Determinants of interest rate spreads in Zimbabwe (2009-2012),

ABSTRACT

The study focused on the determinants of bank interest rate spreads in Zimbabwe’s commercial

banking sector during the multiple currency period from 2009 to 2012. The study was based on

the hypothesis that bank interest rate spreads are determined by banks specific factors and macro

economic factors. Several theories including the Loanble funds, Liquidity preference, Loan

pricing, Signaling arguments and Credit market theories were propounded to explain the

determinants of interest rates and interest rate spread. A descriptive research design was chosen

and is used to show trends and comparative analysis of interest rate spreads and other variables

of interest. The design is also quite employable when there is a specific question for study and

the methodologies to be done are already known which the case in this study was. An

econometric model which employed panel data techniques to analyze the influence of bank

specific and macroeconomic factors on bank spreads and the variables were chosen based on

findings from both empirical and theoretical literature. The variables chosen were liquidity,

operating costs, non-performing loans, growth in gross domestic product and inflation. Results

obtained indicated that bank spreads are high in Zimbabwe and they are mostly driven by nonperforming

loans, growth in gross domestic product and inflation. The other variables which

were liquidity and operating costs proved not to be significant in determining interest rate

spreads. Foreign banks charged lower spreads than local banks in the same period. Lending rates

were highly volatile as compared to deposit rates. The study recommends policies to increase

competition, operational efficiency, coping foreign legislation, strengthening local banks, and

improving international relations. Further studies were recommended in the areas of the impact

of market specific factors in determining spreads in a stable environment, whereby regulatory

policies don’t frequently change