What determines bank interest rate spread? Evidence from Sub-Saharan Africa

Abstract

Purpose

The purpose of this paper is to examine the determinants of bank interest rate spread in Sub-Saharan African countries, which were categorized into macro-specific, bank-specific and institutional variables.

Design/methodology/approach

The authors used fixed effects estimations to analyze the data. The data were drawn from a pool of 20 Sub-Saharan African countries for a period of ten years spanning 2003–2012. The countries were categorized into low-income, lower middle-income and upper middle-income countries based on World Bank income classifications.

Findings

The results show that inflation has a negative and significant effect on interest rate spread, while operating costs and bank concentration have a positive and significant effect on interest rate spread. Similarly, government effectiveness, rule of law and political stability are negatively related to the interest rate spread.

Practical implications

The paper provides evidence that interest rate spread is determined by both bank-specific, macro-economic and institutional variables. The paper also indicates that the income status of a country is important in explaining the variations in the interest rate spread across the region. Therefore, the policy makers should design policies that take into account the variables in order to help in planning by all economic agents, including banks.

Originality/value

The paper uses data from Sub-Saharan Africa and introduces institutional variables in the model, which have been found to be critical in the context.

Citation

Tarus, D.K. and Manyala, P.O. (2018), "What determines bank interest rate spread? Evidence from Sub-Saharan Africa", African Journal of Economic and Management Studies, Vol. 9 No. 3, pp. 335-348. https://doi.org/10.1108/AJEMS-05-2017-0094