Search results
1 – 10 of over 16000This study investigates the reasons behind the very high net interest margins in the Greek banking industry compared to the euro-area, focussing on the association between bank…
Abstract
Purpose
This study investigates the reasons behind the very high net interest margins in the Greek banking industry compared to the euro-area, focussing on the association between bank competition and recapitalisations.
Design/methodology/approach
The author conducts a dynamic panel analysis covering the period from the early 2000s to 2021, that controls for possible endogeneity and treats for heterogeneity. The author also employs local projections impulse response functions that control for structural changes in Greek banking.
Findings
The author finds that low bank competition has contributed to high net interest margins in Greece. Interestingly, the impact of recapitalisations conditional to low bank competition has had a significant further impact on increasing net interest margins, which is a noteworthy case due to several Greek bank recapitalisations in the last ten years. The author’s findings are supported by local projections impulse response functions.
Originality/value
To mitigate distortions in bank competition, the author argues to accelerate steps toward the direction of the banking union and a common bank regulation framework in the euro-area.
Details
Keywords
Saeed Al-muharrami and Y. Sree Rama Murthy
Average bank net interest margins vary widely across Gulf Cooperation Council (GCC) countries, net interest margins of Omani banks are significantly higher. The resultant low…
Abstract
Purpose
Average bank net interest margins vary widely across Gulf Cooperation Council (GCC) countries, net interest margins of Omani banks are significantly higher. The resultant low level of financial intermediation implies reduced investment and economic growth. Understanding the reason for these high and persistent spreads is important to develop a policy for improving effectiveness of the banking system. The paper aims to discuss these issues.
Design/methodology/approach
Net interest margins of Arab GCC banks during the period 1999-2012 are examined using the balanced panel regression model with bank specific, financial/market structure specific and macroeconomic factors as determinants. The method used for estimation used is the estimated generalized least squares (EGLS) method with both fixed effects and random effects.
Findings
Bank-specific variables, which explain net interest margins in GCC, are bank capitalization ratios, loan ratios and overhead expenses. Spread of banking sector (as measured by ratio of total bank credit to GDP) is positive and highly significant, implying that along with the expansion of the banking sector in GCC economies, interest margins of banks also improved. Omani banks were able to increase interest margins by aggressively marketing high yield personal and credit card loans, and, zero interest paying deposit products. The study also finds a negative relationship between concentration and net interest margin, and attempts to explain this finding which is at variance with other country studies using the price leadership model of oligopoly.
Research limitations/implications
The standard, accepted econometric model of net interest margins which has been used in earlier studies is unable to explain the high net interest margins of banks in Oman although it is able to explain interest margins in other GCC countries. There is a need to develop non econometric models. More work is needed on the implications of NIM spreads for how they affect an economy.
Practical implications
The study shows that as the banking sector spreads in the economy, individual banks have more opportunities to market their products while at the same time maintaining interest margins. Bank managements should note this point and look for opportunities to expand.
Originality/value
There is no evidence of any empirical studies which focused on net interest margins in the GCC countries. This study attempts to fill in this gap with a view to nudge policy makers to look at the issue of high interest margins and its detrimental impact on economic growth and development in the Gulf region. The paper is useful for policy makers to understand and rectify the problem of excessive interest spreads which is hurting the financial intermediation process.
Details
Keywords
Srdjan Marinkovic and Ognjen Radovic
The purpose of this paper is to study the link between, on one hand the interest margin of the bank, and the determinants of the interest margin on the other. The basic importance…
Abstract
Purpose
The purpose of this paper is to study the link between, on one hand the interest margin of the bank, and the determinants of the interest margin on the other. The basic importance of bank interest margin or spread (BIS), arises from the fact that it presents an indicator of a bank's profitability as well as the cost of financial intermediation imposed on both its depositors and debtors.
Design/methodology/approach
To test the relationship using multiple linear regressions with lagged variables (OLS – ordinary least squares). In addition using correlation analysis as well as bootstrapping model was necessary to overcome the issue of unknown statistical distribution of small data samples.
Findings
The quantitative study reveals proposed positive and significant correlation between bank interest margins and proxies of interest‐rate risk, negative correlation with risk averseness, positive but slightly lower correlation with credit risk variable, and finally, not so strong influence of foreign bank entry. Research limitations/implications –To be more reliable, models should include individual bank‐specific data for cross‐banks examination, an area worthy of further research.
Social implications
Having implemented the methodology, the paper draws some policy recommendations. To make interest margin optimal, authorities should redesign existing system of deposit protection together with building institutional credit guarantees and thus enable relevant information to flow freely amongst participants, i.e. to establish official information sharing arrangements for bank industry.
Originality/value
This is the first econometric study of the bank interest spread determinants for the Serbian banking industry.
Details
Keywords
The purpose of this paper is investigate the impact of financial reforms, financial liberalization and banking regulation and supervision policies on net interest margins by using…
Abstract
Purpose
The purpose of this paper is investigate the impact of financial reforms, financial liberalization and banking regulation and supervision policies on net interest margins by using the BankScope database of 76 economies.
Design/methodology/approach
The micro-panel data of more than 1,300 banks of 76 developed and developing economies over the period 2001-2005 have been used to investigate the relationships of financial reform, financial liberalization, banking supervision and regulation with net interest margins by using dynamic two-step system of generalized method of moments.
Findings
The empirical results provided the evidence that financial reform have a negative and statistically significant impact on bank interest margins. Specifically, it is important to note that in a weakly regulated and supervised environment, financial liberalization has a negative and insignificant impact on net interest margins. The findings of this paper also explain that the huge entrance of banks, the removal of interest rate controls, strong banking regulation and supervision and effective liberalization policies have reduced net interest margins in sample countries.
Originality/value
The originality of this research into the existing literature is the inclusion of some recently introduced determinants such as index of financial liberalization (with range 0-3 meaning fully repressed to fully liberalize) and banking regulation and supervision, bank age and the share of foreign and government banks. This paper applies large micro-data to explore the relationship of financial reform, financial liberalization and banking regulation and supervision on net interest margins. This paper also tries to explore the relationship of different levels of liberalization and banking supervision with net interest margins in detail.
Details
Keywords
Liviu Voinea, Flaviu Mihaescu and Andrada Busuioc
Purpose – This chapter investigates the effect of capital requirement regulations, both national and those issued by the Basel Committee on Banking Supervision, on banks’ interest…
Abstract
Purpose – This chapter investigates the effect of capital requirement regulations, both national and those issued by the Basel Committee on Banking Supervision, on banks’ interest rate margins between loans and deposits. Higher capital requirements lead to higher margins, as banks pass this additional cost to consumers.
Methodology – To estimate this effect, we use yearly data from a cross section of countries and fixed/random effects regressions. Our results exhibit a stronger statistical significance when we focus on a cross section of 20 transition economies from Central and Eastern Europe between 2000 and 2008.
Findings – Once we include institutional factors, as well as banking system and macroeconomic-related variables, we are able to explain more than 60% of the variation in interest margin across countries. We find that the banking capital to asset ratio positively and significantly impact the margin: we estimate that a 1 percentage point increase in capital requirements leads to a 20 basis point increase in the interest rate margin. The banking system liberalization index has a strong and significant impact on margin, with a higher degree of liberalization bringing about lower margins. The impact of a one-step increase (1/3 on a scale of 1 to 4) is a reduction in the margin by 1.25 percentage points. Other variables that influence the margin are real interest and inflation, both with a positive sign.
Implications/value of chapter – National banking authorities should not impose higher capital requirements than those recommended by the Basel Committee, as this would increase local borrowing costs. Romania's 15% capital requirements (vs. 10% required by Basel rules) have increased the interest rate margin by at least 1.5 percentage points.
Details
Keywords
Khemaies Bougatef and Fakhri Korbi
The distinctive feature of Islamic financial intermediation is its foundation on profit-and-loss sharing which reinforces solidarity and fraternity between partners. Thus, the bank…
Abstract
Purpose
The distinctive feature of Islamic financial intermediation is its foundation on profit-and-loss sharing which reinforces solidarity and fraternity between partners. Thus, the bank margin and its determinants may differ between Islamic and conventional banks (CBs). The purpose of this paper is to empirically assess the main factors that explain the bank margin in a panel of Islamic and CBs operating in the Middle East and North Africa (MENA) region. This study will permit to identify the common and the specific determinants of the intermediation margins in dual banking systems.
Design/methodology/approach
The authors use a dynamic panel approach. The empirical analysis is carried out for a sample of 50 Islamic banks (IBs) and 126 CBs from 14 MENA countries.
Findings
The results reveal that net profit margins of IBs may be explained for the most part by risk aversion, inefficiency, diversification and economic conditions. With regard to CBs, their margins depend positively on market concentration and risk aversion and negatively on specialization, diversification, inefficiency and liquidity.
Practical implications
The significant impact of the degree of diversification on margins suggests that any policy analysis of the pricing behavior of banks should rely on its whole output. The high levels of margins in Islamic and CBs based in the MENA region may represent an obstacle to these countries to pursue their development process. Thus, policy makers in these countries should consolidate the role of capital markets and nonbanking financial institutions to provide alternative sources of funding and stimulate more competition.
Social implications
The positive relationship between concentration and net interest margins requires that policy makers should create competitive conditions if they want to lower the social cost of financial intermediation. The creation of competitive conditions may be achieved through encouraging the establishment of new domestic banks or the penetration of foreign banks.
Originality/value
The present study aims to contribute to the existing literature on the determinants of bank margins in three ways. First, the authors identify the factors that most explain bank margins for both conventional and IBs. The majority of previous studies examine the determinants of the profitability or the overall performance of banks and in particular conventional ones. Second, this paper employs two generalized method of moments (GMM) approaches introduced by Arellano and Bover (1995) and Arellano and Bond (1991). It differs from Hutapea and Kasri (2010) who employed the co-integration technique to examine the long-run relationship between Islamic and CB margins and their determinants in Indonesia. Third, unlike previous studies focusing on MENA region that use a small number of countries and a short sample period, the period of study covers 16 years from 1999 to 2014 and a large sample of countries (14 countries). This paper differs from Lee and Isa (2017) who applied the dynamic two-step GMM estimator technique introduced by Arellano and Bond (1991) to study the determinants of intermediation margins of Islamic and CBs located in Malaysia.
Details
Keywords
Fekri Ali Shawtari, Mohamed Ariff and Shaikh Hamzah Abdul Razak
The purpose of this paper is to examine the determinants of bank margins in the Yemeni banking sector for Islamic and conventional banks. The first objective is to investigate…
Abstract
Purpose
The purpose of this paper is to examine the determinants of bank margins in the Yemeni banking sector for Islamic and conventional banks. The first objective is to investigate whether there is a significant difference between the margins of conventional and Islamic banks. The second objective is to examine whether efficiency represents an influential factor in determining bank margins for Islamic and conventional banks controlling for other micro and macro variables.
Design/methodology/approach
Using a data set of banks in Yemen for the post-liberalisation period from 1996 to 2011, the study utilises panel data with unbalanced observations for 16 banks, of which four are Islamic banks and the remainder conventional banks. Parametric and non-parametric techniques are complemented by dummy variable regression using random effects. Panel fixed effects regression was also undertaken as a robustness check.
Findings
The paper finds that the overall bank margin in Yemen has steadily decreased during the observation period with the exception of the year 2011. The parametric and non-parametric results show that the bank margins are significantly higher for conventional banks than for Islamic banks. The results provide evidence that bank margins are related to neither types of efficiency, but are affected by capitalisation, size, the opportunity cost of the reserve and liquidity, although the impact is shaped differently for Islamic and conventional banks.
Practical implications
The paper provides a basis for regulators and bankers for assessing the viability of the banking sector and proposes policies to restructure the industry to enhance its performance.
Originality/value
This paper adds value to the literature for the Yemeni banking sector and extends the previous research on the determinants of bank margins by focusing on the impact of efficiency on bank margins. Also, it compares the Islamic banks with different types of conventional banks in Yemen in their margins trend.
Details
Keywords
Emmanuel Sarpong-Kumankoma, Joshua Abor, Anthony Quame Q. Aboagye and Mohammed Amidu
This paper examines the effect of financial (banking) freedom and market power on bank net interest margins (NIM).
Abstract
Purpose
This paper examines the effect of financial (banking) freedom and market power on bank net interest margins (NIM).
Design/methodology/approach
The study uses data from 11 sub-Saharan African countries over the period, 2006-2012, and the system generalized method of moments to assess how financial freedom affects the relationship between market power and bank NIM.
Findings
The authors find that both financial freedom and market power have positive relationships with bank NIM. However, there is some indication that the impact of market power on bank margins is sensitive to the level of financial freedom prevailing in an economy. It appears that as competition intensifies, margins of banks in freer countries are likely to reduce faster than those in areas with more restrictions.
Practical implications
Competition policies could be guided by the insight on how financial freedom moderates the effect of market power on bank margins.
Originality/value
This study provides new empirical evidence on how the level of financial freedom affects bank margins and the market power-bank margins relationship.
Details
Keywords
The purpose of this paper is to determine of bank margins for conventional and Islamic banks in the dual banking system in Malaysia.
Abstract
Purpose
The purpose of this paper is to determine of bank margins for conventional and Islamic banks in the dual banking system in Malaysia.
Design/methodology/approach
The study uses unbalanced panel data for 20 conventional banks and 16 Islamic banks over the period 2008-2014. The dynamic two-step GMM estimator technique introduced by Arellano and Bond (1991) is applied.
Findings
The results suggest that there are significant similarities with minor differences in terms of factors determining bank margins between conventional and Islamic banks in Malaysia. The margins for conventional banks are influenced by operating costs, efficiency, credit risk, degree of risk aversion, market share, size of operation, implicit interest payments and funding costs. For Islamic banks, the margin determinants are found to be operating costs, efficiency, credit risk, market share and implicit interest payments. This means that more factors influence the margins in conventional banks compared to Islamic banks. Although bank diversification activities have increased in recent years, their impact on bank margins is minimal.
Practical implications
The results suggest that improving operational costs, operational efficiency and credit risk management, and minimising implicit interest payments would be the best strategy to enhance the bank margins for both conventional and Islamic banks. The results also have important policy implications on the necessity to expand the size of Islamic banking in Malaysia.
Originality/value
There are relatively few studies concerning determinants of bank margins in emerging markets. The present study adds to the literature by presenting evidence from Malaysia, an emerging market with a dual banking system. This allows us to explore the similarities and differences between conventional and Islamic banks in Malaysia in respect of determinants of the margins.
Details
Keywords
Shabeer Khan, Hakan Aslan, Uzair Abdullah Khan and M.I. Bhatti
This study investigates the determinants of net interest margin (NIM) and tests the decoupling hypothesis in Turkey's Islamic and conventional banks.
Abstract
Purpose
This study investigates the determinants of net interest margin (NIM) and tests the decoupling hypothesis in Turkey's Islamic and conventional banks.
Design/methodology/approach
This study has employed a panel quantile model (PQM) to assess the net interest margin (NIM) and test the decoupling hypothesis in the dual banking system of Turkey.
Findings
The empirical results show that the impact of equity is positive for both Islamic and conventional banks but relatively more robust for Islamic banks. Moreover, it is observed that return on assets has a positive association with NIM in both types of banking systems. Interestingly, the impact increases from lower to higher quantiles, but a higher acceleration rate is observed for Islamic banks. The study also finds that, as bank stability increases, NIM decreases for both groups of banks but more stably for Islamic banks, resulting in lower margins than conventional banks. Thus, the paper confirms the decoupling hypothesis and suggests that, to increase profit margins, Islamic banks need to increase assets and equity.
Practical implications
The paper confirms the decoupling hypothesis and suggests that to increase profit margin, Islamic banks need to increase assets and equity.
Social implications
Since both equity and assets contribute positively to interest margins, policymakers in the industry need to increase the size of equity and assets to get maximum returns.
Originality/value
This is one of the first studies to investigate NIM's determinants and test the decoupling hypothesis in the Turkish dual banking system using a non-parametric MCMC panel quantile regression (QRM) model.
Details