On the determinants of interest margin in transition banking: the case of Serbia

Abstract

Purpose -The purpose of this paper is to study the link between, on one hand the interest margin of the bank, and the determinants of the interest margin on the other. The basic importance of bank interest margin or spread (BIS), arises from the fact that it presents an indicator of a bank's profitability as well as the cost of financial intermediation imposed on both its depositors and debtors. Design/methodology/approach -To test the relationship using multiple linear regressions with lagged variables (OLS -ordinary least squares). In addition using correlation analysis as well as bootstrapping model was necessary to overcome the issue of unknown statistical distribution of small data samples. Findings -The quantitative study reveals proposed positive and significant correlation between bank interest margins and proxies of interest-rate risk, negative correlation with risk averseness, positive but slightly lower correlation with credit risk variable, and finally, not so strong influence of foreign bank entry. Research limitations/implications -To be more reliable, models should include individual bankspecific data for cross-banks examination, an area worthy of further research. Social implications -Having implemented the methodology, the paper draws some policy recommendations. To make interest margin optimal, authorities should redesign existing system of deposit protection together with building institutional credit guarantees and thus enable relevant information to flow freely amongst participants, i.e. to establish official information sharing arrangements for bank industry. Originality/value -This is the first econometric study of the bank interest spread determinants for the Serbian banking industry.

Impact of internal and external factors on the net interest margin of banks in Indonesia

“…SBI is a Bank Indonesia's instrument used as securities for the recognition of short-term debt in rupiah using a discount system. The findings of this study are in line with Azeez and Gamage (2013), Hamadi and Awdeh (2012) and Marinkovic and Radovic (2010) who show a positive effect of interest rates on the NIM ratio banking network. When SBI interest rates are high, this affects investors who are more interested in transferring funds to deposits.…”

The determinants of Serbian banking industry profitability

“…Therefore, we can say that there is a lack of literature that analyses the profitability of banking sector in Serbia as a single country in a study. The research of Marinkovic and Radovic (2010) dealt with Serbian banking sector in the period from July 2000 to August 2003 and revealed positive and significant correlation between bank interest margins and proxies of interest-rate risk, negative correlation with risk averseness and positive but slightly lower correlation with credit risk variable. Also, the results did not show the strong influence of foreign bank entry.…”

Stock market volatility and bank performance in China

“…In terms of the macroeconomic indicators, higher GDP is associated with higher bank's Return on Average Assets (ROAA), while inflation is found to have a negative effect on bank's Return on Average Assets (ROAA). The determinants of Interest Margin in Serbia are examined by Marinkovic and Radovic (2010); they suggest that higher interest rate risk tends to improve bank's interest margin, whereas risk averseness is negatively related to bank's interest margin. The determinants of Bank Margin of Islamic and conventional banks in Indonesia are evaluated by Hutapea and Kasri (2010).…”