Financial Intermediation Costs in Low-Income Countries : The Role of Regulatory, Institutional, and Macroeconomic Factors

Author/Editor: Tigran Poghosyan
Publication Date: May 01, 2012
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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: We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.
Series: Working Paper No. 12/140
Subject(s): Banking systems | Banks | Commercial banks | Economic models | Emerging markets | Financial intermediation | Low-income developing countries

Author's Keyword(s): Net Interest Margins | Banks | Low Income Countries | Emerging Economies
Publication Date: May 01, 2012
ISBN/ISSN: 9781475503937/1018-5941 Format: Paper
Stock No: WPIEA2012140 Pages: 35
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