Determinants of Bank Interest Margins in Sub-Saharan Africa

Abstract

Financial intermediation is low in sub-Saharan Africa (SSA) compared to other regions of the world. This paper examines the determinants of bank interest margins using a sample of 456 banks in 41 SSA countries. The results show that market concentration is positively associated with interest margins, but the impact depends on the level of efficiency of each bank. In particular, compared to inefficient banks, efficient ones increase their margins more in concentrated markets. This indicates that policies that promote competition and reduce market concentration would help lower interest margins in SSA. The results also show that bank-specific factors such as credit risk, liquidity risk, and bank equity are important determinants of interest margins. Finally, interest margins are sensitive to inflation, but not to economic growth or public or foreign ownership. There are regional differences within SSA regarding the level of interest margins even after controlling for other factors.

Interest Rate Spread on Bank Profitability: The Case of Ghanaian Banks

“…A study by Siddiqui (2012) found a positive effect of return on assets on interest spreads. Similar results were found by Ahokpossi (2013) in his study on determinants of interest rates spread. He concluded that return on average assets plays a key role in interest rates determination.…”

Essential information sharing thresholds for reducing market power in financial access: a study of the African banking industry

“…More contemporary literature suggests that compared to big banks, smaller banks are linked to lower margins of interest (see Beck & Hesse, 2006;Ahokpossi, 2013) 2 . This is a paradox because, banks with greater market power are expected to be associated with lower interest margins because of the economies of scale they enjoy (internal and external advantages).…”

Information asymmetry and market power in the African banking industry

“…This study builds on this literature by investigating the relationship between information sharing offices and market power in African countries. We do so by analysing 162 banks from 42 African countries over the period of 2001-2011. Prior literature indicates that smaller banks are characterised with lower interest margins (see Beck & Hesse, 2006;Ahokpossi, 2013) 1 . In essence, relative to small banks, financial institutions with high market power are supposed to reduce their interest margins because of internal and external economies of scale.…”