Bank Efficiency, Ownership, and Market Structure: Why are Interest Spreads so High in Uganda?

By Thorsten Beck, Heiko Hesse. 2006

222 citations recorded by the source corpus.

Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure, and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank variation in spreads and margins. Further, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7944f01900017ada25a0157e3c3a4d4109f4a4ac

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Citations in the corpus

FDI Flows to Sub-Saharan Africa: The Impact of Finance, Institutions, and Natural Resource Endowment (2012, background): “The systems are characterised by limited financial products and financial innovation, wide interest rate spreads, weak legal systems, and pronounced market fragmentation (Beck and Hesse, 2009; Ncube, 2007; Marr, 1997).”
What factors drive interest rate spread of commercial banks? Empirical evidence from Kenya , (2014, unknown): “Studies outside Africa include a study by Brock and Franken (2003) on interest rate spread in Chile which showed that the influence of industry concentration, business cycle variables, and monetary policy variables on interest rate spreads differed markedly depending on whether the spreads are compu”
Financial Intermediation Costs in Low-Income Countries: The Role of Regulatory, Institutional, and Macroeconomic Factors (2012, background): “Barajas et al. (2000) and Beck and Hesse (2009) are examples of single-country empirical studies employing this approach for Colombia and Uganda, respectively.”
Information Asymmetry and Market Power in the African Banking Industry (2017, unknown): “2 Beck and Hesse (2006, p.1) have established that bank size significantly contributes to variations in margins and spreads in the banking sector. For example, in Kenya the high cost of loans is favorable to big banks compared to small lenders (Ngigi, 2013a, 2013b). Ahokpossi (2013, p. 1) has conclu”
Banking Sector Stability, Efficiency, and Outreach in Kenya (2010, methodology): “Evidence for Uganda has shown that macroeconomic policies and deficiencies in the contractual framework are the most important factors explaining high spreads and margins (Beck and Hesse, 2009).”