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1、 1 Interest rate spread determination in an error correction model Seetaram Navneet a, Seetanah Boopen b*, Rojid Sawkutc , Ramessur Shalinia, and Seetanah Bineshd uUniversity of Technology, Mauritius, Pointes aux Sables, Mauritius bUniversity of Mauritius, Reduit Mauritius cThe World Bank dRoyal Mel
2、bourne Institute of Technology * Corresponding author. Tel.:+230 4541041 E-mail address:b.seetanahuom.ac.mu Abstract Using time series data over the period 1975-2006, this study investigates the determinants of interest rate spreads in Mauritius using a cointegration and error correction model. Resu
3、lts from the study show that, at the micro level, banks sustain a widening spread when the profit margin is threatened by increased operating costs. Rising credit risk due to distress borrowing are also associated higher risk premiums on banks lending rates. Increase in non-interest bearing reserve
4、requirements are observed to result in a widening of banking spread as banks face reduced liquidity. At the macro level, it is observed that banks tend to profit in inflationary environment as the spreads widen with banks charging higher risk premium. Reducing operating costs, financial taxation and
5、 inflation and improving loan quality and liquidity are key issues in an attempt to narrow the banking interest rate spread. 2 I. Introduction Over the past two decades, the determinants of interest rate spreads have attracted much interest of academic research as well as of bank management and supe
6、rvisors. Banking researches have ensured that the determinants of interest margins or spreads remain empirically well explored. The vast majority of studies included industry or market-specific, bank-specific and macroeconomic determinants and showed that such determinants tend to vary enormously ac
7、ross countries and among regions of the world. Most studies carried out on banking systems of developed countries revealed that interest spreads were positively and significantly correlated to the banks level of capital, the loan loss provision, reserve requirements, implicit taxation and interest v
8、olatility (Dermirg-Kunt and Huizinga, 1999; Saunders and Schumacher, 2000). Scholars usually consider such results as benchmarks since banking systems of such countries are referred to as mature and stable ones. However, studies carried out in other parts of the globe, for instance across Latin Amer
9、ica by Brock and Rojas-Suarez (2000) and across low and middle income countries by Tennant and Folawewo (2006), reached diverging conclusions and even contradicted some of the benchmark results whereby negative and sometimes insignificant relationships were observed between the alleged determinants
10、and interest margins. Thus, this study attempts to supplement the literature by bringing new evidence from an emerging African economy namely Mauritius and aims at investigating the effect of bank-specific and macroeconomic determinants on interest rate spreads using time series data over the period
11、 1975-2006 in a cointegration and error correction framework. The choice of the determinants has been made based on the availability of data. The set of bank-specific variables includes the aggregate credit risk and liquidity risk, the operational efficiency and the opportunity costs of holding requ
12、ired reserves while the macroeconomic set of variables comprises of economic activity, inflation rate, discount rate and regulatory changes made within the observed period. Therefore, by considering a 3 wide pool of alleged determinants, this study would attempt to establish a time path of banking s
13、preads in Mauritius and the main factors influencing their evolution. Mauritius remains an interesting case study as it is one of the best performers and boasts itself to have one of the best financial systems of the continent as well. Moreover, like in many developing countries, is mainly bank-base
14、d and this implies that commercial banks are highly responsible for the financing of both private and public investments and expenditures. Hence, it is of great importance that this work of intermediation is carried out with minimal possible costs so as to achieve greater social welfare; and it foll
15、ows that the lower the banking interest spread, the lower the social costs of intermediation would be. Interest rate spread in Mauritius was around 3.3 per cent in the early 1970s and it peaked at around 6.7 per cent in 1993 to reach 3.9 per cent in 2005 and is presently among one of the lowest in A
16、frica. This reduction in the interest margin during the past decade can be interpreted as a result of increasing competition in the Mauritian banking sector; but, however, there are other determinants that have depicted the variation of spreads over the years. The results would be highly significant in the sense that they would either aver or disprove the arguments postulated by commercial bank managers that the typically wide spreads in most developing countries are promp
