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Article
Publication date: 17 July 2017

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…

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

International Journal of Emerging Markets, vol. 12 no. 3
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 19 October 2010

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…

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

Managerial Finance, vol. 36 no. 12
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 April 2016

Syed Faizan Iftikhar

The purpose of this paper is investigate the impact of financial reforms, financial liberalization and banking regulation and supervision policies on net interest margins

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

Journal of Financial Economic Policy, vol. 8 no. 1
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 12 June 2017

Siew Peng Lee and Mansor Isa

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

Managerial Finance, vol. 43 no. 6
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 16 November 2012

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…

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

New Policy Challenges for European Multinationals
Type: Book
ISBN: 978-1-78190-020-8

Keywords

Content available
Article
Publication date: 25 June 2020

Paula Cruz-García, Anabel Forte and Jesús Peiró-Palomino

There is abundant literature analyzing the determinants of banks’ profitability through its main component: the net interest margin. Some of these determinants are…

Abstract

Purpose

There is abundant literature analyzing the determinants of banks’ profitability through its main component: the net interest margin. Some of these determinants are suggested by seminal theoretical models and subsequent expansions. Others are ad-hoc selections. Up to now, there are no studies assessing these models from a Bayesian model uncertainty perspective. This paper aims to analyze this issue for the EU-15 countries for the period 2008-2014, which mainly corresponds to the Great Recession years.

Design/methodology/approach

It follows a Bayesian variable selection approach to analyze, in a first step, which variables of those suggested by the literature are actually good predictors of banks’ net interest margin. In a second step, using a model selection approach, the authors select the model with the best fit. Finally, the paper provides inference and quantifies the economic impact of the variables selected as good candidates.

Findings

The results widely support the validity of the determinants proposed by the seminal models, with only minor discrepancies, reinforcing their capacity to explain net interest margin disparities also during the recent period of restructuring of the banking industry.

Originality/value

The paper is, to the best of the knowledge, the first one following a Bayesian variable selection approach in this field of the literature.

Details

Applied Economic Analysis, vol. 28 no. 83
Type: Research Article
ISSN: 2632-7627

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Article
Publication date: 1 October 1996

Kürsat Aydogan and G. Geoffrey Booth

This paper investigates the performance characteristics of Turkish private and state‐owned commercial banks for the 1986– 1990 period. The link between interest margins

Abstract

This paper investigates the performance characteristics of Turkish private and state‐owned commercial banks for the 1986– 1990 period. The link between interest margins and maturity structures of bank asset and liabilities is specified. Empirical evidence indicates that banks with longer positions experienced lower interest margins, a finding consistent with the presence of a downward sloping yield curve during most of this period. The results document that bank margins suffered after the financial reforms of 1988. Further, compared to private banks, state‐owned banks exhibited lower interest margins and longer maturities, which is a direct consequence of portfolio constraints and management style of banks.

Details

Managerial Finance, vol. 22 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 27 November 2019

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

Journal of Financial Regulation and Compliance, vol. 28 no. 2
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 10 August 2015

Saeed Al-Muharrami

– The purpose of this study is to try to answer whether the banking system in Oman is fair for both depositors and entrepreneurs.

Abstract

Purpose

The purpose of this study is to try to answer whether the banking system in Oman is fair for both depositors and entrepreneurs.

Design/methodology/approach

The interest margin decomposition is based on the methodology proposed in Randall (1998). The income statement of banks defines profits before taxes (P) as interest income (II), plus non-interest income (NII), minus interest expense (IP), minus operating costs (OC) and minus provision for loan losses (Prov). After rearranging this identity, the net interest revenue can be expressed as follows: II – IP = OC + Prov + P – NII. The above expression decomposes the margin into the following cost and profit components: reserve requirement costs, operational costs, loan loss provision costs, profitability and non-interest income (with a negative sign).

Findings

A trend analysis of commercial banks’ interest rate spreads in Oman exposes the following facts: First, the implicit interest margin is relatively small (in the neighborhood of 1 percentage point); second, profits constitute a substantial proportion of the margin; third, the share of operating costs in the margin has been broadly constant over time; fourth, reserve requirement costs have been reduced following the decline of the reserve requirement ratio; and fifth, the weighted average interest rate on deposits base is lower than the rate of inflation.

Originality/value

This work is original.

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Article
Publication date: 29 June 2010

Barry Williams and Laurie Prather

The purpose of this paper is to consider the impact on bank risk of portfolio diversification between traditional margin income and fee‐based income for banks operating in…

Abstract

Purpose

The purpose of this paper is to consider the impact on bank risk of portfolio diversification between traditional margin income and fee‐based income for banks operating in Australia.

Design/methodology/approach

Considering several performance variables, this analysis compares the benefits of diversification across different bank types relative to margin income and fee income. Further, regression analysis considers bank risk and revenue concentration.

Findings

This paper documents that fee‐based income is riskier than margin income but offers diversification benefits to bank shareholders. While improving bank risk‐return tradeoff, these benefits are of second order importance compared to the large negative impact of poor asset quality on shareholder returns.

Practical implications

These results have implications for all stakeholders in Australian banks. The results suggest that shareholders of banks will benefit from increased bank exposure to non‐interest income via diversification. From a regulatory perspective, diversification reduces the possibility of systemic risk, but caution must be offered with respect to banks pursuing absolute returns rather than monitoring risk‐return trade‐offs, and so exploiting the benefits of the implied guarantee offered by “too big to fail” However, shareholders should also monitor bank exposure to non interest income to ensure that they do not become over‐exposed to the point where the volatility effect outweighs the diversification benefits.

Originality/value

The results of this study suggest that Australian regulators should consider requiring increased disclosure of the composition of bank non‐interest income. Such disclosure would aid in understanding the changing nature of banking in Australia. Given the recent sub‐prime crisis in the USA and the role played by fee based income sourced from securitization, increased disclosure of the nature of bank non interest income is now of global importance. This disclosure is particularly germane within the context of the implementation of Basle II, with its increased emphasis upon market discipline, given that Stiroh found increased disclosure in this area is accompanied by improved market pricing for risk.

Details

International Journal of Managerial Finance, vol. 6 no. 3
Type: Research Article
ISSN: 1743-9132

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