Factors Determing Interest Rate Variations in Ghanaian Banks

Global Journal of Management and Business Research-C Finance, 2018

The improvement of the financial sector in Tanzania by the introduction of financial reforms was expected to improve the efficiency of the financial sector which includes lowering the Interest rate spread. Beyond the expectations of the reforms, the interest rate spread is high with no sign of narrowing down. This study was set to analyse the determinants of Interest rate spread in Tanzania commercial banks focusing on the internal characteristics. Data from commercial banks incorporated before 2002 were extracted and analysed using SPSS 16 and regression model was established. The results indicate that operating costs, loan loss provisioning, and liquidity risk increases the interest rate spread. While factors of required reserve and non-interest income decrease the interest rate spread

Interest rate spreads in Ghana have been historically high and appear to have increased marginally post April 2009. As the analysis below will show, there seems to be relative stability in the average deposit rate; suggesting that the increase in the interest rate spread may be more as a result of rising average lending rates than falling average deposit rates.

This paper contributes to the literature on the determinants of interest rate spreads by using actual loan and deposit interest rate data to scrutinize the bank specific, market-specific, and macroeconomic determinants of banking sector interest rate spreads in the Gambia. Despite the proliferation of banks in the Gambia, financial intermediation is inefficient; with the primitive perspectives amongst the various stakeholders in the country that the high interest rates are caused by the internal activities of the commercial banks, such as their propensity to maximize their profits in an oligopolistic market. While others argue that the spread is because of the imposition of the macroeconomic policies and the institutional atmosphere in which the commercial banks operate. These diverse perspectives of the stakeholders can only be adjudicated via objectivism and quantitative analysis of the determinants of the banking sector interest rate spread in the country. This paper examines macroeconomic factors that influence Interest Rate Spreads (IRS) in commercial banks of the Gambia using time series data set covering a 22-year period 1991 to 2012. The study employed quarterly time series data from 1991to 2012. Results from the regression indicate that interest rate spread in the Gambia are significantly influenced by Inflation (INF), Treasury Bills (T-bill), and Exchange Rate Volatility (EXV), while Gross Domestic Product Per Capita (GDPpc) and Required Reserve (RR) on the other hand are statistically insignificant.

2014

This paper investigates the determinants of commercial banks interest rate spread in Namibia, using a panel data analysis of bank level dada. It applied the OLS technique to identify the bank-specific variables that have been influencing interest rate spread in Namibia over the period 2004 – 2011. The results of the study indicate that deposit market share, liquidity levelsand operating costs are the main bank-specific determinants of interest rate spread in Namibia. More specifically, it was found that the deposit market share and operating costs reduces net interest margin whilst the liquidity levels of a commercial bank increases its net interest margin. Furthermore, it was revealed that the tax paid by a bank, non-performing loans and the capital ratio are not important determinants of the net interest margin.The foregoing implies that the monetary authority in Namibia should place emphasis on the policies aimed at reducing the liquidity levels in the banking industry, which w...

2013

Despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in a number of African countries, including Kenya. This paper investigates the determinants of interest rate spreads in Kenya’s banking sector based on panel data analysis. The empirical results show that bank-specific factors play a significant role in the determination of interest rate spreads. These include bank size based on bank assets, credit risk as measured by non-performing loans to total loans ratio, liquidity risk, return on average assets and operating costs. The impact of macroeconomic factors such as real economic growth and inflation is not significant. Similarly, the impact of policy rate as an indicator of monetary policy is found to be positive but weak. On average, big banks have higher spreads compared to small banks. There is need for explore policy options meant to enhance competition in the industry and measures to break market dominance will be one such...

Modern Economy, 2012

The paper examines the determinants of interest rate spreads in Nigeria using a panel of 12 commercial banks for the period 1986-2007. The results suggest that cash reserve requirements, average loans to average total deposits, remuneration to total assets and gross domestic product have positive effect on interest rate spreads. However, non-interest income to average total assets, treasury certificate and development stocks have negative relationship with interest rate spreads. In general, the findings that suggest a reduction in cash reserve ratio, high bank overhead costs amongst others will help to moderate the high interest rate spreads in Nigeria.

International Business Research, 2014

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.

Purpose-The purpose of this paper is to investigate the determinants of interest rate in emerging markets, focusing on banking financial institutions in Uganda. Design/methodology/approach-Using the net interest margin model, interest rate was estimated by applying a panel random effects regression method on 24 banks, while controlling for bank-specific factors, industry and macroeconomic indicators. Data were drawn from annual reports provided by Bank of Uganda Depository Corporation survey from 2008 to 2016. Findings-The results indicate that liquidity, equity capital, market power and reserve requirement have a positive effect on interest rate. The study further finds that operational efficiency, lending out ratio, concentration, public sector borrowing and private sector credit have a negative effect on interest rate. However, credit risk does not influence interest rate. Research limitations/implications-Studied banks are grouped in one panel data set; future studies would focus on the differences in banks and establish how these differences affect interest rate. Future study would also focus on how the determinants of interest rate in Uganda are compared with those of other banks in other emerging market countries. Practical implications-Bank managers need to take interest in equity mobilization because it is a reliable and cheaper source of funding bank operations. Banks should emphasize efficient operations to reduce on the cost of doing business. Government should utilize funds borrowed from banks in efficient ways to improve economic growth. The central bank should minimize the use of reserve requirement as a means of controlling money in circulation. Originality/value-This is the first paper that uses annual report data from several banks and periods to investigate the determinants of interest rate in an emerging country.

Review of Development Finance, 2014

The paper empirically investigates the determinants of interest rate spread in Kenya's banking sector based on panel data analysis. The findings show that bank-specific factors play a significant role in the determination of interest rate spreads. These include bank size, credit risk as measured by non-performing loans to total loans ratio, return on average assets and operating costs, all of which positively influence interest rate spreads. On the other hand, higher bank liquidity ratio has a negative effect on the spreads. On average, big banks have higher spreads compared to small banks. The impact of macroeconomic factors such as real economic growth is insignificant. The effect of the monetary policy rate is positive but not highly significant. The results largely reflect the structure of the banking industry, in which a few big banks control a significant share of the market.

2016

This paper investigates the determinants of commercial banks interest rate spread in Namibia, using a panel data analysis of bank level dada. It applied the OLS technique to identify the bank-specific variables that have been influencing interest rate spread in Namibiaover the period 2004 – 2011. The results of the study indicate that deposit market share, liquidity levelsand operating costs are the main bank-specific determinants of interest rate spread in Namibia. More specifically, it was found that the deposit market share and operating costs reduces net interest margin whilst the liquidity levels of a commercial bank increases its net interest margin. Furthermore, it was revealed that the tax paid by a bank, non-performing loans and the capital ratio are not important determinants of the net interest margin.The foregoing implies that the monetary authority in Namibia should place emphasis on the policies aimed at reducing the liquidity levels in the banking industry, which will...

2020

Interest rate spreads in Uganda have been persistently high over the last two decades. This paper aims to complement the literature by investigating the determinants of interest rate spreads in Uganda, following the period after the adoption of Inflation Targeting, using three different approaches: first, a cross country comparison with regional peers, second, a decomposition of interest rates spreads in Uganda and third, a panel data analysis using system generalized method of moments (GMM). A consistent result from each of our analytical approaches is that overhead costs are positively and significantly related with bank spreads. Other important variables in explaining bank spreads include profitability (return on assets), market structure (herfindahl index), non-performing loans, economic growth, the exchange rate and the real Treasury bill rate. The results have important implications for economic policy: singling out the need for a reduction in overhead costs which needs to com...

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This paper examines the effect of financial sector reforms on net interest margin of Ghanaian banks during the period 1997-2006. Changes have taken place in Ghana as in other countries. However, net interest margins have not declined as much in Ghana as they have elsewhere due to the influence of the degree of risk aversion, high operating costs and uncompetitive nature of the market structure. Although banks have relied heavily on fee-and commission-based services as additional sources of income to lower margins, this paper argues that despite recent developments in the Ghanaian financial landscape, financial sector reforms have not yet succeeded in bringing about a major reduction in the operating costs of banks that would translate into substantially narrower margins. This is by far the major significant effect of relatively wide net interest margin in Ghana.

IMF Working Papers, 2013

Financial intermediation is low in sub-Saharan Africa (SSA) compared to other regions of the world. This paper examines the determinants of bank interest margins using a sample of 456 banks in 41 SSA countries. The results show that market concentration is positively associated with interest margins, but the impact depends on the level of efficiency of each bank. In particular, compared to inefficient banks, efficient ones increase their margins more in concentrated markets. This indicates that policies that promote competition and reduce market concentration would help lower interest margins in SSA. The results also show that bank-specific factors such as credit risk, liquidity risk, and bank equity are important determinants of interest margins. Finally, interest margins are sensitive to inflation, but not to economic growth or public or foreign ownership. There are regional differences within SSA regarding the level of interest margins even after controlling for other factors.

2019

University of Ghana http://ugspace.ug.edu.gh v ACKNOWLEDGEMENT My warm appreciation goes to the Lord Almighty whose divine strength and wisdom enabled me to complete this exercise. To my supervisor, Dr. Elikplimi Komla Agbloyor, I say a big thank you for the support and counsel throughout my research work. I also wish to appreciate Mr. Edmund Ankomah for editing this paper. I would also want to express my gratitude to my wife, Mrs. Akosua Ageiwaa Asare, for being my motivation. Lastly, to everyone whose comments and responses helped shape the final outcome, I say a big thank you.

Applied Financial Economics, 2009

This paper contributes to the literature on the determinants of interest rate spreads by using actual loan and deposit interest rate data to examine the macroeconomic and marketspecific determinants of banking sector spreads in middle and low income countries. Numerous variables exogenous to the operations of commercial banks have been widely touted in academic literature and popular discourse to be important factors causing the typically high spreads in developing countries. This paper has tested such claims using panel data econometric techniques, allowing for more focused attention on the variables most likely to impact on spreads. Results are also examined to ascertain whether the determinants of spreads vary across regional groupings of countries.