What Drives Interest Rate Spreads in Pacific Island Countries? An Empirical Investigation

By Fazurin Jamaludin, Vladimir Klyuev, Anuk Serechetapongse

May 4, 2015

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Fazurin Jamaludin, Vladimir Klyuev, and Anuk Serechetapongse. What Drives Interest Rate Spreads in Pacific Island Countries? An Empirical Investigation, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Growth has been sluggish in Pacific island countries (PICs). High cost of credit is likely one of the reasons. While the small scale, geographic dispersion, and vulnerability to shocks increase the cost and risk of credit in this country group, there is considerable variability in interest rate spreads both across countries and over time. This paper examines the determinants of lending rates and interest rate spreads in a panel of six PICs, extending the literature that was largely descriptive in nature or focused on a single country. Our results are in line with economic theory. We find that the size of the economy is negatively correlated with spreads, confirming the importance of scale. Inflation appears to have only marginal impact on spreads. High loan loss provisions and nonperforming loans increase the cost of credit. So does banking system concentration. Higher institutional quality is associated with lower spreads.

Subject: Banking, Commercial banks, Deposit rates, Financial institutions, Financial regulation and supervision, Financial services, Income, Loan loss provisions, Loans, National accounts

Keywords: Asset quality, Bank assets, Bank taxation, Banking systems, Banks ANZ, Capitalized bank, Caribbean, Commercial banks, Deposit rate, Deposit rates, Income, Interest income, Interest rates, Lending activity, Lending rate, Loan loss provisions, Loan market, Loan portfolio, Loans, Loss provision, Market concentration, Market power, Pacific island countries, Pacific Islands, PIC bank, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/096
Stock No:

WPIEA2015096
ISBN:

9781484362266
ISSN:

1018-5941

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