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Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries

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  • David Tennant
  • Abiodun Folawewo

Abstract

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 Interest Rate Spreads (IRS) in developing countries. Using data for a group of 33 countries, this article applies dynamic panel estimation techniques to investigate the macroeconomic and market determinants of banking sector IRS in low- and middle-income countries. The empirical results suggest that only one market specific factor, the banking sector reserve requirement, significantly and positively affects IRS. Conversely, several macroeconomic and macro-policy variables such as inflation, government crowding-out and the discount rate are important determinants of IRS. Results are also examined to ascertain whether the determinants of spreads vary across regional groupings of countries.

Suggested Citation

  • David Tennant & Abiodun Folawewo, 2009. "Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries," Applied Financial Economics, Taylor & Francis Journals, vol. 19(6), pages 489-507.
  • Handle: RePEc:taf:apfiec:v:19:y:2009:i:6:p:489-507
    DOI: 10.1080/09603100701857930
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    References listed on IDEAS

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    1. 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.
    2. Ruby Randall, 1998. "Interest Rate Spreads in the Eastern Caribbean," IMF Working Papers 98/59, International Monetary Fund.
    3. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 07/101, International Monetary Fund.
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    1. repec:gam:jjrfmx:v:10:y:2017:i:2:p:9-:d:96046 is not listed on IDEAS
    2. Abdul Latif Alhassan & Michael Lawer Tetteh & Freeman Owusu Brobbey, 2016. "Market power, efficiency and bank profitability: evidence from Ghana," Economic Change and Restructuring, Springer, vol. 49(1), pages 71-93, February.
    3. Tatum Blaise Pua Tan, 2012. "Determinants of Credit Growth and Interest Margins in the Philippines and Asia," IMF Working Papers 12/123, International Monetary Fund.
    4. Fazurin Jamaludin & Vladimir Klyuev & Anuk Serechetapongse, 2015. "What Drives Interest Rate Spreads in Pacific Island Countries? An Empirical Investigation," IMF Working Papers 15/96, International Monetary Fund.

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