Determinants of Banks Interest Rate Spread: An Empirical Evidence from Ethiopian Commercial Banks
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Date
2014-06
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Addis Ababa University
Abstract
The banking sector plays a fundamental role in economic growth, as it is the basic
element in the channeling of funds from lenders to borrowers. Efficient financial
intermediation is an important factor in economic development process as it has
implication for effective mobilization of investible resources. A major indicator of banking
sector efficiency is interest rate spreads. Thus, this study examines the bank, industry and
macro-economic specific factors affecting banks interest rate spread for a total of eight
commercial banks in Ethiopia, covering the period of 2004-2013. To this end, the study
adopts a mixed research approach by combining document analysis and in-depth
interviews. The findings of the study show that credit risk, liquidity risk, , operating cost,
concentration, reserve requirement, gross domestic product , interest rate volatility and
exchange rate volatility have statistically significant and positive relationship with banks
interest rate spread. Conversely return on asset, non interest income and financial
development indicator has a negative and statistically significant relationship with banks’
interest rate spread. However, the relationship between management quality and inflation
is found to be statistically insignificant. The study suggests that banks in Ethiopia should
not only be concerned about internal structures and policies, but they should consider
both the internal and external environment together in fashioning out strategies to
improve their intermediary efficiency.
Key words: Interest rate spread, efficient financial intermediation, economic growth,
commercial banks.
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Keywords
Interest rate spread; efficient financial intermediation; economic growth; commercial banks.