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Why are interest spreads so high in Uganda?

  • Beck, Thorsten
  • Hesse, Heiko

Using international comparisons and 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. International comparisons show that the small size of Ugandan banks, persistently high T-Bill rates and institutional deficiencies explain large proportions of the high Ugandan interest rate margins. The Ugandan bank panel confirms the importance of macroeconomic factors, such as high inflation, high T-Bill rates and exchange rate appreciation. There is also evidence for the small market place and high costs of doing business explaining persistently high spreads and margins; smaller banks and banks targeting the low end of the market incur higher costs and therefore higher margins. Spreads and margins also vary significantly with the sectoral loan portfolio composition of banks, while there is little evidence for foreign bank entry, privatization or changes in market structure explaining variation in spreads or margins over time.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 2 (March)
Pages: 192-204

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Handle: RePEc:eee:deveco:v:88:y:2009:i:2:p:192-204
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