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Bank Efficiency, Ownership and Market Structure,Why are Interest Spreads so High in Uganda?

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  • Heiko Hesse
  • Thorsten Beck

Abstract

Using a unique bank-level dataset on the Ugandan banking system over the period 1999 to 2005, we explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, we do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio, explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank-variation in spreads and margins. Further, we find tentative evidence that banks targeting the low-end of the market incur higher costs and therefore higher margins.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 277.

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Date of creation: 01 Sep 2006
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Handle: RePEc:oxf:wpaper:277

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Keywords: Foreign Bank Entry; Financial Sector Reform; Bank Efficiency; Financial Intermediation; Uganda;

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  1. Martinez Peria, Maria Soledad & Mody, Ashoka, 2004. "How foreign participation and market concentration impact bank spreads : evidence from Latin America," Policy Research Working Paper Series 3210, The World Bank.
  2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  3. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
  4. Demirguc-Kunt, Asli & Laeven, Luc & Levine, Ross, 2004. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 593-622, June.
  5. Barajas, Adolfo & Steiner, Roberto & Salazar, Natalia, 2000. "The impact of liberalization and foreign investment in Colombia's financial sector," Journal of Development Economics, Elsevier, vol. 63(1), pages 157-196, October.
  6. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," World Bank Economic Review, World Bank Group, vol. 13(2), pages 379-408, May.
  7. Claessens, Stijn & Laeven, Luc, 2003. "What drives bank competition? some international evidence," Policy Research Working Paper Series 3113, The World Bank.
  8. Laeven, Luc & Majnoni, Giovanni, 2005. "Does judicial efficiency lower the cost of credit?," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1791-1812, July.
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Cited by:
  1. Govori, Fadil, 2013. "The performance of commercial banks and the determinants of profitability: Evidence from Kosovo," MPRA Paper 46824, University Library of Munich, Germany.
  2. Hesse, Heiko, 2007. "Financial intermediation in the pre-consolidated banking sector in Nigeria," Policy Research Working Paper Series 4267, The World Bank.
  3. Dilli Raj Khanal, 2007. "Services Trade in Developing Asia:A Case Study of the Banking and Insurance Sector in Nepal," Working Papers 3907, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
  4. Chuling Chen, 2009. "Bank Efficiency in Sub-Saharan African Middle Income Countries," IMF Working Papers 09/14, International Monetary Fund.

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