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Financial Intermediation Costs in Low-Income Countries; The Role of Regulatory, Institutional, and Macroeconomic Factors


  • Tigran Poghosyan


We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.

Suggested Citation

  • Tigran Poghosyan, 2012. "Financial Intermediation Costs in Low-Income Countries; The Role of Regulatory, Institutional, and Macroeconomic Factors," IMF Working Papers 12/140, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/140

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    Cited by:

    1. Soedarmono, Wahyoe & Tarazi, Amine, 2013. "Bank opacity, intermediation cost and globalization: Evidence from a sample of publicly traded banks in Asia," Journal of Asian Economics, Elsevier, vol. 29(C), pages 91-100.
    2. Perera, Anil & Wickramanayake, J., 2016. "Determinants of commercial bank retail interest rate adjustments: Evidence from a panel data model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 1-20.
    3. repec:eee:ecanpo:v:55:y:2017:i:c:p:106-123 is not listed on IDEAS
    4. repec:sos:sosjrn:170412 is not listed on IDEAS
    5. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.

    More about this item


    Commercial banks; Banks; Banking systems; Economic models; Emerging markets; Financial intermediation; Low-income developing countries; Net Interest Margins; Low Income Countries; Emerging Economies; market concentration; banking; net interest margin; competition; bank entry;

    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
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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