Republic of Azerbaijan: Selected Issues

Abstract

In this note, we use a bank-level panel dataset to investigate the determinants of bank interest spreads in Azerbaijan over the period 2002-13. We applied the dealership model of Ho and Saunders, supplemented by market structure and macroeconomic environment variables, to assess the extent to which high spreads of banks in Azerbaijan can be related to bank-specific variables or to a low degree of competition, controlling for macroeconomic factors. We find that interest spreads are affected by operation cost efficiency, credit risk, liquidity risk, bank size, bank diversification, banking sector competition, policy rate, and reserve requirement. The main implications of our results are that policies aimed at containing banks' interest margins should enhance bank efficiency, encourage greater competition, consolidate the small banks, and maintain a stable macroeconomic environment.