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Why Have Bank Interest Margins Been so High in Indonesia Since the 1997/1998 Financial Crisis?

Author

Listed:
  • Agusman Agusman

    (bank indonesia - bank indonesia)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Irwan Trinugroho

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

We investigate the determinants of net interest margins of Indonesian banks after the 1997/1998 financial crisis. Using data for 93 Indonesian banks over the 2001-2009 period, we estimate an econometric model using a pooled regression as well as static and dynamic panel regressions. Our results confirm that the structure of loan portfolios matters in the determination of interest margins. Operating costs, market power, risk aversion and liquidity risk have positive impacts on interest margins, while credit risk and cost to income ratio are negatively associated with margins. Our results also corroborate the loss leader hypothesis on cross-subsidization between traditional interest activities and non-interest activities. State- owned banks set higher interest margins than other banks, while margins are lower for large banks and for foreign banks.

Suggested Citation

  • Agusman Agusman & Amine Tarazi & Irwan Trinugroho, 2014. "Why Have Bank Interest Margins Been so High in Indonesia Since the 1997/1998 Financial Crisis?," Post-Print hal-01134850, HAL.
    • Handle: RePEc:hal:journl:hal-01134850
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    Cited by:

    1. TUMIWA Johan & TUEGEH Octavia & NAGY Adrián Szilárd, 2020. "Factor Influencing Msmes Performance Measurement - A Literature Review," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 151-162, July.
    2. Trinugroho, Irwan & Pamungkas, Putra & Ariefianto, Mochammad Doddy & Tarazi, Amine, 2020. "Deposit structure, market discipline, and ownership type: Evidence from Indonesia," Economic Systems, Elsevier, vol. 44(2).
    3. Nys, Emmanuelle & Tarazi, Amine & Trinugroho, Irwan, 2015. "Political connections, bank deposits, and formal deposit insurance," Journal of Financial Stability, Elsevier, vol. 19(C), pages 83-104.
    4. Irwan Trinugroho & Agusman Agusman & Mochammad Doddy Ariefianto & Darsono Darsono & Amine Tarazi, 2015. "Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces," Economics Bulletin, AccessEcon, vol. 35(2), pages 896-910.
    5. Inka Yusgiantoro & Wahyoe Soedarmono & Amine Tarazi, 2017. "Bank consolidation and financial stability revisited: Evidence from Indonesia," Working Papers hal-01577970, HAL.
    6. Sapto Jumono & Abdurrahman & Chajar Matari Fath Mala, 2017. "Market Concentration Index and Performance: Evidence from Indonesian Banking Industry," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 249-258.
    7. Te-Kuang Chou & Agung Dharmawan Buchdadi, 2016. "Bank Performance and Its Underlying Factors: A Study of Rural Banks in Indonesia," Accounting and Finance Research, Sciedu Press, vol. 5(3), pages 1-55, August.
    8. Fotios Pasiouras, 2018. "Financial Consumer Protection and the Cost of Financial Intermediation: Evidence from Advanced and Developing Economies," Management Science, INFORMS, vol. 64(2), pages 902-924, February.
    9. Risfandy, Tastaftiyan & Tarazi, Amine & Trinugroho, Irwan, 2022. "Competition in dual markets: Implications for banking system stability," Global Finance Journal, Elsevier, vol. 52(C).
    10. Mansor H. Ibrahim & Siong Hook Law, 2019. "Financial Intermediation Costs In A Dual Banking System: The Role Of Islamic Banking," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 531-552, December.
    11. Putra Pamungkas & Clovis Rugemintwari & Amine Tarazi & Irwan Trinugroho, 2016. "Bank Lending and Income Inequality: Evidence from Indonesia," Working Papers hal-01251500, HAL.
    12. Shaban, Mohamed & James, Gregory A., 2018. "The effects of ownership change on bank performance and risk exposure: Evidence from indonesia," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 483-497.
    13. Kukk, Merike & Levenko, Natalia, 2024. "Interest rate spreads: Different stories for different types of loan," Research in International Business and Finance, Elsevier, vol. 72(PA).
    14. Nguyen, James & Parsons, Richard & Argyle, Bronson, 2021. "An examination of diversification on bank profitability and insolvency risk in 28 financially liberalized markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    15. Zied Saadaoui, 2018. "Dealing with High Bank Interest Margins in Tunisia: A Dynamic Panel Investigation," African Development Review, African Development Bank, vol. 30(4), pages 434-448, December.
    16. Shan, Shan & Mirza, Nawazish & Umar, Muhammad & Hasnaoui, Amir, 2023. "The nexus of sustainable development, blue financing, digitalization, and financial intermediation," Technological Forecasting and Social Change, Elsevier, vol. 195(C).

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