Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
Non-deposit fund*Monetary policy
(0.0137)
0.0595***
(0.0105)
Credit risk*Monetary policy 0.0785***
(0.0097)
Lerner index*Monetary policy 0.0660***
(0.0095)
Bank spreadt-1 0.1422*** 0.1295*** 0.2487*** 0.1249***
(0.0394) (0.0384) (0.0391) (0.0379)
Monetary policy stance 0.0364*** 0.0117* 0.0115** 0.0059
(0.0050) (0.0067) (0.0057) (0.0066)
GDP growth 0.0817* 0.0588 0.0213 0.0860**
(0.0428) (0.0419) (0.0412) (0.0411)
Inflation 0.0223*** 0.0289*** 0.0168** 0.0405***
Number of observation
R2
Hausman test
Prob>chi2
(0.0069)
691
0.7072
552.81
0.0000
(0.0060)
691
0.7130
575.30
0.0000
(0.0060)
691
0.7489
366.03
0.0000
(0.0062)
691
0.7814
332.67
0.0000
The estimation is based on data for 24 SSA countries using fixed effects estimators. The dependent variable is bank spread. Constant term included but not reported.
Standard errors are reported in parentheses. ***, **, and * indicates statistical significance at the 1% 5% and 10% level respectively.
Conclusion
This paper contributes to the literature on banks spread by examining factors that affect the prevalence of
high interest rate in SSA, focusing on the stance of monetary policy. On the competitive environment, the
figures suggest an improvement in competition level in SSA banking sectors as the trend has been
declining since 2003. In evaluating the spreads of SSA banks, the paper finds evidence to suggest that
high credit risk, risk aversion, excessive implicit payments and the increasing high cost of labor
contribute to high net interest margin. A special mention has to be made of the labor cost of African
banks. The result shows that one percent increase in labor cost increases the spread of banks by more than
fifty percent. Thus African banks increase interest margin to finance labor expenditure. All macro
variables considered in this paper contribute to the high bank spreads in SSA. To enable them to earn
positive real interest margins, banks charge high lending rates during periods of increases in inflation rate.
Similar results are found during an economic boom. There is also evidence to suggest that banks in Africa
profit from monetary policy shocks. Overall results reveal that spreads among banks with market power is
significantly more sensitive to the monetary policy stance, thus making monetary policy less effective in
addressing banks spread. Other interesting avenues remain open for further research on the high spreads
of SSA banks. In particular whether in the absence of a well-functioning capital market, the high spread
of banks in SSA as a response of regulatory shock enables banks to plough back profit and capital for the
purpose of maintaining some level of stability.
Reference
Altunabas, Y., Gambacorta, L., and Marques-Ibanez, D. (2010) Does monetary policy affect Bank
Risk-taking, Bank for International Settlements Working Paper No. 298
Beck, T., and Hesse, H. (2009) ‘Why are interest spread so high in Uganda’? Journal of Development
Economics 88, 192-204
Berger, A.N., Klapper, L., and Turk Ariss, R. (2009) Bank competition and financial stability’, Journal of
Financial Services Research 35, 99-118
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