The Determinants Of Commercial Banks' Interest Rate Spread In Namibia: An Econometric Exploration

ABSTRACT

The objective of this study is to explore the main determinants of interest rate spread in

Namibia's commercial banking industry using a panel data analysis of bank level data

and time series analysis of macroeconomic data. The literature surveyed in this study

suggests that the interest rate spread is influenced by several bank-specific, bankindustry,

and macroeconomic variables. The data for the bank-specific model covered

a sample period from the first quarter of 2004 to the last quarter of 2011 whilst the

macroeconomic model included a sample period from the first quarter of 1991 to the

third quarter of 2011 . The unit root and cointegration analysis were applied in order to

model the interest rate spread.

The results at the bank level suggest that the deposit market share reduces the net

interest margin whilst the liquidity levels of a commercial bank increases the net

interest margin. Furthermore, it was found that the tax paid by a bank and the capital

ratio are not important determinants of the net interest margin. The results at the

macroeconomic level implies, that the treasury bills rate reduces the interest rate spread

whilst, inflation rate; exchange rate and the bank rate increases the interest rate spread.

Thus, the contractionary monetary policy has an effect of increasing the interest rate

spread and the expansionary fiscal policy has a negative influence on the interest rate

spread.

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