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Financial reforms and persistently high bank interest spreads in

Bangladesh: Pitfalls in institutional development?

Monzur Hossain*

Bangladesh Institute of Development Studies (BIDS), E-17 Agargaon, Sher-e-Bangla Nagar, Dhaka 1207, Bangladesh

1. Introduction

It is widely argued that financial reforms and liberalization that involve decontrolling interest rates, eliminating credit

limits and enacting new lawsand regulations governing the financial sector should improve efficiency in the intermediation

process. The interest rate spread (IRS), i.e., the difference between the weighted average interest rates on loans and deposits,

is a key indicator of financial performance and efficiency of the banking sector. The spread is expected to decline over time

with liberalization of the financial sector. This proposition is linked to the McKinnon (1973)Shaw (1973) paradigm that

financial liberalization leads to significant improvement of growth prospects. A high spread usually refers to a lowdeposit

rate and a high lending rate that act as impediments to the expansion of financial intermediationby entailing a high cost of

borrowing and discouraging savings in the economy. A high spread thus limits investment opportunities and restricts the

growth potential of the economy. The conventional view is that financial liberalization and growth usually go together as

liberalization increases the supply of loanable funds to the economy through increasing efficiency of the financial sector

(Khan& Senhadji, 2000; King & Levine, 1993; Levine, 1997). However, financial liberalization may not lead to the expected

outcome unless necessary legal and financial institutions are properly developed (Chinn and Ito, 2006).

Bangladesh carried out extensive financial sector reforms during the 1990s. Financial liberalization measures adopted

include lifting barriers to entry of foreign and private commercial banks, decontrolling interest rates and credit

disbursement, unification of exchange rates and adopting more flexible exchange rates and making the current account

Journal of Asian Economics 23 (2012) 395408

A R T I C L E I N F O

Article history:

Received 3 December 2010

Received in revised form 28 November 2011

Accepted 29 December 2011

Available online 6 January 2012

JEL classification:

G21

G30

O16

Keywords:

Interest rate spread and margin

Financial liberalizationBank efficiency

Bangladesh

A B S T R A C T

This paper analyzes interest rate spreads and margins in Bangladesh for the period 1990

2008 by applying the ArellanoBover/BlundellBond dynamic panel regressionmodel to a

panel of 43banks. The model hasbeenapplied to tackle short-panel bias and endogeneity

problems in banking analysis. A high degree of persistency in spreads and margins is

observed, which points to inefficiencies of bank management. More specifically, high

administrative costs, high non-performing loan ratio, market power, small share of

deposits and some macroeconomic factors are found to be the key determinants of

persistently high interest rate spreads and margins in Bangladesh. The findings of this

study suggest that reforms commenced in the 1990s could not generate adequate

competitionand efficiency in the financial sector, particularly to drive down the spread in

line with the predictions of interest rate literature. This situation in other words indicates

pitfalls in institutional development.

2012 Elsevier Inc. All rights reserved.

* Tel.: +880 2 8129625.

E-mail

addresses:

[email protected], [email protected].

Contents lists available at SciVerse ScienceDirect

Journal of Asian Economics

1049-0078/$ see front matter 2012 Elsevier Inc. All rights reserved.

doi:10.1016/j.asieco.2011.12.002

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convertible. However, the extent of interest rate spread has not changed much in Bangladesh despite these measures.1 The

average interest rate spread wasestimated to be 6.13 percent in the 1980s, 6.37 percent in the 1990s and 5.35 percent in the

2000s.2 From the concern that a large interest rate spread is an impediment to growth prospects, Bangladesh Bank (the

central bank of Bangladesh) had beenpersuading banks to reduce the spread in a rational manner. Asmoral suasion did not

work, Bangladesh Bank imposed ceilings on both lending and deposit interest rates in 2008; however, the ceilings were

removed in 2011 mainly due to pressure from the IMF. This back-and-forth strategy towards interest rates raises several

questions: why

are

spreads and

margins persistently

high in the

banking

sector of

Bangladesh despite

financialliberalization? Why do different types of banks charge different interest spreads?

A wide range of studies identified that large spreads occur in developing countries mainly due to high operating costs,

financial taxation or repression, lack of a competitive financial/banking sector and macroeconomic instability (Barajas,

Steiner, & Salazar, 1999; Beck & Hesse, 2009; Brock & Rojas-Suarez, 2000; Chirwa & Mlachila, 2004). However, our

understanding of the determinants of spreads and margins in Bangladesh is still limited. There is no comprehensive,

rigorously conducted analysis of spreads and margins currently available forBangladesh inpart because ofdata limitations.3

Two recent studies,Mujeri and Islam (2008) and Mujeri and Younus (2009) shed some light on the characteristics of interest

spreads inBangladesh.This papermakesanattempt to improveourunderstandingof the spreads andmargins inBangladesh

by analyzing a unique panel data set relating to 43 banks for the period 19902008.4 A generalized method of moments

(GMM) dynamic panel regression model, namely the Arellano and Bover (1995)/Blundell and Bond (1998) model, has been

applied to the data to identify the determinants of spreads and margins as well as to capture their persistency. Data have

been collected from the commercial banks balance sheets and income statements.

This study, for the

first

time, captures the

persistency

of

spreads and

margins in the

banking

sector of

Bangladesh byapplying dynamicGMM estimators. The estimated persistency effect (0.42) indicates that a major part of interest spreads in

Bangladesh can be explained by some unobserved characteristics of the banking sector including inefficiencies of

management arising from revealed preferences, weaknesses in risk management practices and technological skills. In

general, both less-competitive market structure and management inefficiency are held responsible for persistently high

spreads in Bangladesh.

As a result of financial liberalization,market power has shifted from the state-owned commercial banks (SCBs) to the old

but big private commercial banks (PCBs) in the post-liberalization period (after 1999). This indicates that financial reform

measures undertaken in the 1990s have not contributed much to make the sector more competitive.

The rest of thepaperis organized as follows.Section2providesabrief surveyof literatureon interest rate spreads. Section

3providesanoverviewof thefinancial sector reformsanddevelopment inBangladesh. Section4discussesdata andvariables

and Section 5 discusses methodology and results. Finally, Section 6 concludes the paper.

2. A brief survey of literature

What are the determinants of spreads and margins? Doesfinancial liberalizationdecrease the level of spread? These two

questions are addressed inmost studies dealing withinterest spreads. A reviewof thedeterminants of spreads is provided in

Table A.1 in Appendix.

Beck and Hesse (2009) categorize the determinants of spreads and margins under fourbroad-based views. First, the risk-

based view captures some systematic differences across borrowing sectors and deficiencies in the contractual and

informational frameworks driving high spreads and margins. According to this view, bank size, capital ratio, bank liquidity,

operating costs, non-performing loan (NPL) and non-interest income are associated with risk management practices of

banks. Second, the smallfinancial systemview focuses on the fixed transaction cost component of financial service provision

and the difficulties in exploiting the resulting scale economies. The market share of deposits and/or loans usually represents

the size of the financial system.

Third, the

market structure view

usually

focuses on the

competitiveness

and

the

extent

of

privatization and

foreign bankentry into the banking system.Market concentration ratios areused to assess the relevance of this view towards spreads and

margins. Finally, the macroeconomic factors such as exchange rates, interest rates, inflation rates and GDP growth rates are

also considered as driving forcesof interest spreads and margins in thebanking system.All these factors togetheror partially

can contribute to high spreads and margins in a less developed financial system. Are the determinants similar across

countries? Interest spreads are higher in developing countries than developed countries. Among developing countries,

spreads arehigherinAfrican and Latin Americancountries thanthose inAsian countries. It can be observed from Table A.1 in

1 Bankswere allowed to adjust their ownrates since February 19, 1997. Further flexibility in the interest ratewas introduced on July 12,1999permitting

banks to differentiate interest rates to individual borrowers except exporters (Economic Trends, Bangladesh Bank).2 Interest rate spreads in Bangladesh are comparable to other South Asian countries. The average spreads for the last five years was 6.0 percent in

Pakistan,4.95 percent in India and 6.18percent in Sri Lanka (source: respective central bank). Thus theBangladeshcase is nothing but a typical SouthAsian

case of maintaining moderate but persistent level of spreads.3 In recent days, a growing tendency can be seen among banks to be engaged in capital market businesses through operating merchant banks, creating

mutual funds and trading individually in the stock markets. However, their profits from share-market business are not clearly reported in any of the

published documents.4 A total of 48 banks are now operating in Bangladesh, of which long time-series data are available for 43 banks.

M. Hossain/Journal of Asian Economics 23 (2012) 395408396

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Appendix that almost similar factors such as management inefficiency, high administrative costs, high non-performing

loans, market power and inflation can explain highspreads across countries. Country-specific characteristics do not seem to

have important implications for higher interest rate spreads.

Studying the determinants of spreads and margins ismeaningful only in a financially liberalized economy. The empirical

evidence regarding the impact of financial liberalization on spread is mixed. While some studies argue that financial

liberalization substantially reduces spreads (see, Denizer, 1999; Honohan, 1999), some other studies reported the opposite

scenario

(e.g. Barajas et

al., 1999; Chirwa

& Mlachila, 2004). The

contrasting

evidence

can be

explained

by

the

difference

inthe level of financial reforms, regulatory framework in place, institutional strength and country-specific factors.

Regarding econometric techniques, it is observed that various types of regression models are used to analyze interest

spreads. Some of the commonmethods are pooled OLS (Ordinary Least Squares) regression, median least squares method,

fixed effect (FE) and random effect (RE) panel regressions and system equation (Table A.1). These regressionmodels largely

suffer from short-panelbias and they are alsonot suited to tackle endogeneityproblem.The interest rate spread is associated

with both observed and unobserved characteristics of banks including risk aversion attitude and revealed preferences of

managers, governance structure etc., which cannot be captured unless a suitable model is applied.

Consider someexamples ofendogeneity inbankingvariables.Thecapital structure ofbanksactsasa bufferagainstfailureof

banks.Non-performing loan is an ex postmeasurement of the risk assumed by the institution. These variables are likely to be

correlated with idiosyncratic component of risk profile of institutions, hence, they are endogenous.Overhead costs, bank size,

non-interest income also appeartobeendogenousas theyare the choice variables.Moreover, persistencyof spreads isharmful

to the economy eventhoughthe spread ismoderate. Persistency in spreads refers tounobserved characteristicsofbanks, such

asmanagerial

risk

aversion and

revealed

preferences. Therefore, it

is important

to

capture

the

persistency

effect

of

spread. If

amethod isusedwithout taking intoaccount the concernsraisedhere, itmay lead tobiased and inefficient estimates. One of the

solutions to address the persistency and endogeneity issues could be the use of the GMM dynamic panel model.

3. Financial reforms, financial development and interest spread in Bangladesh

The formalfinancial sectorinBangladesh,as inother regionsof thedeveloping world,essentiallyconsists ofbanks.Although

non-bank financial institutions and capital markets have been developing gradually in Bangladesh, their influence in the

economy still remainsmarginalcompared to thebankingsector.Thebanking sectoratpresent comprisesof48banksincluding

4 state-owned commercial banks (SCBs), 30 private commercial banks (PCBs), 5 specialized banks (SBs) and 9 foreign

commercial banks (FCBs) (see details in Table 1). Private banks were allowed to operate in Bangladesh from the early 1980s.

Table 1

Characteristics

of

the

financial

sector of

Bangladesh.

Bank type Number Number of branches Percentage of total asset Percentage of total deposit

Rural Urban Total

A: Financial intermediation in Bangladesh (as of March, 2009)

State owned commercial banks 4 2146 1240 3386 30.66 48.07

Private commercial banks 30 634 1461 2095 53.71 29.71

Specialized banks 5 1206 157 1363 6.08 8.31

Foreign commercial banks 9 0 56 56 9.55 13.91

Total 48 3986 2914 6900 100.00 100.00

Period average Credit to private

sector (% of GDP)

Total deposits

(% of GDP)

Broad money

(% of GDP)

Gross fixed capital

formation (%GDP)

GDP per capita at

current US dollar

B: Financial development in Bangladesh

19761980 6.59

14.86

19.03

10.44

160.019811985 13.67 20.23 24.54 10.51 192.0

19861990 19.08 24.75 28.67 13.87 242.0

19911995 16.58 23.07 26.68 17.93 283.0

19962000 23.17 26.7 31.01 21.51 353.0

20012005 28.83 35.08 40.02 22.63 395.0

20062008 34.5 45.0 45.0 24.4 565.5

Year Savings

rate

Fixed (term)

deposit rate

Interest

rate on

agri. loan

Interest rate

on large

term loan

Interest rate

on small

term loan

Interest rate

on working

capital

Interest

rate on

exports

Interest rate

on trade

financing

Interest rate

on house

financing

Interest rate

on consumers

loan

C. Interest rate structure across banks in Bangladesh (yearly average)

2004 5.50 7.60 9.37 11.50 10.88 11.88 7 12.49 10.02 7.29

2005 5.56 7.91 9.41 11.61 10.97 12.01 7 12.59 10.15 8.81

2006 5.99 9.59 9.92 13.19 12.08 13.59 7 14.30 12.95 13.66

2007 5.99 9.82 9.93 12.90 11.98 13.75 7 14.41 12.98 14.16

2008

5.95

10.98

10.41

12.48

12.10 13.07

7

14.07

12.85

14.56

Sources: (1) Economic trends, Bangladesh Bank (various issues); Bangladesh Bank Bulletin (various issues), (2) Bangladesh economic review (various

issues), Ministry of finance.

M. Hossain/Journal of Asian Economics 23 (2012) 395408 397

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Prior to reforms that began in the early 1990s, bankswere mostly government-controlled and political imperatives were

consistently given priority overcommercial viability. Competition betweenbanking institutions remained stifled and banks

had little incentive to develop their activities. As a result, the institutional capacity of banks to manage the systemic and

idiosyncratic risks in financial systems has failed to develop sufficiently. In part to remedy these problems, Bangladesh

pursued extensive financial sector reforms in the 1990s. These reforms generally entailed financial liberalization,

institutional reforms and prudential regulatory frameworks.5 The main features of these reforms were interest rate

deregulation, relaxation of regulations on credit disbursements, strengthening of capital base of banks, adoption of risk

management guidelines and initiationof flexible exchange rates. These have succeeded in limiting the scope of government

intervention in the financial sector and in strengthening prudential regulation of financial institutions. As a result ofliberalization, the dominance of SCBs has reduced after 1999 with a strong emerging role of PCBs (see Table 1).

Interest rate deregulations were done in steps. Initially the banks were allowed to set lending and deposit interest rates

within certain bands. Later the bandswere removed allowing the banks to determine interest rates along the lines dictated

by market conditions. Financial liberalizationprocess was completed in 1999 by removing all other restrictions that enable

the banks to enjoy greater flexibility in determining interest rates.

Financial development indicators display steady increasing trend, implying widening and deepening of the financial

system in Bangladesh over time (Table 1, Panel B). It is observed that the average credit, deposit and broad money to GDP

ratios increased substantially from 6.6 percent, 14.9 percent and 19.0 percent to 28.8 percent, 35.01 percent and 40.0

percent, respectively during 19762005. Investment as a percentage of GDP and per capita income (in current USD) also

display a similar pattern and move broadly together reflecting a close association among financial development, investment

and per capita income during the period.

Fig. 1. Non-interest income of different banks. Notes: SCB indicates the state-owned commercial banks, PCBs indicate private commercial banks and FCBs

indicate foreign commercial banks. Non-interest income represents the ratio of commission and fees as percentage of interest income. Source: Authors

calculation.

Fig. 2. Bank interest spreads and margins in Bangladesh. Note: data of 43 commercial banks for the period 19912008 are considered. SCBs indicate the

state-owned commercial banks, PCBs indicate private commercial banks, FCBs indicate foreign commercial banks and SBs indicate specialized banks. For

definitions of interest spread and margin, see notes in Tables 3 and 4. Source: Authors calculation. (A) Bank interest rate spread in Bangladesh. (B) Bank

interest margin in Bangladesh.

5 These reformswere doneunder the Financial Sector Reform Program (FSRP)in the 1990s.Thisis aWorldBank led reformprogramwithin the context of

structural adjustment program.


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Interest rates (yearly average) for different types of credits and deposits are reported in Table 1 (Panel C) for the period

20042008. It can be observed that interest rates on trade financing, working capital and consumer loan are higher than

those onother types of loans and advances. On the other hand, savings rates remained fairly stable ranging between 5 and 6

percent during the period considered, while the fixed (term) deposit rates showed an increasing trend. Non-interest income

(e.g. commission and fees) is substantially higher among private commercial banks, particularly among FCBs (Fig. 1).

The estimated spreads and margins showed slightly decreasing trend particularly after 1999 (Fig. 2). After 2004, spread

wasestimated

to

be

less than5

percent

in the

case

of

PCBs, but

over5

percent

in the

case

of

otherbanks. The

highest

spread

isobserved for FCBs (8.83%).6 Interest margin also showed an increasing trend except for 2007. It is apparent from Fig. 2 that

FCBs enjoy higher margins than their counterparts.

The above discussionsuggests that althoughfinancial liberalizationand reforms have improved financial deepening and

diversification in Bangladesh, financial market still remains segmented and less competitive.

4. Data and variables

The data on43 banks for the period between 1990 and 2008 are used for the analysis.7 Interest rate spreads and margins

are ourdependent variables.The spread is defined as thedifferencebetweentheweighted average lending rate andweighted

average deposit rate,where the weights are the relative amounts of loans or deposits contracted at specific interest rates in

the respective year by the respective bank. On the other hand, the net interest margin is defined as the difference between

total interest income plus commission/fees received over total earning assetsand total interest paid minus commission/fees

over total interest bearing liabilities.Explanatory variables include variables representing risk factor, market structure, small financial system and

macroeconomicconditions, as suggestedby the literature. The variablesthat represent risk-profileofbanks are, inter alia, the

bank size, capital ratio, bank liquidity, operating costs, non-performing loans (NPL) and non-interest income. The logarithm

of total asset is used as a measure of bank size. Given the operating efficiency of banks, bank size can influence the spreads

either negatively or positively depending on the scale of economies. If scale economies work, bigger banks can maintain

lower spread, otherwise not. Similar contrasting results can be observed in the case of non-interest incomethe ratio of

commission and fees to interest income. A bank which has higher non-interest income may not be keen to earn interest

income especially if there is market segmentation and inadequate competition. In fact, non-interest income may lead to

either a highspread or a lowspread depending onmarket conditions. Hence, the signs of coefficients for these variablesmay

be either positive or negative.

Overhead cost is the ratio of administrative costs to total assets. Higher operating costs are expected to lead banks to

charge higher interest spreads. High overhead cost may result from inefficiencies in bank operations that may be shifted to

bank customers. Liquidity and capital ratio are indicators of bank solvency. Bank liquidity is defined as the ratio of totaloperational assets to total bank liabilities. Thisvariable is expected to be negatively related to interest spread. An increase in

liquidity reduces the bank liquidity risk, which reduces the interest spread due to a lower liquidity premium charged on

loans. Capital ratio is defined as the ratio of shareholders equity to total assets. Saundars and Schumacher (2000) provide

evidence of the positive and generally significant relationship between spreads and capital ratios in developed countries.

Since there are limited channels for increasing capital because of thin and underdeveloped equity markets in developing

countries, banks will be in a strong position to keep the spreads high. Thus, the capital ratio is expected to be negatively

associated with the spread. As liquidity appears to be highly correlated with capital ratio, only capital ratio is considered in

the analysis.

Historically, banking sector in Bangladesh is characterized by high non-performing loans, most of which are borne by the

state-owned commercial banks(Fig.3).WhileNPL ratio isabout5percent forPCBs, it is stillabout20percent forSCBs(Table2).

Banks tend to offset the cost of screening andmonitoring ofbad loans and/or the cost of foregone interest revenue by charging

higherlending rates(Barajaset al.,1999).Therefore,NPLmighthaveapositiveand significantassociationwithspreads(Brock&

Rojas-Suarez, 2000; Randall, 1998).Themarket shareofdepositsor loans is usuallyused to seewhetherthe size of thefinancial systemmatters forthe spread.

The market share of loan (deposit) is the share of individual banks loans (deposits) to total loans (deposits) provided by both

banks and non-banks in a year. The market share of banks in total deposits is estimated to be about 55 percent on average

during the time period considered, and the rest of the deposits are attributed to public borrowings throughNSD certificates8

and postal deposits. Among the banks, while SCBs share in total deposits is 29 percent, PCBs share is 21 percent (Table 2).

Historically, fourSCBscapture the major share of both deposits and loans inBangladesh. In the analysiswe consider only the

market share of deposits (MSD),which is estimated as a ratio of individual banksdeposits to all deposits including deposits in

6 Itwasnotpossible for usto estimate theweighted average spread forthe FCBsdue tounavailabilityof theirdataon loans anddeposits.Some of the FCBs

do not even publish country-specific annual reports; they only prepare performance reports for the Bangladesh Bank.7 Data are not available for all banksfor all the years as some newbanks have emerged during the period considered. Moreover, all the required data are

not available for all banks particularly for the period before 1999. Thus, the panel is unbalanced.8 The National Savings Directorate (NSD) certificates are the principal devices of public (non-bank) borrowing for financing budget deficit. The interest

rate on3-yearNSD certificate hasbeen 11.5% while the same on 5-yearcertificate is 12%. These savings ratesare substantially higher than those are offered

by banks (see Table 1).


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banks and non-banks, postal deposits and public borrowings through National Savings Directorate (NSD) certificates. The

variable MSD is particularly important for capturing the impact of NSD certificates on spreads, as researchers and

practitioners often argue that by offering higher than market interest rates for NSD certificates, the government creates

distortions in the money market that ultimately influence the spread. The NSD certificate rates,which are higher than bank

deposit

rates, are

likely

to

filter deposits away

from

banks. This may

influence

the

spread

by

causing

a

rise

in bank

lendingrates due to limited supply of loanable funds.While a negative relationship betweenmarket share and interest rate spreads

predicts a small financial system, a positive relationship would predict a less competitive market structure.

To assess the impact of market structure on spread, market concentration ratios for loans and deposits are estimated

considering the Herfindahl-Hirschman Index (HHI). Both indexes indicate that market power has shifted gradually from SCBs

to PCBs after financial liberalization (Fig. 4). Particularly, PCBs concentration ratios for loans and deposits have crossed the

one for SCBs in 2004. Since the HHIs for PCBs hovered around 4000 in 2008 with an increasing trend, it indicates that a

monopolistic competition prevails in the banking sector of Bangladesh. In addition, the impact of financial liberalization is

captured by a financial liberalization dummy (FLI) (1 for year 1999 onward, 0 otherwise).

Among macroeconomic factors, quantum index of production (QI), inflation, liquidity reserve requirement (LRR) and

corporate income taxrate (Tax) are considered as potential drivers of spreads and margins. The GDP growth rate has not been

used in the analysis as it may not reflect the impact of overall demand of the economy on spreads due to segmented credit

Fig. 3. Non-performing loan ratio for different banks.Note: data of 43 commercial banks for the period 19932008 are considered. SCBs indicate the state-

owned commercial banks and PCBs indicate private commercial banks.Non-performing Loan (NPL) represents the ratio of bad loans to total loans. Source:

Authors calculation.

Table 2

Summary statistics of key variables.

Stats Interest

spread

Overhead cost

as % of total asset

Capital ratio

as % of total asset

NPL as % of

total loan

Liquidity reserve

ratio (%)

Non-interest income

as % of interest income

MSD

All banks

Mean 5.18 0.05 0.20 9.00 19.57 26 0.54

sd 1.70 0.48 1.30 0.10 1.73 0.17 0.23

cv 0.33 9.08 6.39 1.23 0.09 0.67 0.42

State owned commercial banks

Mean 5.83 4.00 0.14 16 22.21 23 0.29

sd 0.91 0.02 0.12 0.12 0.60 0.12 0.16

cv 0.16 0.66 0.86 0.75 0.03 0.50 0.54

State-owned commercial banks (year>1999)

Mean 5.45 2.00 0.04 21 22.45 25 0.25

sd

0.81

0.01

0.03

0.11

0.61

0.09

0.15cv 0.15 0.34 0.89 0.55 0.03 0.34 0.54

Private commercial banks

Mean 5.01 6.00 0.22 7 20.01 24 0.21

sd 1.82 0.58 1.57 0.10 1.13 0.13 0.10

cv 0.36 9.18 7.05 1.36 0.06 0.55 0.48

Private commercial banks (New)

Mean 3.75 14.0 0.42 3 19.48 20

sd 2.00 1.14 3.08 0.03 1.35 0.11

cv 0.53 8.34 7.35 0.85 0.07 0.54

Private commercial banks (Old)

Mean 5.42 4.0 0.16 8 20.12 25

sd 1.56 0.02 0.16 0.10 1.07 0.14

cv 0.29 0.62 1.01 1.31 0.05 0.55

Private commercial banks (Year> 1999)

Mean 4.62 7.0 0.21 7 20.25 21 0.22

sd

1.88

0.71

1.92

0.10 1.09

0.09

0.11cv 0.41 10.40 9.33 1.38 0.05 0.43 0.51

Notes: sd, standard deviation; cv, coefficient of variation. See notes in Table 3 for definitions of variables. Source: Authors estimation.


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marketswithsubsidized interest rates(see Table 1). Instead, the QI is used to capture the impact of segmented credit market

on spreads as banks charge a competitive interest rate for industrial credit. A positive association of QI with spread will

indicate

the

existence

of

segmented

credit

market.Correlation between variables is estimated in Table 3. Table 3 (Panel A) shows that before 1999, the spreads were

correlated positively with the loan rate and negatively with the deposit rate (except for SBs). After 1999, in the case of PCBs,

spread is found to be positively correlated with the rates of large loans and working capital loansbut negativelywithsavings

deposit rates. In the case of SCBs,spread is correlated (negatively) onlywithsavingsdeposit rates. In the case of SBs, spread is

perfectly correlated with large loan rate. A high interest spread is therefore associated with the rise of the lending rates of

large loansordecrease of thedeposit rates. Table3 (PanelB) showspair-wise correlation betweenthe variables concerned.In

most cases, the correlations between spread and other variables show a positive and significant relationship, but far from

perfect correlation.

5. Methodology and results

5.1. Methodology

One of the difficulties that one may have to encounter in the banking sector analysis is that all unobserved bank

characteristics are not captured in the available data.Anotherdifficulty is that most of thebanking variables, suchas interest

spread, profit margin, capital ratio, NPL etc. are endogenous, that is, these variables are likely to be correlated with

unobserved firm-level heterogeneity. If the OLS method is used ignoring such unobserved firm-level characteristics, it will

lead tobiased and inconsistent estimates(Wooldridge,2002). The application of thefixed effectmodelsto adynamicpanel is

also problematic. One potential problem of the fixed effect model is that firm fixed effect is correlated with the lagged

dependent variable, which introduces a bias that is substantial with shorter panels9 (Baltagi, 2005; Nickell, 1981;

Wooldridge, 2002).

Since in our data each panel consists of about 40 observations, we need to apply a suitable model that can address the

biases in estimatesdue to a short panel aswell as endogeneity problems. There are a numberof choices: The first option is to

adopt a traditional instrumental variables (IV) approach. However, in corporate finance, it is difficult to find reliable

instruments. The other option is to apply the generalized method of moments (GMM, or differenced GMM) estimator

suggestedbyArellano andBond (1991). ThisGMM technique transforms the data intofirst-difference form and thenuses the

endogenous (or predetermined) lagged variables as instruments for the transformed lagged dependent variable. However,

the ArrelanoBond model also suffers from certain limitations. The lagged levels provide little information about the first

differences when the underlying series are relatively stationary and, therefore, are weak instruments (Arellano & Bover,

1995; Blundell & Bond, 1998).To overcome the problem particularly in a shorter panel, Arellano and Bover (1995)/Blundell

Bond (1998) modified the GMM by employing additional moment conditionsbased on the lagged variables first differences

(in addition to their levels).

Thus, to address the short-panel bias and endogeneity problem, here we choose to apply the ArellanoBover/Blundell

Bond GMM model. The regression model is thus specified as:

IRSi;t a bBi;t gIt dMt ei;t

Fig. 4. Herfindahl-Hirschman (HH) index for loans and deposits.Note:data of 43 commercial banks for the period 19912008 are considered. SCBs indicate

the state-owned commercial banks,PCBs indicateprivate commercial banks,FCBs indicate foreign commercial banksand SB indicatesspecialized banks.To

understand the market structure, the market concentration ratios are estimated by the Herfindahl-Hirschman Index (HHI) for deposits and loans. Source:

Authors calculation. (A) HH Index for loans. (B) HH Index for deposits.

9 This bias can be quite large even for panels with 30 observations per unit (Judson and Owen, 1999).


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where Bi,t is a vectorof bank-specific variables, suchas overhead costs, liquidity ratio, capital ratio, bank size, NPL,MSD, and

non-interest income; It is a vector of time-varying market structure variables, such as FLI and HHI; Mt is a vector of time-

varying macroeconomic variables, such as QI, GDP growth rate, inflation, corporate tax rate and LRR. The QI is used to see

whether industrial production has any impact on interest spread.

The ArellanoBover/BlundellBond GMM model provided tests for AR(1) and AR(2) in first differences. The model

introduces first order serial correlation; however, the test for no second order serial correlation for the disturbances of the

first-differenced equations is important for testing the consistency of the GMM estimates.The results show that there exists

first order serial correlation, but not the second order serial correlation. Further, the Sargan (1958) test has been applied totest the joint validity of moment conditions (the presence of over-identification) and to identify optimal lag. The tests

confirm that the instruments used are orthogonal to the error term, that is, over-identification is rejected. The optimal lag is

found to be two years in most of the cases.

5.2. The results

The results are obtained by analyzing spreads separately for different categoriesof banks, and for separate time periods

period before1999 (pre-liberalizationperiod) and after1999 (post-liberalization period) to capture the behaviorof different

banks in the pre- and post-liberalization periods. Although financial liberalization was completed in 1999, different

liberalization measures were taken in steps before 1999. Therefore, the results representing the period 19901999 are

attributed to partial liberalization of the financial sector.

Table4 reports the results for all banks. The results provide support to all the underlying views of the determinants of

interest spreads and margins in Bangladesh. The effects of lagged interest spreads and margins are found to besignificant, indicating persistency in interest rate spreads and margins. The estimated persistency effects on spreads and

margins are, 0.42 and 0.63, indicating that last years spread and margin will amplify current spread and margin by 42

Table 3

Correlations of variables.

Loan rate Deposit rate

Agriculture Large loans Small loans Working capital Savings Fixed term

A. Correlation of spread with lending and deposit rates

Panel A. Before 1999

Private com. banks 0.50 0.38 0.54 0.44 0.45 0.53State-owned com. banks 0.05 0.47 0.52 0.43 0.57 0.61

Specialized banks 0.39 0.99 0.61 0.56 0.47 0.59

Overall 0.10 0.04 0.40 0.27 0.47 0.43

Panel B. After 1999

Private comm. banks 0.25 0.39 0.05 0.48 0.51 0.05

State-owned com. banks 0.03 0.14 0.10 0.19 0.44 0.34

Specialized banks 0.39 0.99 0.61 0.56 0.47 0.59

Overall 0.17 0.90 0.07 0.22 0.24 0.02

Interest

spread

Over

head

Capital

ratio

NPL Bank size Non interest

income

MSD HHI QI Inflation LRR

B. Pair-wise correlation between bank-specific variables

Overhead 0.12*

Capital

ratio

0.11*

0.99*

NPL 0.16* 0.15* 0.12*

Bank size 0.05 0.21* 0.24* 0.19*

Non-interest income 0.24* 0.001 0.03 0.01 0.15*

MSD 0.15* 0.01 0.02 0.30* 0.57* 0.01

HHI 0.16* 0.01 0.002 0.21* 0.45* 0.05 0.86*

QI 0.08 0.01 0.01 0.05 0.06 0.03 0.14* 0.20*

Inflation 0.23* 0.01 0.01 0.05 0.23* 0.001 0.03 0.09* 0.15*

LRR 0.06 0.003 0.03 0.20* 0.88* 0.08 0.56* 0.44* 0.05 0.25*

Tax 0.12* 0.01 0.002 0.03 0.02 0.13* 0.03 0.02 0.15* 0.23* 0.05

Notes. Data of 43 commercial banks for the period 19902008 are considered. The interest spread is calculated by taking difference between the weighted

average loanrate andweighted averagedeposit rate foreachbank and eachyear, where theweights are the relative amounts of loansor deposits contracted

at specific interest rates in the respective year and by the respective bank. The logarithm of total asset is used as a measure of bank size. Non-interest income

implies the ratio of commission, feesover interest income.Overhead costisthe ratio of administrative costs to total assets.Non-performing Loan (NPL) ratio

represents the ratio of bad loansover total loans.Capital ratio is defined asthe ratio of shareholders equity to total assets. The marketshareof deposits (MSD)

is the share of individual banks deposit in a year in terms of total deposits including deposits in banks, non-banks, postal deposits and National Savings

Directorate certificates. To understand the market structure, the market concentration ratios are estimated by the Herfindahl-Hirschman Index (HHI) for

deposits and loans. QI is the quantum index of industrial production. LRR is the liquidity reserve requirements, set by the Central Bank. Tax indicates

corporate income tax for banks. Source: Authors estimation. * Represent significance at 10% level. ** Represent significance at 5% level. *** Represent

significance at 1% level.


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percent and 63 percent, respectively. This high persistency effect indicates that a major part of spread in Bangladesh is

attributed to inefficiencies of bank management, particularly in credit allocations and risk management practices. This

persistency effect points to the weaknesses of corporate governance of the banking sector as board directors, who are

usually nominated by the owners, often dictate managers to maintain a certain level of profit. From operational

perspective, the persistency of spread may be linked to the Lazy bank hypothesis (Manove, Padilla, & Pagano, 2001),

which argues that the presence of a high level of guarantees (collateral) weakens the banks incentive to evaluate the

profitability

of

a

planned investment project.

High level

of

spread

can also

act

as a

guarantee as it

reduces screening

andmonitoring activities of banks.

Overhead cost and NPL are found to be positively and significantly associated with interest spread for the whole sample

period as well as for the post-liberalization period, but not withmargin. Both the factors point to management inefficiency

for which the cost has to be borne by the customers. For the pre-liberalizationperiod (before 1999), capital ratio is found to

be negatively associated with spreads. This is consistent with the argument that due to limited channels for raising capital in

the 1990s particularly in the absence of a well-functioning capital market, banks were in a strong position to keep the

spreads high. The coefficient of bank size is significant and negatively related to interest margin, indicating that bigger size

can significantly reducesmargins. On the other hand, before 1999, bank size was significant and positively related to spread.

This may be due to the fact that larger banks, particularly SCBs maintained a higher spread in the 1990s because of their

market power.

Market share of deposits (MSD) is found to be negative and significant, lending support to the small financial system

view of spreads or margins in Bangladesh. This finding calls for rationalization of non-bank savings rates, particularly the

NSD

certificate

(savings) rates and

postal

savings rates in order to

make

the

market

more

competitive.Financial liberalization, represented by a dummy (FLI), has negative and marginally significant impact on spreads, but

positive impact on interest margin. Although the FLI dummy is a rough indicator of financial liberalization, the finding is

broadly consistent with ouroverall findings that liberalizationdid not contribute much to the rationalizationof spreads. The

Herfindahl-Hirschman index (HHI) representing market concentration on loans has been included in the model. The HHI is

found to be significant to spreads forall banks for the whole period, 19902008, indicating a less competitive banking sector

in Bangladesh.

From macroeconomic point of view, quantum index (QI) of production is found to be positive and significant to spreads.

This indicates the existence of a segmented credit market as the QI represents investment behavior of firms. On the other

hand, inflation is found to be positively associated with spread in the liberalized period. This positive association can be

explained by the fact that an increase in inflation drivesdown the real rate of returnthus the adverse effects of inflation are

compensated with higher spreads.

Among themonetarypolicy variables,only liquidity reserve requirement (LRR),which is currently20percent, is found tobe

negative

and

significant

to

spread. A rise

of

reserve

requirement, which is a

kind

of

financial

taxation on commercial

banks,compelbanks to increase deposit rates toattractmore liquid funds,whicheventuallydecreasesthe spread.Thus, the LRRcould

Table 5

Determinants of interest spreads and margins for private commercial banks (PCBs).

PCBs (Period) Interest spread Interest margin

PCBs

(19902008)

PCBs

(19992008)

PCBs (old)

(19992008)

PCBs

(19902008)

PCBs

(19992008)

PCBs (old)

(19992008)

Lagged interest spread 0.41 (0.07)*** 0.30 (0.09)*** 0.46 (0.07)*** 0.06 (0.03)** 0.08 (0.03)*** 0.70 (0.04)***

Overhead 16.08 (7.58)* 16.75 (9.60)* 3.52 (8.20) 0.32 (0.25) 0.32 (0.31) 1.37 (0.77)*

Capital ratio 0.85 (1.16) 1.39 (2.17) 0.39 (1.07) 0.14 (0.04)*** 0.00 (0.05) 0.09 (0.11)

NPL 2.49 (1.65) 2.94 (1.83) 1.91 (1.43) 0.00 (0.04) 0.07 (0.05) 0.07 (0.11)

Bank size 1.17 (0.98) 1.09 (1.27) 0.44 (1.24) 0.54 (0.03)*** 0.60 (0.04)*** 0.18 (0.07)***

Other income 0.42 (0.90) 0.40 (1.45) 0.63 (0.82) 0.05 (0.03)* 0.11 (0.05)*** 0.07 (0.11)

MSD 1.76 (1.19) 2.69 (1.46)** 2.68 (1.26)** 0.13 (0.04)*** 0.08 (0.76) 0.23 (0.12)***

HHI 0.02 (0.02) 0.01 (0.03) 0.04 (0.02)** 0.001 (0.00006)** 0.001 (0.00007)** 0.00001 (0.0001)

QI 0.004 (0.001)*** 0.006 (0.001)*** 0.01 (0.001)*** 0.00002 (0.00002) 0.000008 (0.00003) 0.00001 (0.00008)

Inflation 0.06 (0.03)** 0.10 (0.05)*** 0.06 (0.03)*** 0.0007 (0.001) 0.001 (0.002) 0.001 (0.004)

FLI 0.24 (0.31) 0.24 (0.34) 0.08 (0.01)***

Tax 3.03 (2.91) 5.21 (3.67) 8.27 (3.67)*** 0.21 (0.01)*** 0.24 (0.02)*** 0.06 (0.02)***

LRR 0.88 (0.37)*** 0.81 (0.44)** 0.90 (0.35)** 0.01 (0.00)*** 0.01 (0.00)*** 0.05 (0.02)**

Bank Rate 0.03 (0.04) 0.02 (0.04) 0.01 (0.03) 0.51 (0.11)*** 0.07 0.17 0.39 (0.34)

Constant 7.76 (4.58)* 8.13 (6.55) 12.63 (5.51)*** 1.43 (0.17)*** 1.41 (0.20)*** 0.85 (0.45)**

N 235 191 185 263 212 204

Wald (2 test 173.5*** 128.79*** 128.79** .75*** 473.65*** 534.04***

Sargan test ((2 value) 173.03*** 121.77** 121.78** 229.06*** 196.95*** 183.23***

Notes: See notes in Tables 3 and 4 for definitions of variables. Source: Authors estimation.

* Represent significance 10% level.

** Represent significance at 5% level.

*** Represent significance at 1% level.


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beaneffectivemonetarypolicy instrument to reduce the spread.However, otherpolicy instruments, suchasdiscount rate and

corporate tax rate are insignificant to spread although they have some negative effects on interest rate margins.

5.2.1. Results for the PCBs

The determinants of interest rate spreads and margins are analyzed separately for PCBs in Table 5. Lagged spreads and

margins are found to be significant indicating persistency in spreads and margins in the case of PCBs. The coefficient of

overhead

cost is positive

and

significant

to

spread

in the

case

of

all

PCBs, but

not

significant

when only

old

PCBs(established before 1999) are considered. This implies thathighoverhead cost leads to highspread particularly in the case of

new PCBs that were established after 1999. The Herfindahl-Hirschman index is significantly associated with spreads in the

case of old PCBs. When all types of PCBs are considered, it is found significant only to interest margins. Therefore, it may be

concluded from the analysis that among the PCBs, the older PCBs have a certain degree of market power that allows them to

keephigher spreads, particularly after1999. Small share ofdeposits also contributes tohighspreads chargedby the old PCBs,

that is, segmented deposit market is also partly responsible for higher spreads.

The capital ratio is positive and significant to interest margins for the whole period (19902008), but insignificant for the

post-liberalization period indicating that high margins contribute to high bank earnings, which are channeled into the

capital base of the PCBs before liberalization. The bank size is negative and significant in explaining interest margins for all

private commercial banks. Financial liberalization (FLI) dummy is not significant to spreads, but it seems to have caused

interest margins of PCBs to widen.

Among the monetary policy variables, LRR is negative and significant to spreads and margins, while the bank rate is

negatively

and

significantly

associated

only

with the

interest

margin. The

QI

is significant

to

spreads indicating

thatsegmented credit market has added extra leverage that contributed to high spreads of the PCBs.

Thus, from the analysis it hasbecome clearer that the PCBs are the dominant players in the banking sectorof Bangladesh,

particularly in determining spreads in the post-liberalizationperiod. On the other hand, the newly established PCBs are in a

vulnerable situation. Therefore, market power and segmented credit and deposit markets are mainly responsible for

maintaining persistently high spreads by the older PCBs in the post-liberalization period.

5.2.2. Results for the SCBs

The determinants of interest rate spreads and margins are separately analyzed for the SCBs in Table 6. Interest rate

spreads are not found to be persistent in the case of SCBs. Only overhead cost and non-interest incomes are positive and

significant to spreads in SCBs. These two factors broadly trigger to inefficiencies in SCBs, which are attributed to (i)

government intervention in loan disbursement as well as in day-to-day management; (ii) high administrative costs due to

large number of branches as well as employees, and (iii) poor service quality of these banks. Moreover, spreads in SCBs is

partly

influenced

by

the

macroeconomic environment

as inflation is found

to

be

positive

and

significant.To sum up, interest rate spreads in the banking sector of Bangladesh is determined by the PCBs in the post-liberalization

period. Market power, small share of deposits and segmented credit markets are largely responsible for persistently high

spreads inPCBs.Althoughfinancial liberalizationhas succeeded in reducing thedominance of SCBs and increasing the role of

Table 6

Determinants of interest spreads and margins for state-owned commercial banks (SCBs).

SCBs (Period) Interest spread Interest margin

SCBs (19902008) SCBs (19992008) SCBs (19902008) SCBs (19992008)

Lagged interest spread 0.22 (0.16) 0.07(0.15) 0.36 (0.14)*** 0.14 (0.16)

Overhead 23.48(12.65)** 53.95(18.71)*** 0.03 (0.14) 0.09 (0.15)

Capital ratio 5.41(2.66)** 6.12(3.17)** 0.01 (0.03) 0.03 (0.03)

NPL 0.35(1.27) 0.11(2.53) 0.01 (0.02) 0.02 (0.02)Bank size 5.54(1.63)*** 6.36(4.61) 0.01 (0.04) 0.01 (0.05)

Non-interest income 4.88(2.77)* 6.04(2.30)*** 0.02 (0.02) 0.01 (0.02)

MSD 0.29(0.97) 0.83(3.62) 0.01 (0.03) 0.04 (0.04)

HHI 0.001(0.001) 0.002(0.002) 0.00004 (0.0001)*** 0.00004 (0.00002)**

QI 0.001(0.001) 0.001(0.001) 0.000006 (0.00001) 0.0008 (0.001)

Inflation 0.09(0.04)*** 0.06(0.07) 0.0009 (0.0005)** 0.002 (0.002)

FLI 0.17(0.29) 0.01 (0.01)

LRR 1.25(0.65)** 1.69(1.77) 0.01 (0.02) 0.01 (0.02)

Tax 4.43 (4.3) 7.47 (9.12) 0.09 (0.04)*** 0.08 (0.09)

Constant 35.86(6.88)*** 35.52(16.51)*** 0.02 (0.15) 0.02 (0.17)

N 53 37 53 37

Wald (2 test 55.35*** 35.55*** 134.23*** 80.3***

Sargan test ((2 value) 40.81 31.18 41.36 28.32

Notes: see notes in Tables 3 and 4 for definitions of variables. Source: Authors estimation.

* Represent significance at 10% level.

** Represent significance at 5% level.

*** Represent significance at 1% level.


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the private banks in the financial system, still the banking sector lacks adequate competition and efficiency. This indicates

that the financial system lacks proper legal and institutional infrastructure.

It is therefore important to develop necessary legal and financial institutions in order to get the maximum benefit of

financial reforms, particularly to narrow the spread (Beck & Levine, 2004; Chinn & Ito, 2006). Development of the capital

market andbondmarket, development ofprudential regulatory framework and gradual privatizationof SCBs are some of the

measures that can be adopted to make the banking sector more competitive in a liberalized environment. In addition to

these, rationalization of

non-bank

rates can help

the

sector to

be

competitive.

6. Conclusion

This study has attempted to explain why interest spreads are persistently high in Bangladesh and why different banks

chargedifferent interest spreads despite major financial sectorreforms undertaken in the1990s. The results provide support

to all fourunderlying views of the determinants of spreads, namely market structure, small financial system, risk-based and

macroeconomics-based views.This study for thefirst time captures the persistency in spreads and margins that are linked to

inefficiencies of management arising from revealed preferences, lack of risk management practices and technological skills

of management. Persistency effect therefore points to the weaknesses of corporate governance as well as lazy bank

argument.

More specifically, high operating costs and the non-performing loan ratio, market power, and segmented credit and

deposit markets are responsible for high spreads in Bangladesh.

The financial liberalization commenced in the 1990s increased financial deepening by ensuring higher levels of savingsand investments in Bangladesh. As a result of reforms and liberalization, market power has shifted to private banks from

state-ownedbanks after liberalization. Althoughfinancial liberalizationhas increased thedepthof the financial sector, it has

not succeeded in generating enough competition and efficiency in the financial sector. This suggests that there are pitfalls in

institutional (both legal and financial) development. Thus, further efforts in developing legal and financial institutions will

be necessary to make the sector competitive and reduce spread.

Acknowledgments

The author gratefully acknowledges the grant received from the BIDS Policy Resource Program (PRP) for this study.

The author thanks K.A.S. Murshid for approving this study under the PRP and providing useful inputs to the study. The

author also thanks Quazi Kholiquzzaman, Saleh Uddin Ahmed, M.K. Mujeri and other participants for their helpful

comments in a

seminar organized

by

the

PRP

on this paper.

The

author thanks an anonymous referee

and

the

Editor,M.G. Plummer for useful comments on the paper. Special thanks to Sifat Adiya for providing editing support. The usual

disclaimer applies.

Appendix

See Tables A.1 and A.2.

Table A.1

An international comparison of the determinants of interest rate spreads and margins.

References Country/Sample period Methodology Determinants of spreads/margins

A. African countries

Beck and Hesse (2009) Uganda. 19992005 Pooled OLS; median least

square; fixed effect

Small market, high operating cost,

high inflation, high T-bill rate,

exchange rate appreciation

Average spread: 18%.

Crowley (2007) 18 African countries (Botswana,

Ethiopia, Gambia, Ghana, Kenya,

Lesotho, Malawi,

Cross-section OLS Low inflation, greater number of

banks, greater public ownership

of banks, poor governance, higher

reserve ratio

Mauritius, Mozambique, Namibia,

Nigeria, Rwanda,

Sierra Leone, Swaziland, Tanzania,

Uganda, Zambia, and Zimbabwe).

19752004.

Average spread: 7%

Chirwa and

Mlachila (2004)

Malawi. 19891999 Fixed effect, random effect

panel regression

Monopoly power, reserve

requirements, discount rate,

inflation


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Table A.1 (Continued )

References Country/Sample period Methodology Determinants of spreads/margins

Average spread: 16.75%a

B. Eastern Caribbean

countries

Randall (1998) Eastern Caribbean countries (Antigua

and Barbuda, Dominica, Grenada,

St. Kitts and Nevis, St. Lucia, and St.

Two-stage least square

estimation

Operating cost, loan loss provision

and reserve costs accounts for 75%

of the observed interest spread.Among policy variables, statutory

deposit requirements, strict loan

loss provision, and bank fixed costs

are important for high spread.

Vincent and the Grenadines).

19911996

Average spread: 7.3%

C. Latin American

countries

Brock and

Rojas-Suarez (2000)

Latin America. 19911995 Two-step regression Capital ratio, cost ratio, liquidity ratio,

interest rate volatility, inflation

Argentina (12.9%), Bolivia (7.1%),

Colombia (21%), Chile (11.6%), Peru

(20%), Mexico (7.7%).

Barajas et al. (1999) Colombia. 19741996 Two-stage least squares Operating cost, financial taxation, loan

quality and market power

Average spread: 1632% (19741988);

2519% (19881996)a

D. OECD countries

Saundars and

Schumacher (2000)

7 OECD countries (Germany, Spain,

France, UK, Italy, USA, Switzerland)

Two-step regression Capital ratio, monopoly power,

volatility of interest rates

Angbazo (1997) US 19891993 De fault risk, opportunity cost of

non-interest bearing reserves, leverage,

management efficiency

E. South Asian countries

Mujeri and Islam (2008) Bangladesh: 20012007 Summary statistics and

conceptual argument

NPL, high administrative cost and

non-competition

Average spread: 6%

Ahmed and Islam (2006) Bangladesh: 20032006 Summary statistics Limited competition, overstaffing,

high administrative costs, NPLs.

Average spread: 5.6%

Khawaja and Din (2007) Pakistan. 19982005 Fixed effect model Inelasticity of deposit, liquidity, NPL

F. Cross-country analysis

Beck and Hesse (2009) Cross-country. 86 countries;

20002004; Average spread: 5%

Cross-sectional OLS Bank size, real T-bill rate, liquidity ratio,

concentration, inflation, GDP growth,

institutional deficiencies, overhead cost

Demirguc-Kunt

and Huizinga (1999)

Cross-country (80). 19881995 Cross-sectional OLS Ratio of equity to lagged total asset, ratio

of loans to total assets, foreign ownership,

bank size, overhead cost, inflation rate,

short-term market interest ratea Estimation of spread depends on a particular definition.

Table A.2

List

of

banks considered

for the

analysis.

State-owned commercial

banks (SCBs)

Specialized banks (SBs) Private commercial banks (PCBs) Foreign commercial banks (FCBs)

Agrani Bank Ltd BASIC Bank Limited AB Bank Limited Citibank N.A

Janata Bank Ltd Bangladesh Krishi Bank A L-Arafa Islami Bank Ltd Commercial Bank of Ceylon

Sonali Bank Ltd Bangladesh Shilpa Bank BRAC Bank Limited Habib Bank Ltd

Rupali Bank Ltd Bangladesh Commerce Bank Ltd Standard Chartered Bank

Bank Al-Falah Limited State Bank of India

Bank Asia The Hong Kong and Sanghai Bank Ltd

Dhaka Bank Woori Bank

Dutch-Bangla Bank Ltd

EXIM Bank Limited

Eastern Bank Limited

First Security Islami Bank Ltd

ICB Islami Bank

IFIC Bank LimitedIslami Bank Bangladesh Limited

Mercantile Bank Ltd


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Randall, R. (1998). Interest rate

spreads in the

Eastern Caribbean. IMF

Working Paper WP/98/59, International

Monetary

Fund, Washington D.C.Sargan, J. D. (1958). The estimation of economic relationships using instrumental variables. Econometrica, 26(3), 393415.Saundars, A., & Schumacher, L. (2000). The determinants of bank interest rate margins: An international study.Journal of International Money and Finance, 19,

813832.Shaw, E. M. (1973). Financial deepening in economic development. Oxford University Press: Oxford.Wooldridge, J. M. (2002). Econometric analysis of cross sectional and panel data. Cambridge: The MIT Press.

Table A.2 (Continued )

State-owned commercial

banks (SCBs)

Specialized banks (SBs) Private commercial banks (PCBs) Foreign commercial banks (FCBs)

Mutual Trust Bank

National Bank Limited

National Credit and Commerce Bank Limited

One Bank Limited

Premier Bank LimitedPrime Bank Ltd

Pubali Bank Ltd

Rupali Bank Ltd

Shahjalal Bank Ltd

Southeast Bank Ltd

Standard Bank Ltd

The City Bank Ltd

Trust Bank

United Commercial Bank

Uttara Bank Limited


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