The Determinants of Interest Rate Spreads in Developing Countries: Evidence on Tanzania, 1991-2009

Mugizi, Francisco M.P.; Ndanshau, Michael O. A.; Aikaeli, Jehovaness

doi:10.2139/ssrn.1894008

Cited by 3 publications

(3 citation statements)

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“…Generally, mixed results are evident, suggesting a wide range of factors in explaining movements in banks' lending interest rates (see for example, Chodechai, 2004;Chirwa & Mlachila, 2004;Cihak, 2004;Grenade, 2007;Gambacorta, 2008;Olokoyo, 2011;Siddique, 2012;Georgievska et al, 2011;Aikael et al, 2011;Were & Wambua, 2013;Mbao et al, 2014;Manamba, 2014;Matemilola et al, 2015).…”

Section: Literature Reviewmentioning

confidence: 99%

“…As for time series-based studies,Matemilola et al (2015), used the momentum threshold autoregressive and asymmetric error correction models and found that bank lending rate adjusts to a decrease in the money market rate in South Africa. However, commercial banks adjust their lending rate downward but the lending rate appears rigid upward supporting the customer reaction proposition.In Tanzania,Manamba (2014) focused on co-integration analysis using macro-level quarterly data covering 1986-2013 period and found that, interest rate spreads are significantly determined by lack of competition among financial institutions; existence of diseconomies of scale in the financial system; and that, as proportion of liquid assets increases the bank liquidity risk decreases, leading to lower interest rate spreads Aikael et al (2011). also use quarterly macro-level data and a co-integration and error correction model to establish relative importance of macroeconomic and regulatory factors in explaining persistence of interest rate spreads in Tanzania.…”

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confidence: 99%

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Determinants of Bank Lending Interest Rates in Tanzania

Mbowe¹,

Mrema²,

Shayo³

2020

AJIBM

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The study seeks to examine the determinants of bank lending interest rates in Tanzania, largely focusing on identifying the key determinants and their relative importance. Techniques employed comprise interest rates decomposition and econometric estimation using banks' annual balance sheet data. Results on interest rates decomposition suggest that, the main drivers of lending rates are operating costs, non-performing loans; and costs of funds (deposits interest rates). The three factors accounted for 70.4 percent of small banks' average lending rates in 2014-17; while for medium and large banks, they constituted about 69.5 percent and 67.4 percent of the lending rates, respectively. Statutory minimum requirement ratio (SMR) appears to play an important role in all banks' lending rates, but its share has been declining overtime consistent with the expansionary monetary policy measures pursued since 2014. With respect to econometric estimations, the findings confirm the role of operating costs, non-performing loans, and cost of funds in explaining bank lending rates dynamics. Operating costs, cost of funds, and inflation have a statistically significant positive effect on bank lending rates, while bank size and level of liquidity have a negative influence. SMR ratio is statistically significant but bears a negative sign except for locally owned banks. In relative importance, the main determinants of bank lending rates could be ranked as follows: inflation with an average positive impact of 0.432 on lending rates for a unit change in inflation, trailed by operating costs (0.261), and cost of funds (0.255). Bank size has the largest negative effect of 0.288 for every unit increase in the variable. The implication of the findings is that effort should be directed at improving operational efficiency aiming at reducing banks operating costs. The key areas of attention are with respect to employees' salaries and benefits, as well as rental and depreciation expenses related to premises and equipment. Banks may consider to take advantage of ICT advancement in the country to cut on costs of "mortal and brick" and employees. Priority could be put on utilizing the growing agent banking framework, and digital How to cite this paper: Mbowe, W. E.,

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Section: Literature Reviewmentioning

confidence: 99%

mentioning

confidence: 99%

Determinants of Bank Lending Interest Rates in Tanzania

Mbowe¹,

Mrema²,

Shayo³

2020

AJIBM

View full text Add to dashboard Cite

show abstract

“…Khawaja and Din (2007) studied on determinants of interest rate spreads in Pakistan and found out that determinants of interest rate spread are; industry's market structure, bank specific factors, macroeconomic variables, and financial regulations. Aikaeli et al (2011) conducted a study on determinants of interest rate spread in Tanzania and found out that factors that determine interest rate spread are bank specific factor. These include; size of capital structure, management efficiency, ownership pattern, quality of portfolio, overhead costs, profit maximization motive and shares of liquid and fixed assets.…”

Section: Cash Forecasting Practicementioning

confidence: 99%