Intermediation, Interrupted? Bank-Level Analysis of Interest Spreads in Montenegro

Financial intermediation in Montenegro has been on a declining trend since independence, with domestic credit to the private sector decreasing from a peak of 86.5 percent of GDP in 2008 to 46.4 percent in 2024. Net interest margin (NIM)—a common indicator of intermediation costs—has remained elevated, ranking among the highest in the Western Balkans. This paper analyzes the determinants of NIMs using a unique bank-level dataset comprising quarterly observations on all commercial banks in Montenegro during the period 2013–25. The empirical analysis reveals three key findings, each with important policy implications. First, larger banks tend to exhibit lower NIMs, reflecting economies of scale, diversification, and stronger market power. Second, higher asset quality is associated with narrower margins, underscoring the role of effective credit risk management. Third, greater operational efficiency correlates with lower NIMs, highlighting the importance of cost control and managerial effectiveness. Taken together, these results underscore the need for policy initiatives that support banking sector consolidation, reinforce credit risk management practices, and promote operational efficiency improvements.