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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Explaining interest rate spreads in Ghana
Author:Aboagye, Anthony Q.Q.ISNI
Year:2008
Periodical:African Development Review
Volume:20
Issue:3
Pages:378-399
Language:English
Geographic term:Ghana
Subjects:banking
interest rates
External link:https://onlinelibrary.wiley.com/doi/10.1111/j.1467-8268.2008.00190.x/pdf
Abstract:The question of the optimal spread between bank lending rates and rates that banks pay on deposits, which is fair to bankers, depositors and borrowers, has dogged economies for some time. In Ghana, there is a widespread perception that the spread is too wide. Bankers, on the other hand, justify the spread on the basis of economic variables that affect them. This paper contributes to the literature by identifying, in the case of Ghana, the short-run response of the net interest margin of banks to changes in bank-specific, industry-specific and macroeconomic variables within the broad framework of T. Ho and A. Saunders (1981). It finds that increases in the following factors significantly increase net interest margin: bank market power (or concentration), bank size, staff costs, administrative costs, extent of bank risk aversion and the rate of inflation. On the other hand, increases in the following variables decrease net interest margin significantly: bank excess cash reserves, the central bank lending rate, management efficiency and the passage of time. To help reduce interest rate margins, the paper recommends that banks should not get too big, the central bank should consider lowering the capital adequacy ratio and banks should be required to pass on to borrowers the full extent of reductions or increases in the central bank lending rate. Continued efforts at keeping inflation at bay will also help. Bibliogr., sum. [Journal abstract]
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