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Financial intermediation costs in low income countries: The role of regulatory, institutional, and macroeconomic factors

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  • Poghosyan, Tigran

Abstract

We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EM) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization (or lower risk aversion), and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 92-110

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Handle: RePEc:eee:ecosys:v:37:y:2013:i:1:p:92-110

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Keywords: Interest margins; Financial intermediation; Dealership model; Bank concentration; Bank regulation;

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References

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Cited by:
  1. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.
  2. Soedarmono, Wahyoe & Tarazi, Amine, 2013. "Bank opacity, intermediation cost and globalization: Evidence from a sample of publicly traded banks in Asia," Journal of Asian Economics, Elsevier, vol. 29(C), pages 91-100.

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