The Determinants of Interest Rate Spreads in Nigeria: An Empirical Investigation

DOI: 10.4236/me.2012.37107   PDF   HTML     6,508 Downloads   12,009 Views   Citations

Abstract

The paper examines the determinants of interest rate spreads in Nigeria using a panel of 12 commercial banks for the period 1986-2007. The results suggest that cash reserve requirements, average loans to average total deposits, remuneration to total assets and gross domestic product have positive effect on interest rate spreads. However, non-interest income to average total assets, treasury certificate and development stocks have negative relationship with interest rate spreads. In general, the findings that suggest a reduction in cash reserve ratio, high bank overhead costs amongst others will help to moderate the high interest rate spreads in Nigeria.

Share and Cite:

A. Akinlo and B. Owoyemi, "The Determinants of Interest Rate Spreads in Nigeria: An Empirical Investigation," Modern Economy, Vol. 3 No. 7, 2012, pp. 837-845. doi: 10.4236/me.2012.37107.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] G. Quaden, “Efficiency and Stability in an Evolving Financial System,” 2004. www.bub.be/Sg/En/Contact/pdf/2004/spo40517an.pdf
[2] S. C.Valverde, R. L. del Pasto and F. R. Fernandez, “Banks, Financial Innovations and RegionalGrowth,” 2004. www.ugr.es/~franrod/ingrowth04.pdf
[3] N. S. Ndung’u and R. W. Ngugi, “Banking Sector Interest Rate Spreads in Kenya,” Kenya Institute for Public Policy Research and Analysis (KIPPRA), Discussion Paper No. 5, 2000.
[4] E. A. Onwioduokit and P. Adamu, “Financial Liberalization in Nigeria: An Assessment of Relative Impact,” In: Nigerian Economic Society, Benefits and Costs of Economic Reforms in Nigeria. Selected Papers for the 2005 Annual Conference of Nigerian Economic Society, 2005.
[5] C. I. Enendu, “Determinants of Commercial bank Interest Rate Spreads in a Liberalized Financial System: Empirical Evidence form Nigeria 1989-2000,” Economic and Financial Review, Vol. 41, No 1, 2003.
[6] L. Angbazo, “Commercial bank Net Interest Margins, Default Risk, Interest-Rate Risk, and Off-Balance Sheet Banking,” Journal of banking and Finance, Vol. 21, No. 1, 1997, pp. 55- 87. doi:10.1016/S0378-4266(96)00025-8
[7] A. Saunders and L. Schumacher, “The determinants of Bank Interest rate Margins: An International Study,” Journal of International Money and Finance, Vol. 19, No. 6, pp. 813-832. doi:10.1016/S0261-5606(00)00033-4
[8] R. Randall, “Interest Rate Spreads in the Eastern Caribbean,” IMF Working Paper, WP/98/59.
[9] L. Catao, “Intermediation Spreads in a Dual currency Economy: Argentina in 1990s,” IMF Working Paper, WP/ 98/90.
[10] K.P. Wong, “On the Determinants of Bank Interest Margins under Credit and Interest Rate Risks,” Journal of Banking and Finance, Vol. 21, No.2, 1997, pp. 251-271. doi:10.1016/S0378-4266(96)00037-4
[11] A. Barajas, R. Steiner and N. Salazar, “Interest Spreads in Banking in Colombia, 1975-96,” Journal of Development Economics, Vol. 88, pp. 192-2004.
[12] P. L. Brock and L. Rojas-Suarez, “Understanding the Behaviour of Bank Spreads in Latin America,” Journal of Development Economics, Vol. 63, 2000, pp. 113-135. doi:10.1016/S0304-3878(00)00102-4
[13] T. A. Beck and H. Hesse, “Bank Efficiency, Ownership and Market Structure: Why Are Interest Spreads So High in Uganda?” World Bank Policy Research Working Paper 4027, 2006.
[14] H. Hesse, “Financial Intermediation in the Pre-consolidated Banking Sector in Nigeria,” World Bank Policy Research Working Paper 4267, 2007.
[15] T. Beck and H. Hesse, “Why Are Interest Spreads So High in Uganda?” Journal of Development Economics, Vol. 88, No. 2, 2009, pp. 192-204. doi:10.1016/j.jdeveco.2008.07.004
[16] T. Ho and A. Saunders, “The Determinants of Bank Interest Margins: Theory and Empirical Evidence,” Journal of Financial and Quantitative Analysis, Vol. 16, No. 4, 1981, pp. 581-600. doi:10.2307/2330377
[17] P. Martinez and M. S. Mody, “How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America,” Journal of Money, Credit and Banking, Vol. 36, No. 3, pp. 511-537. doi:10.1353/mcb.2004.0048
[18] E. W. Chirwa and M. Mlachila, “Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi,” IMF Staff Papers, Vol. 51, No. 1, 2004, pp. 96-122.
[19] W. Samuel and L. Valderrama, “The Monetary Policy Regime and Banking Spreads in Barbados,” IMF Working Paper, WP/06/211, 2006.
[20] J. Crowley, “Interest Rate Spreads in English-Speaking African Countries,” IMF Working Paper, WP/07/101, 2007.
[21] D. Tennant and A. Folawewo, “Macroeconomic and Market Determinants of Banking Sector Interest Rate Spread: Empirical Evidence from Low and Middle Income Countries,” Department of Economics, University of West Indies, Mona, Mimeo.
[22] J. A. Hausman, “Specification Tests in Econometrics,” Econometrica, Vol. 46, No. 6, 1978, pp. 1251-1271. doi:10.2307/1913827
[23] B. Bernanke and M. Gertler, “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, Vol. 79, No. 1, 1989, pp. 14-31
[24] M. Arellano and S. R. Bond, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 277-297. doi:10.2307/2297968

  
comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.