Challenges in the Era of Globalization - iaabd

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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 18
Challenges in the Era of Globalization Edited by Emmanuel Obuah Boyd, J.H., Levine, R., and Smith, B.D. (2001) ‘The impact of inflation on financial sector performance’, Journal of Monetary of Economics 47, 221-248. Brock, P., and Rojas-Suarez, L. (2000) ‘Understanding the behaviour of bank spreads in Latin America’, Journal of Development Economic 63, 113–134 Carbo Valverde, S., and Rodriguez Fernandez, F. (2007) ‘The determinants of bank margins in European banking’, Journal of Banking and Finance 31, 2043-2063 Carbo Valverde, S., Humphrey, D., Maudos, J., and Molyneux, P. (2009) ‘Cross-country comparisons and pricing power of European banking’, Journal of International Money and Finance, 28, 115-134 Chirwa, E.W., Mlachila, M., (2004) Financial reforms and interest rate spreads in the commercial banking system in Malawi. IMF Staff Papers 51 (1), 96-122. Claeys, S., and Vander Vennet, R. (2008) ‘Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West’, Economic Systems 32, 197-216 Demirguc-Kunt, A., Laeven, L., and Levine, R. (2004) ‘Regulations, market structure, institutions, and the cost of financial intermediation’, Journal of Money Credit Banking 36, 593–622 Fernandez De Guevara, J., Maudos, J and Perez, F. (2005) ‘Market power in European banking sectors’, Journal of Financial Services Research 27(2), 109-137 Gelos, G. (2006) ‘Banking spread in Latin America’, IMF Working paper 06/44 Hanweck, G. and Ryu, l. (2005), The Sensitivity of Bank net Interest Margins and Profitability to Credit, Interest-Rate and Ter-Structure Shocks Across bank Product Specializations, Federal Deposit Insurance Corporation. Working Paper 2005-02 Hesse, H. (2007) Financial Intermediation in the Pre-consolidated Banking Sector in Nigeria, World Bank Policy Research Working Paper, 4267 Ho, T. S. and Sauders, A. (1981), The determinants of bank interest margins: theory and empirical evidence’, Journal of Financial and Quantitative Analysis 16 (4), 581-600 Klein, M.A. (1971) ‘A theory of banking firm’, Journal of Money, Credit and Banking 3, 205-218 Koetter, M., Kolari, J., and Spierdijk, L., (2008) ‘Efficient competition? Testing the ‘‘quiet life” of US banks with adjusted Lerner indices. Working Paper, Groningen University. Levine, R. (2004) Finance and Growth: Theory and Evidence, NBER Working Paper 10766 (Cambridge: National Bureau of Economic Research) Maudos, J. and De Guevara, J. (2007) ‘The cost of market power in the European banking sector: Social Welfare cost vs. cost inefficiency’, Journal of Banking and Finance 31, 2103-2125 Maudos, J., and Fernandez De Guevara, F. (2004) ‘Factors explaining the interest margin in the banking sectors of the European Union’, Journal of Banking and Finance 28 (9), 2259–2281. Saunders, A., and Schumacher, L. (2000) ‘The determinants of bank interest rate margins: an international study’, Journal of International Money and Finance 19 (6), 813–32. Souza-Sobrinho, N (2010) ‘Macroeconomics of bank interest spreads: Evidence from Brazil’, Ann Finance (6) 1-32 The Heritage Foundation Index of Economic Freedom (2010) ‘The link between Economic opportunity and prosperity’, The Heritage Foundation and Dow Jones and Company, Washington D.C. Yildirim, H.S., and Philippatos, C.G. (2007) ‘Competition and contestability in Central and Eastern European banking market’, Managerial Finance 33 (3), 195-207. 19
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Challenges in the Era of Globalizat
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Abstract: Study on Africa Governmen
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Abstract Challenges of Oil Revenue
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Abstract Challenges in the Era of G
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Conclusion Challenges in the Era of
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37. Provision of sound education fo
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Abstract The Changing Requirements
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The Model, Data and Variable Defini
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Figure 1.1: Spread of directorships
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Theoretical Framework Challenges in
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Single 18.1 Masters and above 35.3
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Source: Field survey, 2010 Table 3:
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Conclusions and Implications Challe
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Abstract Exploring Organisational R
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Table 1: A Summary of Operating Ban
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Discussion and Conclusion Challenge
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Abstract What does Globalization me
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Banks in Ghana Challenges in the Er
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The study seeks to: • examine typ
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Relationship Commitment Total 1264.
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