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Determinants of Interest Margins in Colombia


  • Dairo Estrada


  • Esteban Gómez


  • Inés Orozco



This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saunders (1981), interest margins are modelled as a function of the pure spread and bank-specific institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly affected by credit institutions' inefficiency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be oriented towards creating the necessary market conditions for banks to enhance their efficiency.

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  • Dairo Estrada & Esteban Gómez & Inés Orozco, 2006. "Determinants of Interest Margins in Colombia," BORRADORES DE ECONOMIA 002335, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:002335

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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. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    3. Lerner, Eugene M., 1981. "Discussion: The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 601-602, November.
    4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, January.
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    6. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-1153, September.
    7. 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.
    8. Kit, Pong Wong, 1997. "On the determinants of bank interest margins under credit and interest rate risks," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 251-271, February.
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    10. 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.
    11. Zarruk, Emilio R., 1989. "Bank spread with uncertain deposit level and risk aversion," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 797-810, December.
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    13. Dairo Estrada, 2005. "Efectos De Las Fusiones Sobre El Mercado Financiero Colombiano," BORRADORES DE ECONOMIA 002424, BANCO DE LA REPÚBLICA.
    14. Zarruk, Emilio R. & Madura, Jeff, 1992. "Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 143-149, March.
    15. 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.
    16. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
    17. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
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    19. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
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    1. repec:eme:csefzz:s1569-375920140000096013 is not listed on IDEAS
    2. repec:bdr:ensayo:v:35:y:2017:i:83:p:154-160 is not listed on IDEAS
    3. Jugnu Ansari & Ashima Goyal, 2014. "Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India," Contemporary Studies in Economic and Financial Analysis,in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 317-339 Emerald Publishing Ltd.
    4. Ignacio Lozano-Espitia & Hernando Vargas-Herrera & Norberto Rodríguez-Niño, 2017. "Financial transaction tax and banking margins: An empirical note for Colombia," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(83), pages 154-160, Junio.
    5. Papavangjeli, Meri & Leka, Eralda, 2016. "Përcaktuesit mikro- dhe makroekonomikë të marzhit neto të interesave në sistemin bankar shqiptar (2002-2014)
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      ," MPRA Paper 78604, University Library of Munich, Germany, revised Jun 2016.
    6. Ignacio Lozano & Norberto Rodríguez, 2015. "Una Nota Sobre el Impacto del Gravamen a las Transacciones Financieras en los Márgenes Bancarios en Colombia," BORRADORES DE ECONOMIA 013876, BANCO DE LA REPÚBLICA.
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    More about this item


    Interest margins; competition; credit risk; interest rate risk;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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