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Financial Intermediation Costs in Low-Income Countries

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  • Tigran Poghosyan

Abstract

We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) 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, 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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/140.

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Length: 35
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/140

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Related research

Keywords: Banks; Banking systems; Commercial banks; Economic models; Emerging markets; Financial intermediation; Low-income developing countries; market concentration; banking; net interest margin; competition; bank entry; regulatory environment; bank interest; banking industries; bank size; bank interest margins; reserve requirement; market competition; bank capitalization; bank assets; loan loss provision; banking activities; bank reserves; regulatory burden; bank margins; income statement; bank market; degree of competition; banking regulation; accounting framework; bank balance sheets; banking markets; liquidity ratio; bank clients; bank operations; bank entries; bank spreads; bank profitability; bank intermediation; bank branch; banking sectors; bank policy; bank regulations; bank ownership; bank regulation; banking industry; concentration index; bank financing; interest expense;

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  1. Brock, Philip L. & Rojas Suarez, Liliana, 2000. "Understanding the behavior of bank spreads in Latin America," Journal of Development Economics, Elsevier, vol. 63(1), pages 113-134, October.
  2. Beck, Thorsten & Hesse, Heiko, 2009. "Why are interest spreads so high in Uganda?," Journal of Development Economics, Elsevier, vol. 88(2), pages 192-204, March.
  3. Adolfo Barajas & Natalia Salazar & Roberto Steiner, 1999. "Foreign Investment in Colombia's Financial Sector," IMF Working Papers 99/150, International Monetary Fund.
  4. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  5. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
  6. Fungacova, Zuzana & Poghosyan, Tigran, 2009. "Determinants of bank interest margins in Russia: Does bank ownership matter?," BOFIT Discussion Papers 22/2009, Bank of Finland, Institute for Economies in Transition.
  7. Poghosyan, Tigran, 2010. "Re-examining the impact of foreign bank participation on interest margins in emerging markets," Emerging Markets Review, Elsevier, vol. 11(4), pages 390-403, December.
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