on the results of the study, policy implications and suggestion for future research are made.

Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya’s Banking Sector

This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya’s banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7 – 10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.

The interest rate spreads in the Czech Republic: Different loans, different determinants?

We analyze the determinants of interest rate spreads of different loan categories in the Czech Republic during 2004–2011. We employ a detailed bank supervisory dataset that allows us to construct the actual spreads for four loan categories, namely small and large corporate loans, consumer loans and mortgages, on a monthly basis. Our regression analysis shows that bank and macroeconomic characteristics matter more for setting the spreads for small corporate loans and mortgages rather than for large corporate loans and consumer loans. Interest rate risk determines the spreads for all loan categories. The global financial crisis has, to a certain extent, increased the responsiveness of spreads to interest rate risk and liquidity risk.